SPSETIA’s FY22 results disappointed, weighed down by weak margins from its Australian developments, i.e. Uno and Sapphire. On a brighter note, FY22 sales of RM4.1b beat our expectation. Mindful of its huge debt servicing obligations that are burdening its performance, it is doubling down efforts to pare down debts. We cut our FY23F earnings by 34% but maintain our asset-based TP of RM0.38. Reiterate UNDERPERFORM.

FY22 core net profit of RM103m missed our forecast and consensus estimate by a whopping 40% and 60%, respectively as the much anticipated fourth quarter bumper earnings failed to materialise. The variance against our forecast came largely from weak margins realised from its Australian developments, i.e. Uno and Sapphire, which were completed and handed over to their buyers in the fourth quarter. Recall, property sales in Australia are recognised on a completion basis (which is lumpy), vs. progress billing in Malaysia.

Despite the higher revenue (+18%), FY22 core net profit dropped 37% YoY mainly due to higher financing cost (+34%) while its Battersea JV reported a loss.

All is not lost as SPSETIA provided upbeat guidance for FY23 during its analyst briefing as follows:

1. FY22 sales of RM4.1b were backed by new launches of RM3.1b which surpassed our RM3.3b assumption but came within the company’s target of RM4b. It sets a higher sales target of RM4.2b in FY23 (versus our RM3.3b target) focusing on landed residentials. FY22 unbilled sales of RM7.3b should sustain its earnings for approximately two years.

2. It has brought net gearing down to 0.62x in 4QFY22 (from a high of 0.71x seen in 3QFY22) and intends to pare down an additional RM1b debt in FY23 through further non-core lands sales. Meanwhile, its outstanding Johor land sale transaction with SCIENTX worth RM518m is still pending EPU approval.

3. All its ongoing projects are progressing well without any labour issue.

Forecasts. We cut our FY23F earnings by 34% to reflect lower margins for its Australian developments of which c.RM1.4b sales will be recognised in FY23 on handover to the buyers. We introduce our FY24F numbers.

We maintain our TP of RM0.38 on unchanged RNAV discount of 90%, steeper than peers’ 60%-65% to reflect its elevated debt levels (highest net gearing within our coverage). There is no adjustment to our TP based on ESG given a 3-star ESG rating as appraised by us (see Page 5).

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. 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 - 1 Mar 2023