1QFY22 came below on weaker-than-expected revenue arising from supply chain disruptions which also affected margins. 1QFY22 sales of RM0.67b was within our RM3.3b target but below management’s RM4b. We expect 2H to see lumpy earnings from the completion of Australian projects (Sapphire and Uno) and land sale gains. Nonetheless, reduce FY22/23E earnings by 47%/29% on weaker billings and GP margins assumption. Maintain UP with lower TP of RM0.90 (from RM0.95) on unchanged 0.3x PBV.

Below expectations. 1QFY22 CNL of RM11.3m came below our/consensus CNP projection of RM509m/RM361m. The underperformance stemmed from weaker than expected revenue and GP margins due to slower than expected billings arising from supply chain disruption (labour and raw materials). No dividends as expected.

1QFY22 sales of RM0.67b (backed by RM0.5b launches) came within our RM3.3b target but below management’s RM4b target. Nonetheless, management is keeping their target unchanged for now with a remainder of RM3.5b launches planned out for the year. However, with the existing soft market, we foresee SPSETIA not going through with the entire RM3.5b planned launches. The thesis for our lower sales target quantum of RM3.3b remains: national affordability will be an issue this year with rising interest rates, inflationary pressures and the absence of HOC. Unbilled sales of RM9.84b provide two years’ coverage.

Highlights. QoQ, 1QFY22 swung into the red at a CNL of RM11.3m vs 4QFY21’s CNP of RM125m on (i) weaker GP (-29%) from weaker revenue (-16%) and margins (-4ppt), (ii) losses at JV level (Battersea) vs profits in the prior quarter, (iii) higher finance costs (+16%) and (iv) incurring the bi-annual RCPS payment of RM66m every 1Q and 3Q. YoY, 1QFY22 dipped into the red against 1QFY21’s CNP of RM40.5m attributable to weaker revenue (-18%) on slower billings due to raw material disruption and labour shortages.

For the rest of the year, we have priced in lumpy earnings for SPSETIA coming from (i) completion of Sapphire Melbourne in Australia with GDV RM1.2b which only recognises profit upon settlement, (ii) stage 1 completion of UNO Melbourne with GDV of RM1.1b, and (iii) completion of first phase land sale worth RM236m to Scientx (total land sale is RM518m split to 3 phases). Nonetheless, management guided that this land sale could be delayed as SPSETIA is still ironing out the details with the government’s economic planning unit (EPU).

Net gearing of the group continues to deteriorate and currently stands at 0.69x (vs 0.67x in 4QFY21 and 0.65x in 1QFY21). Nonetheless, we take comfort that SPSETIA plans to pare down net gearing this year from cash repatriation from Battersea, Singapore and Australia upon handover of projects there.

SPSETIA’s recently announced RCPS-C will tentatively do the price fixing in Oct/Nov-22. We do not discount the possibility of lower implied conversion price (compared to illustrative RM1.39 in announcement) given that share price has decreased by 20% since the fund raising announcement. This could potentially mean higher dilution at a lower price level (instead of RM1.39).

Reduce FY22E/23E earnings by 47%/29% on slower construction progress and weaker GP margins. Thereafter, keep Underperform with a lower Target Price of RM0.90 (from 0.95) based on an unchanged FY22E PBV of 0.3x (-1.0SD from 5 year mean).

Risks to our call include: (i) higher-than-expected property sales, (ii) margin fluctuations, (iii) changes in real estate policies and lending environment, (iv) cash-calls, and (v) timing of overseas/local billing

Source: Kenanga Research - 24 May 2022