SPSETIA’s 1QFY24 results met expectations. While its 1QFY24 core net profit almost doubled YoY, it was meagre at RM18.9m on a turnover of RM1.5b, due to lumpy overheads and finance cost. It remains focused on debt reduction (via land sales) and rolling out industrial products. We maintain our forecasts, TP of RM0.80 and UNDERPERFROM call.

SPSETIA’s 1QFY24 core net profit of RM18.7m (adjusted for RCPS distribution of RM52.8m and forex gains of RM5.8m) came in at only 9% and 6% of our full-year forecast and the full-year consensus estimate, respectively. However, we consider the results within expectations as we expect stronger earnings during the remaining quarters as progress billings accelerate.

YoY, its 1QFY24 revenue increased by 53%, primarily due to higher contribution from Vietnam with the handover of Eco Xuan and higher domestic property development revenue. However, gross profit margin declined to 22.8% (-4.8ppts) due to higher land sales being reported which are of lower margin mix. On the flipside, Battersea JV saw a better turnaround which led to slightly lower losses. Despite that, effective taxes remained lofty at 48.2% (+2.5ppts) and after accounting for RCPS dividends (which we consider as financing costs) and forex, its core net profit almost doubled from a low base.

QoQ, its revenue grew by 7% due to stronger property deliveries as mentioned. However, its core net profit plunged 88% due to a lower gross margin, higher finance costs and JV losses.

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

1. Against the group's RM4.4b sales target for FY24, actual sales for 1QFY24 reached RM1.4b, which is on track to achieve its target though it is worth noting that their sales target includes land sales of RM731m, comprising of Johor land transactions of Taman Pelangi (RM167m) and Taman Pelangi Indah 2 (RM564m).

2. The net gearing ratio demonstrated improvement, decreasing from 0.53x in 4QFY23 to 0.49x in 1QFY24. The group aims to continue enhancing its net gearing by land monetisation, with total land sales revenue recognised of RM424.0m in 1QFY24, and a target gearing of 0.40x-0.42x in FY24.

3. Losses from the Battersea JV persisted mainly due to impairments stemming from unsold units, declining rental income, and elevated interest rates in the UK. It does not expect a turnaround from the unit anytime soon with losses staying at last year’s level.

4. It only registered RM689m property sales in 1QFY24. However, we are not overly concerned as we expect a seasonally uptick in sales in 2QFY24 and 4QFY24, coupled with more project handovers.

Forecasts. Maintained.

Valuations. We maintained our TP of RM0.80 on an unchanged RNAV discount of 75%, vs 55% average for the sector. There is no adjustment to our TP based on ESG given a 3-star ESG rating as appraised by us (see Page 4).

Investment case. We remain cautious on SPSETIA due to: (i) its significant exposure to the high-end landed and high-rise residential segments, which are 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. We maintain our UNDERPERFORM call.

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) risks associated with overseas operations.

Source: Kenanga Research - 17 May 2024