Review

• S P Setia’s 1Q24 net profit of RM77.3mn exceeded our estimates but matched consensus, accounting for 29% and 22% of our and the consensus' full-year estimates, respectively. The outperformance was largely due to stronger-than-expected revenue recognition from ongoing projects.

• The 53% YoY increase in 1Q24 revenue to RM1.5bn was propelled by increased property development contributions from Vietnam and Johor, alongside higher land sale revenue. However, net profit expanded at a slower pace of 39% YoY to RM77.3mn, attributed to higher net finance costs and tax expenses.

• However, sequential net profit fell by 48% in 1Q24, attributed to exceptional boosts in 4Q23 results from increased unit handovers in the UNO Melbourne project and higher-margin land sales.

• New property sales surged 37% YoY but declined 19% QoQ to RM1.4bn in 1Q24, with domestic projects comprising 97% of total sales. Notably, RM1.4bn sales for 1Q24 include the RM731mn from land sales in Johor. The 960-acre Tebrau land was sold for RM564mn, slightly higher than the initial sale & purchase agreement with Scientex for MYR547.7mn, which was terminated earlier this year. Additionally, S P Setia sold a 6.5-acre parcel of freehold land near Bukit Chagar for RM167mn, where the Johor-Singapore Rapid Transit System station is currently under construction. According to management, these land sales are anticipated to result in a gain on disposal of approximately RM380mn, which is expected to be recognised in 2Q or 3Q of this year.

• Excluding these land sales, S P Setia's total property sales for the quarter would have declined by 29% YoY. The weakened property development sales were mainly attributed to a lack of new launches during the quarter, with the group only introducing RM146.2mn worth of new launches in 1Q24, marking a substantial 76% YoY decline.

• Unbilled sales as at Mar-24 stood at RM5.4bn (local unbilled sales = RM4.7bn), providing c. 2 years of earnings visibility.

Impact

• Following the stronger-than-expected results, we adjust our progress billings assumptions for certain ongoing projects. Besides, we also factored in the earnings impact from the RM731mn land sales in 1Q24. Correspondingly, our FY24/25/26 earnings forecasts are adjusted to RM542mn/RM256mn/RM262mn from RM264mn/RM204mn/RM212mn previously. We anticipate that the majority of the land sales proceeds will be allocated towards debt reduction, resulting in lower finance costs in FY25 and FY26.

Conference Call Highlights

• The management maintains its sales target for FY24 at RM4.4bn. We believe the sales target is achievable given that 1) YTD sales accounted for 32% of the target and 2) RM4.5bn worth of new launches in Malaysia are expected to be rolled out in 2Q-4Q24.

• In FY24, the group will prioritise accelerating township and large-scale industrial developments, along with further strengthening its global footprint. 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. Collaborating with Mitsui Fudosan, S P Setia will develop an official launch scheduled for the second half of this year.

• Elsewhere, S P Setia is preparing to launch its first industrial development, Setia Alaman (399 acres), in the Klang Valley this year. 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.

• Through de-gearing strategies like repatriating funds from overseas projects, monetising non-strategic land, and clearing unsold inventory, S P Setia successfully decreased its net gearing to 0.45x in March 2024 from 0.49x in December 2023. The management aims to further reduce net gearing to 0.4x by year-end through the utilisation of proceeds from land sales. Additionally, management has disclosed that the group is in the preliminary stage of exploring the potential of REIT-ing some of its investment properties to further lighten its balance sheet.

Valuation

• We anticipate continued momentum in property counters' share prices driven by robust demand, favourable market conditions, and positive investor sentiment. Specifically for S P Setia, we are optimistic about the group’s compelling turnaround plans and improving financial position. In light of this promising outlook, we align our target P/Bk multiple to 0.7x to match the average target P/Bk assigned to medium-cap developers. This adjustment leads to a new target price of RM1.85/share. Maintain Buy.

Source: TA Research - 17 May 2024