SP Setia reported 4Q22 core PATAMI of RM99m which brought FY22’s sum to RM135.2m (-33.7% YoY), which were below our and consensus expectations. The negative deviation was due to (i) lower-than-expected recognition (as a result of timing); and (ii) lower-than-expected margin from its Australian projects. The group recorded strong 4Q22 sales of RM1.41bn which brought FY22’s sum to RM4.11bn, exceeding its full year target of RM4bn. Maintain forecasts with a higher TP of RM0.64 (from RM0.49) based on 87% (from 90%) discount to its estimated RNAV of RM4.89.

Below expectations. SP Setia reported 4Q22 core PATAMI of RM99m (3Q22: - RM25.4m; -21.7% YoY) which brought FY22’s sum to RM135.2m (-33.7% YoY). The result was below our (52.4%) and consensus (40.9%) expectations. The negative deviation was due to (i) lower-than-expected recognition (as a result of timing); and (ii) lower-than-expected margin from its Australian projects. Note that only 9.4% of its UNO unbilled sales of RM1.11bn and 66.9% of its Sapphire by the Gardens of RM1.18bn were recognized in 4Q22, with remaining to be recognized in FY23.

EIs. FY22 core PATAMI was arrived at after including the payment to RCPS holders of RM162.9m (note that consensus figure may not include this) and excluding net EIs of RM40.9m mainly from FV gain on investment properties (RM30.9m), forex gain (RM30.6m), inventories write-down (-RM3.7m), land held for property development write-down (-RM12.1m) and doubtful debt provision (-RM3.2m).

Dividend. 1.47 sen, ex-date: TBD (4Q21: none). FY22: 0.65 sen (FY21: 0.65 sen).

QoQ. Revenue increased by +98.4% due to recognition of its Australia projects – UNO (RM106.2m) and Sapphire (RM788.5m) – which collectively make up 52.4% of the revenue for the quarter. Excluding these projects, revenue would have declined by -5.5%. Consequently, core PATAMI rebounded to RM68.2m (from -RM25.4m in 3Q22) due to (i) top line improvement; and (ii) lower RCPS payment of RM30.8m (vs. RM66m in 3Q22).

YoY. Revenue increased by +65.4% due to recognition of its Australia projects. Excluding these projects, revenue would have declined by -21.2% likely due to lower progress billings as a result of labour shortage. Despite top line improvement, core PATAMI declined by -46.1% due to (i) lower GP margin of 20% (vs. 28.5% SPLY) as Australia projects have lower margin; (ii) higher finance costs of RM82.4m (+92% YoY) as a result of rise in interest rates; (iii) RCPS payment of RM30.8m (vs. none in SPLY); and (iv) higher tax expense of RM91.2m (+46.8% YoY) partly due to provision for Prosperity Tax for one of its subsidiaries.

FY22. Revenue increased by +18.4% due to recognition of its Australia projects. Excluding these projects, revenue would have declined by -5.5%. Despite top line improvement, core PATAMI declined by -48.8% due to (i) lower GP margin of 23.9% (vs. 26.8% SPLY); (ii) higher finance costs of RM260.3m (+34.1% YoY); and (iii) higher RCPS payment of RM162.9m (+23.3% YoY).

Sales and launches. SP Setia recorded 4Q22 new sales of RM1.41bn (+36.9% QoQ; +61% YoY), which brought FY22’s sum to RM4.11bn (-3.2% YoY), exceeding (102.8%) its full year sales target of RM4bn. The group launched RM1.36bn products in 4Q22, which brought FY22’s sum to RM3.05bn (+36.2% YoY), making up 71.8% of its initial full-year launch target of RM4.25bn. As at 4Q22, unbilled sales stood at RM7.3bn (-13.1% QoQ), representing 1.98x cover of its FY22 property development revenue.

For FY23, the group is setting sales target of RM4.2bn (+2.2% YoY) and planned launches of RM6.17bn (+1x). Most of the launches are from central (70%), with the remaining from Northern (9%), Southern (7%) and International (13%). The group plan to launch most its products from its well-established mature townships to ensure (i) good take-up rate; and (ii) margin preservation through flexibility in pricing.

Outlook. SP Setia recorded strong sales in 4Q22 as its new product launches were well absorbed by the market. With the easing of labour shortage condition, we expect an acceleration in the recognition of its unbilled sales in FY23. The group will also recognize most of the remaining unbilled sales from its Australia projects amounting to RM1.41bn in 1Q23. Given the positive cash flow from its Australia projects, SP Setia’s net gearing (including RCPS) as at 4Q22 improved to 0.81x (from 0.9x in 3Q22). BNM recent rate hike pause should also augur well for the group, giving it much needed breathing room to lower its net gearing. In addition, its replacement of RCPS-i B with RCPS-i C in 4Q22 should also lower preferential dividend payout as the preferential dividend rate is lower by 0.5%. The main downside risk for the group comes from its Battersea project as we anticipate challenging landscape ahead given rising mortgage rates and stubbornly high inflation in the UK.

Forecast. While we expect more contribution from its Australia projects in FY24, the margin from the projects were also lower than our initial assumption. On the balance of these, we maintain our FY24 and FY25 forecasts.

Maintain HOLD with a higher TP of RM0.64 based on a lower discount of 87% (from 90%) to RNAV of RM4.89. We lower our RNAV discount given the more positive outlook for the group as explained above. We believe that at current price and valuation, the risk-reward profile of the stock are quite balanced.

Source: Hong Leong Investment Bank Research - 1 Mar 2023