• Upgrade to BUY from Neutral, new TP of MYR0.75 from MYR0.60, 33% upside. We turn upbeat on SP Setia, given management’s more aggressive effort in de-gearing. While this exercise’s impact on its core earnings should be minimal, we believe the company will be on a stronger footing to improve its core operations, thanks to a lighter balance sheet. Our new TP (with a 0% ESG premium/discount) is now based on a 75% discount to RNAV (previously 80%) to reflect the rapid monetisation of its non-core landbank.

• Same parcel sold to Scientex. SP Setia announced that it has entered into a conditional sale and purchase agreement (SPA) with Scientex Lestari to sell 959.721 acres of freehold land for a cash consideration of MYR547.7m. Scientex Lestari is a 70:30 JV entity between Scientex Quatari, a wholly-owned subsidiary of Scientex (SCI MK, BUY, TP: MYR3.80), and Dato’ Azman bin Mahmud. We highlight that this is the same parcel of land that SP Setia tried to sell to Scientex in 2021, but due to non- fulfilment of a condition precedent related to the approval by the Economic Planning Unit, the transaction was then terminated in Mar 2023. The current condition precedent in the SPA this time around is expected to be satisfied with the disposal.

• Selling at a higher price this time. Interestingly, the transaction price this time is 5.7% higher than the previous MYR518.1m. This latest figure translates into a land price of MYR13.10psf, and SP Setia is expected to realise an estimated gain on disposal of about MYR438.3m upon the completion of the transaction in 2Q24.

• A big effort to de-gear. We are upbeat on management’s latest effort to de-gear the company. Including the latest land sale, SP Setia has sold two big parcels of land – 500 acres in Semenyih were sold to Mah Sing (MSGB MK, BUY, TP: MYR0.77) in late June – in less than a month. Both disposals of non-core land will raise a total of MYR940m, which will come in handy for the company’s repayment of borrowings.

• A lighter balance sheet ahead. The lighter balance sheet should help to improve the company’s ROE going forward from the current low of only 2% in FY22. With both land disposals, SP Setia’s net gearing is expected to fall to 0.54x, from 0.61x as at 1Q23. This should also help to save interest cost of about MYR40m per year. We believe the disposal of non-core land will continue in the coming months, so that management’s target of net gearing of 0.5x by year-end will be met.

• Improving core operations should be the next step. With a better balance sheet, SP Setia should be on a stronger footing to improve its core operations, which have shown various inefficiencies in our view. Any deviation from this strategy will be a key downside risk to our outlook.

Source: RHB Research - 6 Jul 2023