Kenanga Research & Investment

S P Setia - Barely Profitable in 1QFY23

Publish date: Thu, 18 May 2023, 10:37 AM

SPSETIA’s 1QFY23 results met our forecast but missed consensus  estimate. It returned to the black from losses a year ago driven by  higher progress billings and improved margins. With RM1b sales achieved during the quarter, it is on track to meet our full-year  assumption of RM3.3b. We remain concerned over its high debt and maintain our forecasts, TP of RM0.38 and UNDERPERFORM call.

1QFY23 core net profit of RM10m came in at only 8% and 3% our full-year forecast and the full-year consensus estimate, respectively. We  consider the results within our expectation as: (i) its 1Q are normally  weighed down by the RCPS dividend distribution (so is 3Q), and (ii) we  expect stronger earnings during the remaining quarters. However, we  regard the results as below market expectations as 1QFY23 core net  profit only made up a fraction of the full-year consensus estimate.

It returned to the black in 1QFY23 driven by higher progress billings (+12%), improved gross profit margins (+4ppts) and a lower RCPS  distribution.

1QFY23 sales of RM1.03b are on track to meet our full-year assumption  of RM3.3b (which is slightly more conservative that the company’s full-year target of RM4.2b).

The key takeaways from its analyst briefing yesterday are as follows:

1. For FY23, it intends to launch RM4.9b worth of projects (already  launched RM683m in 1QFY23) to achieve its RM4.2b sales target. Of  these launches, 78% would be from central region, 8% from Johor  and the rest from Penang. However, we doubt whether the lofty aim  is a realistic target amidst the challenging backdrop. Recall, in FY22,  the group planned to launch RM4b worth of properties but only  managed to hit RM1.3b.

2. It intends to bring its net gearing of 0.61x down further mainly through  land sales. SPSETIA is hoping to finalise a 500-acre land sale by  June/July 2023 and is also in serious discussions to revive the 960- acre Pelangi (Johor) land sale (which fell through earlier this year).

3. The group intends to pivot into the industrial development space. It  has earmarked land parcels for this purpose in Setia Alaman, Tanjung Kupang and Setia Fountaines. It is currently converting titles  of these land parcels from commercial to industrial.

4. For the rest of the year, its Australian developments (UNO and  Sapphire) have outstanding 35% of vacant possession left to be  delivered worth c.RM800m. Post completion of these developments in FY23, it intends to repatriate c.AUD55m cash back to Malaysia but  will remain active in Australia, developing land pockets.

5. Its 40%-owned Battersea JV registered a loss of RM23m in 1QFY23  as impairments were made arising from discounts given to clear off  units and the higher interest rates in the UK. It does not expect  profitability from this JV anytime soon but assured that cash flows are  healthy enough for repatriation this year.

Forecasts. Maintained.

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 - 18 May 2023

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