Investment Highlights

• We maintain BUY on S P Setia (Setia) with a higher fair value (FV) of RM1.84/share (from RM1.09/share previously) based on a lower discount of 40% (from 45% previously) to our revised RNAV-based valuation and neutral ESG rating of 3 stars .

• The higher FV is mainly driven by the reduction in net debt, which stems from management’s ongoing efforts to monetise non-strategic land banks and divestment of non- core assets. Furthermore, we lower the discount rate to RNAV to reflect improving sentiments in Malaysia’s property market.

• Our FV also implies FY25F PE of 25x, on par with Setia’s 1- year trailing PE.

• Setia’s 1QFY24 CNP of RM73mil came in within our expectation but slightly below consensus’. It accounted for 21% of our earlier forecast and 19% of street’s.

• Nevertheless, we raise our FY24F CNP by 98% to incorporate the estimated gain on disposal amounting to RM380mil for the sale of 2 parcels of land in Taman Pelangi Indah 2 and Taman Pelangi during 1QFY24 .

• YoY, Setia’s 1QFY24 revenue expanded 53% while CNP rose 44%. The improvement was due to higher contributions from Vietnam with the handover of Eco Xuan and higher property and land sales in 1QFY24. The revenue contribution from land sales in 1QFY24 was RM424mil (with PAT of RM62mil) vs. RM38mil in 1QFY23.

• In 1QFY24, Setia registered new sales of RM1.4bil (+37% YoY), attaining 32% of its FY24F sales target of RM4.4bil . The new sales include RM731mil proceeds from Tebrau land sales in 1QFY24 .

• Local projects remain the main contributor, making up 97% of 1QFY24 new sales. Excluding the land sale, the central region in Malaysia accounted for 61% of total sales, in which the townships of Setia Alaman, Bandar Kinrara and Setia Alam Impian were the major contributors. The remaining sales in Malaysia came from regions in the south (36%), north (1%) and east (1%).

• The main contributors for international projects, which accounted for the remaining 3% of the group’s 1QFY24 new sales, was the Battersea Power Station in London together with Sapphire by the Gardens and UNO Melbourne in Australia.

• QoQ, Setia’s 1QFY24 CNP plunged 60% despite a 7% growth in revenue. This was primarily due to the lower profit margin for land sales in 1QFY24 vs. 4QFY23, coupled with lesser contribution from Australian operations upon the handover of UNO Melbourne (Phase 2) in 4QFY23.

• Notably, Setia’s net gearing ratio remained steady at 0.49x in 1QFY24. Management targets to pare down its net gearing ratio to 0.40x-0.42x through ongoing efforts to monetise non-strategic land banks and divestment of non- core assets.

• We expect the group’s FY24F revenue and CNP to be largely supported by unbilled sales of RM5.4bil (-5% QoQ) as at end-March 2024, which represents a cover ratio of 1x FY24F revenue .

• In FY24F, we also expect an acceleration of progress billings for the group’s Malaysian projects given the improvement in labour market conditions. Notably, Setia’s Malaysian projects have unbilled sales of RM4.7bil - 87% of the group’s total.

• Additionally, throughout the remaining months of FY24, we anticipate Setia to record revenue of RM1.1bil from land sales, pending approvals from relevant parties .

• The stock currently trades at an attractive FY25F PE of 22x vs. its 4-year peak of 25x.

Source: AmInvest Research - 17 May 2024