SP Setia (SPSB) is expected to see better earnings in coming quarters, supported by contributions by overseas operations, and its stronger balance sheet. To recap, SPSB expects to improve its net gearing gradually (0.55x as at 2QFY23) to 0.5x by end-FY23, underpinned by non-strategic land sales (c.RM1bn), completion of overseas projects (c.RM1bn) and unbilled sales which stood at RM6.82bn as at 2QFY23. Going forward, we understand that it will continue to strengthen its balance sheet via unlocking the value from its investment assets (worth RM5bn), and right-sizing its land bank (6,870 acres with estimated GDV of RM126bn). With stronger footing, the Group will then embark on unveiling more new projects/townships which among others include “Setia Federal Hill” (52 acres, RM20bn GDV) which could be jointly developed with strategic partners to alleviate capital commitment and expand marketing reach. All told, we maintain our Outperform call but increase our TP from RM0.95 to RM1.20, after narrowing our discount from ~70% to ~60% (vis-à-vis sector average of ~0.5x to NTA, Fig. 5).

• Strengthening balance sheet. We believe its target of 0.5x net gearing is within reach, supported by sale of non-strategic land bank and delivery of overseas projects. Consistent with its strategy to right size its massive landbank (undeveloped landbank 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 for the Group which we estimate is already sufficient to bring down its net gearing to about 0.5x. In addition to these land deals, the Group has about RM6.8bn of unbilled sales of which overseas projects totaling about RM1.1bn are targeted to be delivered by end -23.

• Unlocking value from investment assets worth RM5bn. The Group has a myriad of investment assets worth some RM5bn, which include the luxury Shangri-la Melbourne (located within Sapphire by the Gardens), malls (Setia City Mall, Setia Walk and KL Eco City Mall), offices (Mercu 2 & Aspire Tower at KL Ecocity with combined 1.2m net lettable area), schools (Tenby schools at Ecopark, Eco Gardens and Eco Hill) and convention centers. Interesting to note that Shangri-la Melbourne was in the market for mid-AUD500m range back in 2022. The hotel is slated for completion in 2024. Recently, the Group also sold a penthouse at Sapphire by the Gardens for AUD39m, said to be the most expensive apartment in Melbourne.

• Stronger footing for new growth areas. The Group has identified industrial estates within its landbank i..e Setia Fontaines Industrial Park, Penang (260 acres), Setia Alaman, Klang(Fig.2, 399 acres, RM4.2bn GDV) and Tanjung Kupang, Johor(308 acres, RM1.8bn). Elsewhere, it is also looking to unveil Setia Federal Hills (Fig. 6, mixed development, 52 acres) which has estimated GDV of RM20bn. Elsewhere, it has also just acquired new land in Sydney for RM220m, which is earmarked for a RM708m GDV residential project.

Source: PublicInvest Research - 5 Sept 2023