Review

• S P Setia reported a net profit of RM150.3mn in 9M23, accounting for 52% of both our and the consensus' full-year estimates. Results fell short of expectations due to the delayed full recognition of earnings from UNO Melbourne, now anticipated in 1QFY24. Additionally, higher-thanexpected JV losses, finance costs and effective tax rates also contributed to the deviation from projections.

• Although 9M23 revenue increased by 9% compared to the previous year, net profit declined by 31% YoY to RM150.3mn. This decrease can be attributed to: 1) increased losses from joint ventures, 2) a 49% YoY rise in finance costs, and 3) a 72% YoY increase in tax expenses.

• 3Q23 net profit grew by 20% to RM51.8mn, on the back of a 15% QoQ improvement in revenue. This growth was largely attributed to increased unit handovers in the UNO Melbourne development project in Australia.

• New property sales increased by 30% YoY but declined by 12% QoQ to RM1.33bn in 3Q23 – se Figure 1. This brings the year-to-date total property sales for 9M23 to RM3.89bn, reflecting a 44% YoY increase. Domestic projects accounted for 87% of total sales, while international projects contributed the remaining 13%. During the period, the group cleared RM804mn worth completed inventories.

• Notably, RM3.89bn sales for 9M23 includes the RM1.05bn in sales proceeds generated from the monetization of 1,468.8 acres of nonstrategic land – see Figure 2. Excluding these land sales, S P Setia's total property sales for 9M23 would have shown an 8% YoY growth.

• Unbilled sales as at Sep-23 stood at RM6.8bn (local unbilled sales = RM5.4bn), providing c. 2 years of earnings visibility.

Impact

• We have revised our FY23/24/25 earnings forecasts by -29%/ +154%/-17% respectively. These adjustments reflect updated new sales projections of RM4.6bn/RM4.4bn/RM4.6bn, compared to prior forecasts of RM4.2bn/RM4.4bn/RM4.4bn. We fine-tuned progress billing recognition for local projects due to shifts in the sales mix, notably increased land and inventory sales this year. Additionally, we postponed recognising a portion of development profits from UNO Melbourne to FY24, aligning with management guidance.

• We have also factored in increased losses from joint ventures, higher finance costs, and adjustments to effective tax rates into our earnings model to be consistent with the YTD performance.

• That said, our latest earnings forecasts account for the earnings impact from three major land sales totalling RM1.2bn announced this year. These sales are anticipated to contribute to S P Setia's earnings in 2024.

Conference Call Highlights

• During the third quarter, S P Setia rolled various projects, including RM498.7mn worth of landed properties in the Central and Southern regions, as well as 2-storey commercial retail and office units in the Setia Fontaines City Centre Business Hub in Penang. The response to these new projects has been promising, with a 97% take up rate in the new phase of landed residential units in Bandar Kinrara. Additionally, around 60% of units have been sold in townships like Setia Bayuemas and Setia Fontaines.

• Reducing net gearing remains S P Setia’s pivotal objective for 2023. S P Setia aims to further decrease its current net gearing of 0.53x (compared to 0.64x in Sep-22) to 0.5x by end of the year. This will be achieved primarily through repatriating funds from overseas projects, monetising non-strategic land, and clearing unsold inventory.

• Separately, S P Setia announced the proposed disposal of 17.99 acres of land in Setia City, Selangor to KSL Holdings Bhd for a total cash consideration of RM228.8mn (RM291.97psf) – see Figure 3. The transaction was based on a "willing buyer willing seller" approach, after considering the land's market value appraised at RM204.0mn by independent valuers, CBRE WTW Valuation & Advisory Sdn Bhd. We are not surprised by the proposed disposal, given that it aligns with S P Setia’s strategic plan to improve efficiency by monetising some of its landbank. According to the announcement, the proposed disposal is expected to generate an estimated gain on disposal of around RM140.6mn after the completion of the disposal in 2Q24.

• That said, the management is confident in achieving their FY23 sales target of RM4.2bn. We believe this is highly achievable, considering: 1) YTD property sales of RM3.89bn making up 91% of the target and 2) RM450mn in bookings awaiting conversion to sales. With a conservative approach and limited new launches expected in 4Q23, our revised sales projection anticipates the group achieving total sales of RM700mn for the quarter. This incorporates the complete conversion of bookings into confirmed sales and the RM228.8mn land sale to KSL. This adjusted estimate suggests the potential for FY23 total sales to reach at least RM4.6bn.

Valuation

• We advocate investors to look beyond the soft FY23 performance. FY24 is poised to be significantly stronger with the anticipated recognition of substantial gains from the completion of the land sales. We maintain our Buy recommendation on S P Setia with a higher target price of RM1.07/share (previously RM1.05/share), based on unchanged CY24 P/Bk multiple of 0.35x.

Source: TA Research - 24 Nov 2023