• Maintain NEUTRAL, with new TP of MYR0.60 from MYR0.64, 14% upside. SP Setia’s 1Q23 results were below expectations. While earnings have yet to see a turnaround and gearing remains high, property sales in 1Q23 achieved MYR1.03bn – on track to hit management’s MYR4.2bn target by year end. Our new TP reflects our new ESG score for the company as a result of the adjustment in ESG weightage, as well as minor changes in our RNAV estimate.

• 1Q23 results. The lower revenue QoQ was largely because of the completion and handover of two projects in Australia, namely Sapphire by the Gardens and UNO Melbourne Phase 1 in 4Q22. Meanwhile, interest expense was higher YoY due to interest rate hikes, but lower QoQ as total debt dropped marginally due to repayment of borrowings (about MYR1.1bn). PBT margin is still hovering around the 12% region. Net gearing stood at 0.56x, relatively unchanged from 0.57x as at 4Q22. Unsold inventory improved slightly to MYR1.15bn (at cost), vs MYR1.24bn in 4Q22.

• Encouraging sales in 1Q23. Property sales hit MYR1.03bn in 1Q23 vs MYR1.41bn in 4Q22. In addition to the MYR512m bookings, we think the company should be on track to reach its MYR4.2bn target for the year. Local projects contributed MYR903m, mainly coming from the usual township projects in the central region, such as Bandar Kinrara, Setia Eco Templer, Setia Alam Impian and Setia Eco Gardens.

• Launching MYR4.89bn projects this year. The company launched MYR683m landed projects in 1Q23. In the pipeline, launches will mainly concentrate in the central region, including new phases in Setia Alam, Ecohill 1 & 2, Eco Templer, Bandar Kinrara and Setia Eco Park, Alamsari and Alam Impian. Management also indicated that there could be some potential land disposals in 2Q23, that should help to pare down debt.

• Forecasts. We make no changes to our FY23F-25F earnings for now, and we expect sales and construction works to pick up more materially in 2H, in line with its historical trend. Unbilled sales fell slightly to MYR7.17bn, vs MYR7.3bn as at 4Q22.

• Lower TP. Our new TP is based on an unchanged 80% discount to RNAV, with 0% discount/premium for ESG given our ESG score of 3.0 for the company is in line with the country median.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 18 May 2023