SPSETIA’s 1HFY23 results beat our forecast but were below market expectations. It expects higher property and land sales. We raise our FY23F and FY24F earnings forecasts by 13% and 187%, respectively, lift our TP to RM0.68 (from RM0.38) as we reduce our RNAV discount to 75% (from 90%) but maintain our UNDERPERFORM call on concerns over its high debt.

1HFY23 above expectations. SPSETIA’s 1HFY23 adjusted net profit of RM70.1m accounted for: (i) RCPS distribution of RM40.6m, and (ii) forex losses of RM12.2m. This was above our expectation, making up 58% of our full-year estimate but disappointed consensus’ RCPS-adjusted full year estimates (at 33%). The positive deviation on our end was due to higher-than-expected performance from other income streams. Meanwhile, the negative deviation from consensus could be attributed to under-accounting of tax exposure.

YoY, 1HFY23 revenue was flattish (+1%) given challenges in the property segment but saw some support in its non-core operations (likely trading). That said, the group was able to register higher property sales at RM2.56b (+65%) thanks to the strong clearance of certain property inventories. This could have elevated gross margin to 30.3% (+4.6ppt) and increased gross profit by 19%. However, no thanks to extended losses from its JV (mainly Battersea), pre-tax profits declined by 7%. Alongside higher effective taxes, 1HFY23 net earnings of RM98.5m saw a decline by 33% but would increase by 16% to RM70.1m as we factor in a less stressful RCPS dividend distributions and forex losses in 1HFY23.

Briefing highlights. The group opines that its full-year targets would likely be met given the encouraging traction seen so far. The key takeaways from its analyst briefing yesterday are as follows:

1. With regards to its RM4.2b FY23 sales target, the group has reported sales of RM2.56b in 1HFY23. While this includes the RM392m land sale of Glengowrie to MAHSING, the remainder of the year could be lifted by a growing interest in its Johor products attributable to the Singapore-JB RTS Link that is expected to be completed in 2026. Notwithstanding this, the RM548m Tebrau land sales to SCIENTX would provide support as well.

2. The combined land sale transaction of RM940m would be expected to be earnings accretive in FY24. Even without these, the group opined that its land bank could sustain a further 30 years worth of development, possibly indicating added optimisation of its land holdings. To instil progress, township co-development may be considered.

3. JV losses from Battersea continued to widen, no thanks to higher void holding costs from unsold units and diminishing rentals. Not helping either are high UK base rates. For the time being, the JV may still struggle to breakeven but the group maintained that cash flows are healthy enough for repatriation this year.

4. Australian assets (namely UNO, Melbourne) will likely see its unbilled sales (RM1b) being recognised by 4QFY23, which may result in lumpy reporting.

5. Gearing for the group continued to improve at 0.55x in 2QFY23. The group seeks to narrow its obligations further with an aspirational level of 0.3x in FY27. We believe this may be accelerated by further abovementioned land sales.

Forecasts. While we tweak our FY23F earnings by 13% on better non-key operating income, we raise our FY24F earnings by c.190% as we account for the upcoming recognition of its two major land sales amounting to RM940m in Glengowrie and Tebrau. We keep other property-related assumptions unchanged.

We maintain UNDERPERFORM but with a higher TP of RM0.68 (from RM0.38, previously). This is thanks to our revised discount to RNAV of 75% (from 90%). The TP still reflects a higher discount against its peer average of 60-65% owing to its persistently high debt levels, granted that progressive improvements are noticed. We continue to anticipate some challenges in the property space which may see some near-term relief thanks to infrastructure-related developments. That said, these developments are long-term in nature and may be exposed to execution risks.

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 - 17 Aug 2023