1HFY22 CNP of RM61m is deemed within expectation as we expect a stronger 2HFY22 with the completion of its Australian projects and the recognition of land sale gains. Meanwhile, 1HFY22 sales of RM1.67b are within our full-year target of RM3.3b but trail its own target of RM4b. We maintain our earnings forecasts and UNDERPERFORM call but raise our TP up by 7% to RM0.58 (from RM0.54) as we rationalise our valuation method to RNAV from PBV.

Within expectations. 1HFY22 CNP of RM60.6m accounted for 23% and 21% of our and consensus full-year forecasts, respectively. We deem the results within expectation as we expect a bumper 2HFY22 on: (i) the completion of Sapphire Melbourne (RM1.2b GDV) and stage 1 Uno Melbourne (RM1.1b GDV) (of which profits are recognised on a full completion basis vs. progress billings in Malaysia), and (ii) the completion of the first (RM236m) of three land sales worth a total of RM518m to SCIENTX.

With RM1.67b sales in 1HFY22, SPSETIA is on track to meet our full-year assumption of RM3.3b but trailing its own target of RM4b target. SPSETIA is keeping its target, banking on RM3.2b launches in 2HFY22 (vs. RM0.8b in 1HFY22.). We have reservation whether it is able to put onto the market the entire RM3.2b launches in 2HFY22 given the still soft market condition, labour shortages, rising mortgage rates (that are eroding affordability), persistent inflation (that is eating into consumers’ disposable incomes) and the absence of an extension to the Home Ownership Campaign by the government. Nonetheless, its unbilled sales of RM8.71b shall sustain its earnings for at least another two years.

1HFY22 CNP dipped 47% YoY on: (i) weaker revenue (-12%) due to lower sales of completed inventories worth RM272m (vs. RM425m), (ii) wider JV losses from Battersea, and (iii) higher financing costs (+13%) on higher borrowings.

SPSETIA’s proposed rights issue of up to 1.4b RCPS-C to raise up to RM1.18b to replace its existing RCPS-B is expected to be completed in Nov 2022. As its share price has fallen significantly since the exercise was first announced in April 2022, we believe the illustrative conversion price of RM1.39 is no longer relevant. It also means SPSETIA will have to issue significantly more RCPS C than the proposed 1.4b if the conversion price is to be revised down in accordance with its current share price – potentially leading to a more severe overhang.

We maintain our forecasts, and UNDERPERFORM call but raise our TP up by 7% to RM0.58 (from RM0.54) as we rationalise our valuation method to RNAV (at a 85% discount vs. peers’ 60-65% to reflect the low realisability of SPSETIA’s GDV) from PBV (0.18x). There is no adjustment to TP based on ESG for which it is given a 3-star ESG rating as appraised by us (see Page 4).

Risks to our call include: (i) strong recovery in the property sector; (ii) a decline in mortgage rates boosting affordability; (iii) construction costs stabilise/decline; and (iv) lower risks associated with overseas operations.

Source: Kenanga Research - 19 Aug 2022