SPSETIA’s 9MFY22 results disappointed on widened JV losses and higher financing costs. On a brighter note, YTD sales of RM2.7b were on target. It is mindful of its huge debt servicing obligations that are weighing down on its performance and hence is doubling down on efforts to pare down borrowings including repatriation of overseas proceeds and land sales. We cut our FY22-23F earnings by 36-21%, reduce TP by 34% to RM0.38 (from RM0.58) and maintain our UNDERPERFORM call.

Below expectations. 9MFY22 core net profit of RM35m missed expectations at only 13% and 12% of our full-year forecast and the full year consensus estimates, respectively, weighed down by 3QFY22 core net loss of RM26m (after stripping out forex and fair value gains worth RM30m). The variance against our forecast came largely from: (i) the higher-than-expected financing cost, and (ii) the wider-than-expected losses from 40%-owned JV in Battersea.

9MFY22 sales of RM2.7b backed by new launches of RM1.69b came in at 81% of our RM3.3b target (company targeted RM4b) which we deem inline as we anticipate weaker sales in 4Q arising from the higher interest rate environment (Bank Negara Malaysia has raised rates by 75bps YTD). Unbilled sales stood at RM8.4b which should sustain its earnings for approximately two years.

Results highlight. 3QFY22 CNL sank into the red QoQ on: (i) weaker revenue (-15%) which dragged GP (-14%), (ii) higher financing costs (+13%), (iii) higher effective tax rates of 12ppt, and (iv) incurrence of its bi-annual RCPS dividend distribution of RM66m every 1Q and 3Q. 9MFY22 CNP came off 9% YoY mainly due to higher financing (+18%) and wider JV losses.

The key takeaways from the analysts briefing last Thursday are as follows:

1. SPSETIA has repatriated GBP36m (or c.RM195m) from Battersea with the intention to pare down RM1b worth of borrowings by year end (currently RM12.5b borrowings) and the goal of bringing net gearing down to 0.4x by FY24 (currently 0.71x). Such target will be achieved through: (i) land sales, (ii) debt settlement in Singapore and Australia upon projects completion, and (iii) continuous repatriation of monies from Battersea.

2. Losses at Battersea (40% JV) will narrow on reducing market expenses as the take-up inches towards 100%. Currently, the combined take-up rate from phase 2 and 3A (GDV of GBP1.56b) stands at 89%.

3. The company’s sales conversion rate remains at c.50% and they intend to continue pushing landed properties within its matured townships to achieve its RM4b sales target. As of 3QFY22, bookings stood at RM592m.

A temporary reprieve. We anticipate 4QFY22 net profit to come in strong at c.RM135m upon the handover of Sapphire Melbourne (GDV of RM1.2b, competed in Oct 2022). The contribution from Sapphire will spill over to FY23 on gradual handovers while UNO Melbourne (RM1.5b GDV) will also start to contribute on completion in FY23. Nonetheless, with rising rates, we forecast absolute financing costs to rise in FY23 despite the lower debt levels as c.85% of its existing debts are secured at floating rates.

Forecasts. We cut our FY22F/23F net profit by 36%/21%.

We remain cautious on SPSETIA as: (i) prospects of the property sector seem to be deteriorating further, clouded by eroding affordability due to rising interest rates and elevated input costs, and (ii) its near-term performance will continued to be weighed down by high debt servicing obligations and high-cost structure. We reduce our TP by 34% to RM0.38 (from RM0.58) after raising our RNAV discount to 90% (from 85%) versus peers’ 60-65% to reflect its elevated debt levels (highest net gearing within our coverage) which might potentially lead towards liquidity issues in a weaker market moving forward. There is no adjustment to our TP based on ESG given a 3-star ESG rating as appraised by us (see Page 5). Maintain UNDERPERFORM

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

Source: Kenanga Research - 21 Nov 2022