SP Setia’s (SPSB) 2QFY23 net profit came in at RM55.4m (-17.8% YoY, -21.0% QoQ), constituting only about 30% and 35% of our and consensus full-year estimates. Albeit slower than expected, we believe 2HFY23 earnings to be stronger with overseas contribution especially from UNO Melbourne (about RM1bn unbilled sales) expected to kick in by 4QFY23, and also potential gains from land sales. Encouragingly, Group sales momentum continued into 2QFY23 with another RM1.53bn presales secured, bringing YTD sales to RM2.56bn or already 61% of its FY23 sales target of RM4.2bn. All told, we maintain our earnings estimates for now as we expect 2H earnings to be stronger, lifted by overseas projects and gains from land sale. Separately, net gearing improved further to 0.55x, from 0.56x in 1QFY23. We believe it can easily meet its net gearing target of 0.5x by end-FY23. Unbilled sales stood at RM6.82bn (from RM7.17bn in 1QFY23). Maintain Outperform and TP of RM0.95 pegged at c.60% discount to book value.

• 2QFY23 property revenue dropped 10.2% YoY to RM870.6m, while Group pre-tax profit was lower by the same quantum YoY to RM128.5m mainly due to due to lower contributions from Singapore and Central region as well as higher financing cost from hikes in interest rate, unfavourable foreign exchange movement and higher share of losses from joint ventures. We understand that SPSB has a remaining RM1.3bn to be recognized in the coming quarters from overseas projects. During the quarter, it achieved higher sales of RM1.53bn from RM1.03bn a quarter ago in pre-sales. In 1HFY23, local projects contributed bulk of the presales with RM2.19bn sold or c.86% of total sales while remaining 14% or RM470m from overseas. To recap, it targets to unveil RM6.17bn worth of launches in FY23. So far, it launched a total GDV of RM683m in 1QFY23, and another RM771.6m worth of properties in Q2FY23 and looking to step up the launches in 2HFY23.

• Strengthening balance sheet. Consistent with its strategy to right size its massive landbank (undeveloped landbank in of about 7k acres with estimated GDV of about RM126bn), the Group thus far has disposed two large tracts of land i.e. to Mah Sing Group Berhad (500 acres for RM392m in June) and Scientex JV (959.7acres for RM547.7m). Combined, the two deals are expected to monetize about RM940m to the Group which among others, will be used to pare down its borrowings which is currently depressing its earnings. We are positive on the Group’s commitment to bring down its debt load. To recap, the Group aims to lower it to 0.5x by end-FY23, which among others will be supported by sale of non-core assets such as land and investment properties (with estimated RM5bn total value).

Source: PublicInvest Research - 17 Aug 2023