SP Setia’s 1H22 core PATAMI of RM61.6m, which make up 30.9% of our full year forecast was within expectations as we expect a stronger 2H22 arising from the contribution from its Australia project. 2Q22 saw a decent pick up in sales momentum sequentially, but we remain cautious on the group’s sales outlook given that (i) sales from its completed inventories are declining; and (ii) lack of new launches to support its sales. Maintain our forecast and HOLD rating with a lower TP of RM0.74 (from RM0.98) based on a higher discount of 85% (from 80%) to RNAV of RM4.92 given the challenging near term prospects for the group.

Within our expectation. SP Setia recorded 2Q22 core PATAMI of RM73.1m (QoQ: -RM11.6m; -3.9% YoY), bringing 1H22’s sum to RM61.6m (-45.9% YoY). The results represented 30.9% of our and 21.1% of consensus expectations. We deem the results to be within our expectation as we expect a stronger 2H22 arising from the completion and contribution of its Australia project. 1H22 core PATAMI was derived after we included the payment to RCPS holders of RM66m (note that consensus figure may not include this) and excluding net EIs of RM20m (mainly from net forex gain of RM21m). No dividend was declared.

QoQ. Revenue increased by 17.5% mainly due to higher sales. Core PATAMI improved to RM73.1m (from -11.6m in 1Q22) mainly due to the absence of RCPS payment this quarter (vs. RM66m in 1Q22). Excluding this, core PATAMI would have increased by +34.3% in line with revenue increase in addition to better gross profit margin of 27.1% (vs. 24.1% in 1Q22) arising from cost savings realised from certain project completions.

YoY. Despite a recovery in construction progress (construction was impacted in Jun last year due to MCO3.0), revenue declined by -5.9% due to (i) lower sale of completed inventories of RM113m (-48.4% from RM219m SPLY); and (ii) lower contribution from land sales. Although revenue declined, core PATAMI was flattish at -0.5% due to lower tax expenses of RM30.1m (-44.9% from RM54.7m SPLY).

YTD. Revenue declined by -11.7% YTD mainly due to lower sales of completed inventories of RM272m (-36% YoY from RM425m SPLY). Subsequently, core PATAMI declined by -45.9% due to (i) revenue decline; and (ii) loss from JV and associates of -RM17.8m (vs. RM2.8m SPLY) mainly from the Battersea project.

Sales and launches. SP Setia recorded 2Q22 new sales of RM991m (+45.9% QoQ; -33.9% YoY), bringing 1H22 sales to RM1.67bn (-38.1% YoY), making up 41.8% of its full year sales target of RM4bn. Sales momentum showed an encouraging pick up sequentially, but was lower compared to SPLY due to the absence of HOC which supported sales last year. From 1H22 total sales, 16.3% were from completed inventories (vs. 15.7% SPLY), while 82.6% were from local projects (vs. 76.3% SPLY). Unbilled sales stood at RM8.71bn as at 2Q22 (-11.5% from RM9.84bn in 1Q22), translating to a strong 2.4x cover on FY21 property development revenue, giving it earnings visibility of 2-3 years. The group launched RM300.7m of GDV in 2Q22, bringing 1H22 sum to RM805.7m, making up only 19% of its FY22 launch target of RM4.25bn.

Outlook. SP Setia’s 1H22 earnings were weaker compared to SPLY mainly due to lower sales impacted by the absence of HOC. Nonetheless, the group’s earnings should improve in 2H22 contributed by revenue recognition from the completion of its Australia project, Sapphire by the Gardens, target to complete by 4Q22. While the group recorded an encouraging pick up in sales momentum sequentially, we are cautious on its sales outlook given that (i) the sales from its completed inventories are declining; and (ii) YTD launches of only RM805.7m (trailing its YTD sales of RM1.67bn) may not be enough to sustain the sales momentum. Furthermore, 2H22 launches may continue to be slow as management guided that they are cautious in their new launches in view of the elevated building material costs and the persistent labour shortage condition. Finally, we remain cautious on the group’s high net gearing ratio especially given the current interest rate upcycle. Its net gearing ratio has inched up to 1x including RCPS (from 0.99x in 1Q22).

Forecast. Unchanged.

Maintain HOLD with a lower TP of RM0.74 (from RM0.98) based on a higher discount of 85% (from 80%) to RNAV of RM4.92 to reflect (i) the risk of declining sales momentum; (ii) the group’s high net gearing ratio and (iii) the elevated building material cost and labour shortage which would delay launches. While the group has a healthy earnings visibility and large remaining land bank of GDV RM120.9bn, we note that tnear term prospects remain challenging given the reasons highlighted above.

Source: Hong Leong Investment Bank Research - 19 Aug 2022