SP Setia’s 1Q22 core LATAMI of -RM4m was below expectations due to lower than-expected sales achieved. We lower our earnings forecast by -40.3%/-37.2% for FY22/FY23 to account for lower sales assumptions and introduce FY24 forecast. Maintain HOLD with a lower TP of RM0.98 (from RM1.26) based on a higher discount of 80% (from 75%) to RNAV of RM4.90. While the group has healthy earnings visibility, however, we note that the group’s prospects are weakening given the expected slowdown in sales momentum (from the end of HOC and the beginning of the interest rate upcycle) as well as the persistent rise in construction cost. Furthermore, the group also has a high net gearing ratio of 0.99x (including RCPS).

Below expectations. SP Setia recorded 1Q22 core LATAMI of -RM4m (4Q21: RM126.2m; 1Q21: RM40.3m), which came in below our and consensus full year forecasts of RM333.5m and RM361.1m, respectively. The negative deviation was mainly due to lower-than-expected sales achieved. 1Q22 core LATAMI was derived after we included payment to RCPS holder amounting RM66m and excluding net EIs amounting to RM5.5m mainly from net exchange gain.

Dividend. None (1Q21: None).

QoQ. Revenue declined -16% due to lower sales impacted by the end of HOC which supported sales in the previous quarter. Subsequently, the group recorded core LATAMI of -RM4m (from RM126.2m in 4Q21) in line with the revenue decline, in addition to the RCPS payment in this quarter (no payment in 4Q21).

YoY. Revenue declined -17.6% due to lower sales impacted by the end of HOC which supported sales in SPLY. Consequently, the group recorded core LATAMI of - RM4m (from RM40.3m SPLY).

Sales and launches. SP Setia recorded new sales of RM679m (-22.5% QoQ; - 43.4% YoY), representing 17% of their full year sales target. The lower sales recorded was likely due to the end of HOC which supported sales last year. From total sales, completed inventories contributed 23.4% (vs. new launches and ongoing projects), while local sales contributed 92% (vs. international projects).

Outlook. SP Setia’s unbilled sales stand at RM9.84bn as at 1Q22 (from RM10.21bn in 4Q21), translating to a strong 2.6x cover on FY21 revenue, giving it earnings visibility of 2-3 years. While 1Q22 earnings were evidently weaker dragged by local sales negatively impacted by end of HOC, we note that the group’s earnings should improve in 2H22 contributed by revenue recognition from its Australia projects. Having said that, we note that the current upcycle in interest rate will negatively impact the group through (i) weaker property sales as property buyers’ mortgage instalments are expected to increase; and (ii) higher financial obligation especially given SP Setia’s high net gearing ratio of 0.99x including RCPS (vs. 0.96x in 4Q21). Furthermore, the persistent increase in building material costs would likely dent the margin of the group’s upcoming launches.

Forecast. We lower our earnings forecast by -40.3%/-37.2% for FY22/FY23 to account for lower sales and margin assumptions. We introduce FY24 forecast.

Maintain HOLD with a lower TP of RM0.98 (from RM1.26) based on a higher discount of 80% (from 75%) to RNAV of RM4.90 to reflect the increasingly challenging prospects as a result of (i) the expected slowdown in sales momentum given the end of HOC and the beginning of the interest rate upcycle and (ii) the persistent rise in construction cost. While the group has a healthy earnings visibility, however, we note that the group’s prospects are weakening given the reasons as highlighted above.

Source: Hong Leong Investment Bank Research - 24 May 2022