What Happened?

Last Friday, S P Setia announced the termination of the agreement to sell a freehold of 960-acre land in Tebrau, Johor, to Scientex Lestari, a 70 %-%- owned joint venture of Scientex Bhd. The termination was due to the failure to meet the conditions precedent within the extended completion period.

Disposal Fallen Through for the Second Time

S P Setia’s second attempt to sell prime land in Johor to Scientex has encountered another setback. Initially offered at RM518mn (RM12.39 psf) in 2021, the deal collapsed in March 2023 due to Scientex's inability to secure a waiver for the Bumiputera equity condition mandated by the Economic Planning Unit. Despite both parties re-entering negotiations in July 2023 with a revised price of RM548mn (RM13.10 psf), and Scientex forming a joint venture with Dato’ Azman bin Mahmud to fulfil the Bumiputera Equity condition, the deal has once again fallen through.

Disappointment Fuels Potential for Future Higher-Value Disposal

The termination was an unexpected disappointment for us. We had anticipated S P Setia's net gearing to decrease to 0.43x by the end of 2024 (from 0.53x as of Sep-23) if the land sale had gone through. However, we still anticipate an improvement in the group's net gearing to 0.47x by the end of 2024, driven by repatriating funds from overseas projects, recognising land sales proceeds totalling RM733mn and clearing unsold inventory.

Despite this setback, we understand that the group remains committed to actively seeking potential buyers for the land. With a positive outlook for the Johor property market, anticipating increased demand driven by the region's improved investment climate and economic opportunities, we remain optimistic that S P Setia could secure a better price for the land if disposal opportunities emerge once more.

Management’s FY23 Sales Target of RM4.2bn Remains Intact

Excluding the Tebrau land sales, S P Setia's new sales for 9M23 would total RM3.33bn (down from the previously reported RM3.89bn). Despite this, we believe the management's FY23 sales target of RM4.2bn remains achievable, considering: 1) 9M23 property sales already accounted for 79% of the target; 2) the RM229mn land sales to KSL announced in Nov-23; 3) RM450mn in bookings achieved as of Sep-23 that are to be converted to sales and 4) positive reception for new launches in 4Q.

Forecast

Excluding the RM548mn land sales and factoring in better performance from ongoing and newly launched projects in the fourth quarter, we expect S P Setia's FY23 new sales to reach RM4.2bn, a decrease from our previous projection of RM4.6bn. As a result of the deal termination, we have revised down our FY24 earnings forecast by 52% due to the exclusion of the land sales contribution. Meanwhile, we have raised our FY25 earnings forecast by 4.3%.

Recommendation

In light of the earnings downgrade, we have cut our target price from RM1.07/share to RM1.05/share, based on a CY24 P/Bk multiple of 0.35x. We downgrade the stock from Buy to Hold, as the stock now only renders a total return of 11%, following the recent 28% price rally over the past one month

Source: TA Research - 8 Jan 2024