• Maintain BUY and MYR1.72 TP, 13% upside with c.1% FY24F yield. SP Setia’s 1H24 earnings beat expectations, as its land monetisation strategy and equity stake sale in a project helped to offset an increase in one-off administrative expenses and wider losses related the Battersea Power Station JV. Its net gearing has also improved to 0.44x from 0.50x in FY23. Land sales amounting to MYR396m are expected to be recognised in 2H24, but, moving forward, earnings should be “more normalised” – driven mainly by its township developments and industrial expansion.

• 2Q24 results. Revenue was higher QoQ, driven by the recognition of the land disposal (+33% QoQ) in Taman Pelangi Indah 2 which is worth MYR564m (PAT gain of MYR333m), offsetting the lower property development revenue (-12% QoQ) for the quarter. This also resulted in a wider EBIT margin of 39.9% (1Q24: 18.9%). Headline PBT was also boosted by a MYR56.3m gain arising from a 50% equity stake disposal in Taman Ikan Emas, Cheras (a partnership redevelopment project). Meanwhile, JV losses widened to MYR101m during the quarter (1Q24: -MYR20.8m) due to an income guarantee agreement for an office tower in Battersea Power Station. Unsold inventory dropped 15% from end-FY23 to MYR1.5bn, with a significant portion remaining from Aspire Tower, KL Eco City, and Uno Melbourne.

• Losses from Battersea. The JV’s agreement to sell an office tower in Battersea Power Station, which was newly completed in March, included some income guarantee for a period of five years. However, due to soft market conditions and the resulting low occupancy rates, the JV had to record a total loss of MYR125m. This was also partially attributed to higher interest rates in the UK which raised the project’s interest payments. Management acknowledged that the subsequent quarters may see similar results until the building’s occupancy rates improve.

• On track to meet its sales target. YTD, the group has recorded MYR2.3bn in sales (1H23: MYR2.6bn), with MYR731m from land sales. So far, the group has launched projects worth MYR1.08bn, and this should pick up in 2H24 as Setia Federal Hill – Phase 1 (GDV: MYR1.4bn) will be launched, as well as other products from the existing township projects. Other key projects include Setia Alaman Industrial Park, which is part of the group’s industrial expansion strategy. Including the land sales, we believe SP Setia should be able to hit its MYR4.4bn sales target by the year-end.

• We raise FY24F earnings by 15% to reflect the land disposal gains, and FY25-26F earnings by 2%. Two more land sales transactions (worth MYR396m), which lead to a PAT gain of ~MYR198m, will be concluded in 2H24. Unbilled sales stood at MYR4.16bn vs MYR5.38bn as at 1Q24. Our TP is based on a 45% discount to RNAV and 0% premium for ESG. Downside risks: Weaker-than-expected property sales, margins and market conditions.

Source: RHB Research - 15 Aug 2024