Review

• S P Setia reported a net profit of RM98.5mn in 1H23, accounting for 34% of both our and the consensus' full-year estimates. We deem the results to be in line with our expectations, as we anticipate lumpy revenue recognition upon the completion of the UNO Melbourne project in Australia (unbilled sales RM1.0bn) in 4Q.

• Although 1H23 gross profit increased by 19% compared to the previous year, net profit declined by 33% YoY to RM98.5mn. This decrease can be attributed to: 1) increased losses from joint ventures, 2) a 55% YoY rise in finance costs, and 3) a 67% YoY increase in tax expenses.

• 2Q23 net profit decreased by 22% to RM43.1mn, despite a 17% QoQ improvement in gross profit. The decline was primarily due to higher finance costs and tax expenses, as well as increased profit attributable to minority interest holders.

• In the second quarter of 2023, S P Setia achieved a substantial increase in property sales, rising by 48% QoQ and 54% YoY to RM1.5bn. This boosted the 1H23 total property sales to RM2.56bn, marking a 53% YoY increase. Domestic projects accounted for 86% of total sales, while international projects contributed the remaining 14%.

• Notably, RM2.56bn sales for 1H23 includes the RM504mn in sales proceeds generated from the monetization of 509 acres of non-strategic land. Excluding these land sales, S P Setia’s total property sales for 1H23 would still reflect a commendable 23% YoY growth.

• Unbilled sales as at Jun-23 stood at RM6.8bn (local unbilled sales = RM5.1bn), providing c. 2 years of earnings visibility.

Impact

• No change to our FY23-25 earnings forecasts.

• Note that our earnings model has not incorporated the recent announcements regarding the sale of 500 acres of land in Semenyih, Selangor, and eight parcels of land totalling 960 acres in Tebrau, Johor, with a combined value of RM940mn – refer to our reports dated 20 June 2023 and 6 July 2023 for more details. Pending the fulfilment of condition precedents, these land sales are anticipated to be recognised in the upcoming year, potentially elevating our FY24 net profit projections by 127% to RM465mn.

Conference Call Highlights

• During the second quarter, S P Setia launched projects with a total GDV of RM772mn. Notably, their landed properties in established areas like Bandar Kinrara and Setia Alam Impian garnered a strong response, achieving full take-up rates.

• The management expresses confidence in achieving their FY23 sales target of RM4.2bn. We believe this is achievable, considering: 1) YTD property sales of RM2.05bn (excluding land sales) making up 49% of the target; 2) RM498mn in pending bookings awaiting conversion to sales; and 3) anticipated launches of RM2.7bn in Malaysia during 2H.

• Alongside achieving the sales target, reducing net gearing is a pivotal objective for 2023. S P Setia aims to further decrease its current net gearing of 0.55x (compared to 0.64x in 1H22). This will be achieved primarily through repatriating funds from overseas projects, liquidating non-strategic land, and clearing unsold inventory. Despite having already realised over RM1.0bn from non-strategic land monetization this year, the management remains committed to additional land monetization to strengthen financial position and pursue future growth opportunities.

• Elsewhere, S P Setia is preparing to launch their first industrial development, Setia Alaman (399 acres), in the Klang Valley. Scheduled for 2H launch, efforts are underway to convert the land parcels' titles to industrial use. Beyond Setia Alaman, the company has also allocated 260 acres in Setia Fontaines, Penang, and 308 acres in Tanjung Kupang, Johor, for industrial park development.

Valuation

• With the anticipation of 1) BNM’s OPR hike cycle nearing its end, 2) the added potential for land value enhancement stemming from mega infrastructure projects (HSR, RTS, and MRT3) and 3) the potential implementation of more favourable policies aimed at facilitating homeownership for both local residents and foreigners (relaxation of MM2H), the property sector is currently witnessing a resurgence in investor optimism. This upbeat sentiment is likely to persist, potentially resulting in continued gains for property stocks.

• In the case of S P Setia, its series of land disposals combined with robust property sales are poised to strengthen its financial standing, leading to reduced gearing levels and a proactive pursuance of future growth opportunities. Consequently, we have revised our target P/Bk multiple upward from 0.25x to 0.35x. Worth noting is that our target P/Bk multiple remains slightly below the group’s 5-year average of 0.4x.

• We arrive at a new target price of RM1.05/share (previously RM0.75/share). Maintain our Buy recommendation on the stock.

Source: TA Research - 17 Aug 2023