Review

• S P Setia’s FY23 net profit of RM298.6mn beat expectations, accounting for 146% and 115% of our and the consensus' full-year estimates, respectively. The outstanding performance was primarily attributed to higher-than-expected margins achieved from land sales.

• The group declared an ordinary dividend of 1.34sen/share, which exceeded our projected dividend of 0.75sen/share, and was marginally lower than the 1.47sen/share declared in FY22.

• S P Setia’s net profit decreased by 1.9% YoY to RM298.6mn in FY23, in tandem with a 1.8% decline in revenue. The group managed to enhance its EBIT margin by 5.0 percentage points to 24% in FY23, attributed to the recognition of land sales with lucrative margins.

• 4Q23 net profit soared 186% QoQ to RM148.2mn, on the back of 28% growth in revenue. This growth was largely attributed to increased unit handovers in the UNO Melbourne development project in Australia, along with a substantial contribution from higher-margin land sales.

• New property sales surged 24% YoY and more than doubled QoQ to RM1.75bn in 4Q23 – see Figure 1. This brings FY23 property sales to RM5.1bn, reflecting a 24% YoY increase. Notably, FY23 new property sales surpassed both our sales assumptions and the management’s sales target of RM4.2bn. Domestic projects accounted for 86% of total sales, while international projects contributed the remaining 14%.

• Notably, RM5.1bn sales for FY23 includes the RM836mn in land sales – see Figure 2. Excluding these land sales, S P Setia's total property sales for FY23 would have shown a 7% YoY growth.

• Unbilled sales as at Dec-23 stood at RM5.6bn (local unbilled sales = RM4.9bn), providing c. 2 years of earnings visibility.

Impact

• Following the FY23 results, we adjust our progress billings and margin assumptions, leading to an upward revision of our FY24 and FY25 earnings forecasts by +6.9% and +6.6%, respectively.

• Our FY24/25/26 new sales assumptions are RM4.4bn/RM4.55bn/RM4.6bn respectively.

• We introduce our FY26 net profit of RM211.6mn, representing a growth of 8.3% YoY. Conference Call Highlights

• The management stays positive on the property sector outlook and has thus set a sales target of RM4.4bn. To accomplish this, the group has lined up RM4.5-5.0bn in new launches for FY24.

• In FY24, the group will prioritise accelerating township and large-scale industrial developments, along with further strengthen its global footprint.

• In the exciting year ahead, S P Setia is set to commence the first phase of Setia Federal Hill, a prestigious development in Bangsar with a total GDV of RM20.2bn. The group will develop 2.67 acres of prime commercial land in partnership with Mitsui Fudosan. The development will include two residential towers, which will add a total of 1,300 units and have a GDV of approximately RM1.4bn. The launch of the first tower is slated for 2H of this year.

• Elsewhere, S P Setia is preparing to launch their first industrial development, Setia Alaman (399 acres), in the Klang Valley. Scheduled for launch this year, efforts are underway to convert the land parcels' titles to industrial use. Beyond Setia Alaman, the company has also allocated 323 acres in Setia Fontaines, Penang, and 307 acres in Tanjung Kupang, Johor, for industrial park development. – see Figure 3.

• On the international front, the focus will persist on advancing development plans in Vietnam and Australia. Specifically, in Australia, the Group aims to sustain the momentum of its current presence, reinforced by the development of the newly acquired land in Sydney.

• By implementing de-gearing strategies such as repatriating funds from overseas projects, monetizing non-strategic land, and clearing unsold inventory, S P Setia achieved a reduction in net gearing to 0.49x in Dec- 23, successfully meeting the target of bringing gearing below 0.5x, as compared to the 0.57x recorded in Dec-22. For FY24, the management plans to further reduce its borrowing by utilising proceeds from land sales.

Valuation

• Following the earnings revision and rolling forward the base year valuation to CY25, our TP for S P Setia is adjusted to RM1.10/share (previously RM1.05/share) based on a P/Bk multiple of 0.35x. S P Setia's share price has declined by 11% since we downgraded the stock to Hold last month. Considering the improving risk-reward profile, we upgrade the stock from Hold to Buy.

Source: TA Research - 1 Mar 2024