• Upgrade to BUY from Neutral with a higher MYR1.48 TP from MYR1.28, 21% upside. SP Setia’s financial position should gradually improve from 2H onwards. Degearing is now management’s top priority. We believe the handover of a few projects in Melbourne and Singapore as well as the potential completion of some land disposals will help reduce its net gearing to 0.51-0.53x by year end from the current 0.61x (including non- controlling interests). Our new TP is now based on a 65% discount to RNAV (from 70% previously) with a 2% ESG premium.

• Completion of overseas projects should pare down MYR1.5-1.6bn in debt. We recently had a meeting with Justine Jiew, Head of IR of SP Setia. The completion of Sapphire and UNO in Melbourne in 3Q22 as well as Daintree Residence in Singapore in 4Q22 should help to pare down MYR1.5-1.6bn in debt from the company’s total borrowings of MYR12.6bn. Also earnings are expected to be more lumpy in 2H this year.

• Potential re-financing of the existing Islamic redeemable convertible preference shares (RCPS-i). Management has indicated that the company may redeem the RCPS-i B (worth MYR1,035m) in Dec 22 after the 5th year anniversary, by re-financing it. The current coupon rate for this tranche is at 5.93% and, in our view, the company is at an advantage to ride on the current low interest rate cycle to re-finance it at a lower rate. If this materialises, it should help to reduce SP Setia’s total preferential dividend payment to both RCPS-i’s which amounted to MYR130m pa.

• Proceeds from land disposal to Scientex may come in handy. Recall, SP Setia announced the disposal of 959.7 acres of land in Johor to Scientex in May last year for MYR518.1m. The land sale, which is expected to be completed in phases, is now pending Economic Planning Unit’s (EPU) approvals. At the same time, management is also in talks to some corporates and a logistic player to potentially sell some commercial land plots in Setia Alam Impian. The continuous sale of non-core landbank as well as strategic plots within its township developments should help to pare down gearing further and accelerate value unlocking of its landbank.

• Potential landbank replenishment in Melbourne. While there are no plans to add more land in Malaysia, management is looking to replenish its landbank in Melbourne, given that the existing projects there will be completed this year. We are not concerned over the potential funding as the accumulated profits generated in all SP Setia’s past projects in Melbourne should help to finance the new land.

• Softer sales in 1Q22 but MYR4bn sales target remains on track. The slower property sales in 1Q is generally within expectation. We believe SP Setia should be on track to hit its MYR4bn sales target on the back of MYR4.25bn worth of launches, of which 65% is landed properties.

Source: RHB Research - 21 Apr 2022