SPSETIA’s FY23 results beat our forecast but disappointed the market. Its FY23 core net profit almost doubled thanks to lumpy profits from an Australian project. It remains focused on debt reduction (via land sales) and rolling out industrial products. We maintain our forecasts, lift our TP by 18% to RM0.80 (from RM0.68) and upgrade our call to MARKET PERFORM from UNDERPERFORM.

SPSETIA’s FY23 core net profit of RM208.8m (adjusted for RCPS distribution of RM101.5m and forex gains of RM11.7m) beat our forecast by 56% but missed the consensus estimate by 7%. The variance against our forecast came mainly from higher-than expected lumpy profits from UNO Melbourne.

YoY, its FY23 revenue decreased by 2%, primarily due to more completions seen in the preceding year. However, this was offset by lumpy recognitions from UNO Melbourne, and the clearance of certain property inventories, resulting in a 26% increase in gross profit due to their higher margins. This elevated gross margin to 30.7% (+6.8ppts), cascaded to better operating profits (+25%). However, the group's joint venture, notably Battersea, experienced worsening losses (+c.130%).

After accounting for RCPS dividends (which we consider as financing costs) and forex, FY23 core net profit still increased significantly by 88%.

QoQ, it turned around in 4QFY23 backed by a 28% growth in revenue, similarly, due to lumpy profits from Australia and improve sales from township projects in Klang Valley.

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

1. In relation to the group's RM4.2b sales target for FY23, actual sales reached RM5.1b, with RM4.7b from property development and RM400.0m from land sales. Looking ahead, interest in the group's Johor products is expected to increase due government’s projects and incentives, and support from the RM548.0m Tebrau land sales to SCIENTX. For FY24, the group has set a sales target of RM4.4b, inclusive of contributions from land sales. With the group's proactive approach to leveraging its landbanks and expansion, we opine this target is attainable.

2. The net gearing ratio demonstrated improvement, decreasing from 0.53x in 3QFY23 to 0.49x in 4QFY23. The group aims to continue enhancing its net gearing, with pending considerations on the impact of the Tebrau land sale on the gearing position. Consequently, as income is factored in over the upcoming years, the net gearing is expected to decline to 0.48x.

3. The Battersea JV sustained ongoing losses, mainly due to impairments stemming from unsold units, declining rental income, and elevated interest rates in the UK. Profitability is not expected from this partnership in the foreseeable future. Nevertheless, the company affirms that cash flows remain strong enough to enable repatriation this year.

4. Its emphasis is on expanding its large-scale industrial projects - Setia Alaman, Tanjung Kupang, and Setia Fontaines Industrial, with a total GDV of RM6.64b remaining a focal point.

5. The outlook for borrowing costs will remain relatively stable compared to FY23, assuming there are no rate hikes. The
target is to decrease borrowings to RM9.4b, but there are also factors that may lead to increases, such as borrowing for
land acquisition in Australia to strengthen the international pipeline.

Forecasts. We raise our FY24F earnings forecast by 4% on the back of greater progress billings expected from stronger sales achieved during FY23. Meanwhile, we introduce our FY25F numbers.

Valuations. We raise our TP to RM0.80 (from RM0.68) after we updated our RNAV inputs. We maintain our toppish RNAV discount of 75% to the stock, lower than 60% we ascribed to the sector to reflect the lower realisability of its RNAV. There is no adjustment to our TP based on ESG given a 3-star ESG rating as appraised by us (see Page 5).

Investment case. We remain cautious on SPSETIA due to: (i) its significant exposure to the high-end landed and high-rise residential segment, which is not highly sought after by buyers at present, (ii) its high gearing and hence debt servicing obligation amidst a high interest environment, and (iii) losses at its JV projects. That said, following the recent correction in its share price, we believe the stock’s risk-reward is skewing more favourably, with c.6% dividend returns likely to entice yield seekers. Upgrade to MARKET PERFORM from UNDERPERFORM.

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

Source: Kenanga Research - 1 Mar 2024