SP Setia announced that its land disposal to Scientex was terminated due to non-fulfilment of the conditions relating to the approval by the EPU. While this is a negative development, we are not entirely surprised given that there was a delay in the timeline of the land disposal. Despite this development, we note that there was improvement in the group’s net gearing in 4Q22, while we expect further improvement in the coming 1Q23 given positive cash flow from its Australia projects. Key downside risk for the group stems from its Battersea project given the challenging landscape in UK. Maintain HOLD with an unchanged TP of RM0.64 based on a discount of 87% to RNAV of RM4.89.

NEWSBREAK

SP Setia announced that its land disposal to Scientex was terminated due to non - fulfilment of the conditions relating to the approval by the Economic Planning Unit (EPU). In particular, Scientex’ subsequent appeal for the waiver of the bumiputera equity condition imposed by the EPU was not obtained upon the expiry of the extended Conditions Precedent Period.

HLIB’S VIEW

Recap. To recap, SP Setia on 7 May 2021 entered into a SPA with Scientex fo r the disposal of eight parcel of plantation lands measuring 960 acres in Johor Bahru for a consideration of RM518.1m. The proceeds from the sale of land was intended for (i) the funding of the group’s other project developments; and (ii) paring down its debt.

Negative but not surprised. While this is a negative development, we are not entirely surprised given that there was a delay in the timeline of the land disposal. In particular, the Phase 1 of the land disposal comprising four parcel of lands amounting to RM236.1m was originally slated to be completed by 1Q22 but was not completed. As at 4Q22, SP Setia’s net gearing (including RCPS) stood at 81.1% (from 90.7% in 3Q22). If the land sale were to materialize, this would have resulted in a further reduction of 3.9% in its net gearing.

Improvement in outlook. Despite the land sale not going through, we note that SP Setia’s outlook has turned slightly more positive recently given (i) its improvement in net gearing as highlighted above; (ii) strong sales recorded in 4Q22; (iii) BNM rate hike pause which allows the group more time to pare down its debt; and (iv) easing of labour shortage which will accelerate recognition of its local unbilled sales. Furthermore, we note that only 38.9% of its Australia projects unbilled sales were recognized in 4Q22, while the bulk of the remaining unbilled sales are expected to be recognized by 1Q23. This should further lower its net gearing in 1Q23.

Key risk from Battersea project. Nonetheless, we do highlight that the main downside risk for the group stems from its Battersea project as we anticipate challenging landscape ahead given rising mortgage rates and stubbornly high inflation in the UK.

Forecast. Unchanged. Maintain HOLD with an unchanged TP of RM0.64 based on a discount of 87% to RNAV of RM4.89. We believe that at current price and valuation, the risk-reward profile of the stock are quite balanced.

Source: Hong Leong Investment Bank Research - 7 Mar 2023