SPSETIA's 9MFY24 earnings were below expectations as sales flows disappointed. However, we opine this could spillover into FY25 instead, leading us to cut our FY24F earnings by 31% but raise FY25F earnings by 9%, driven by core property development ventures while adjusting for lower losses from Battersea without the recurrence of rental guarantee provisions. In line with our view in the medium-term, we narrow our discount to RNAV to 65% (from 75%). TP is raised to RM1.25 (from RM0.90) and we maintain our UNDERPERFORM call.

SPSETIA's 9MFY24 core net profit of RM323.6m (mainly adjusted for RCPS distributions, one-off divestment gains and one-off restructuring expenses) made up 54% of our full-year forecast and 56% of consensus full-year estimate. We deem this to be below expectation with the negative deviation attributed to slower-than-expected pick-up in core property development revenue. However, given the decent showing in 3QFY24 revenue, absent land sales, we believe this could now more meaningfully spill over into FY25 instead.

YoY, 9MFY24 revenue surged by 42% mainly from land sales contribution. While land sales accounted for 23% of total revenue, we still saw property development revenue improving by 46% from sequential progress billings on existing projects. Attributed to the significantly higher margin from the land sales, SPSETIA's 9MFY24 core net profit increased by 511% with a sturdier net margin on 7.7% (+5 ppts).

QoQ, its revenue declined by 16% due to the absence of sizeable land sales as seen in 2QFY24 (RM564m at Taman Pelangi Indah 2, Johor) which led to its core net profit to decline by 86% during the period.

Adjusting for the abovementioned land sale, we would otherwise see revenue increased 36% QoQ from more aggressive sales seen in both residential and industrial developments in Setia Alaman.

Outlook:

1. SPSETIA's RM4.4b sales target for FY24 could still hold with RM3.2b recorded as of Sep 2024, with a significant focus on land sales. The group seems satisfied with its current landbank rationalization efforts, indicating a potential shift towards greater emphasis on property products in the upcoming periods.
2. Property development sales are anticipated to be driven by township projects in the Klang Valley and Johor Bahru. However, aware of increasing competition from neighbouring plots, the group is reassessing its strategies for upcoming launches.
3. An effective net gearing of 0.38x has made the group reached to its target of 0.40x-0.42x in FY24, which is carried by its land monetisation.

Forecasts. As we had previously expected property development sales to catch up with the group's headline target of RM4.4b (excluding land sales), we opt to re-base our sales forecast in FY24F from RM5.4b to RM4.4b on an overall basis, leading to the 31% cut in earnings while recalibrating our gross margin assumptions from 40% to 33% (at par with YTD results). We anticipate a slight spillover of this into FY25, as we raise our sales assumptions from RM4.7b to RM4.8b. We also recalibrate our assumed losses for Battersea given clarity that its RM48m rental guarantee provision is non-recurring, raising our FY25F earnings by 9%.

* Note our CNP forecast is based on profit attributable to ordinary shareholders i.e. after deducting Perpetual Bonds and iRCPS interest costs. Note that consensus' forecasts have defined their CNP as before iRCPS interest costs, resulting in higher forecasts.

Valuations. In line with our refreshed lense, we raised our TP by 39% to RM1.25 (from RM0.90) against a lower discount to RNAV of 65% from 75% (vs our applied peer average of 50%) on better core property development operations for SPSETIA. This level of discount is still higher than our derived historical 10-year average for SPSETIA which sits at 55%. This discount applied is also higher than the sector average, to reflect the low realisability of SPSETIA's GDV. Although the group is making efforts to lower its gearing, its levels are higher than peers (average: 0.2x) which exposes them to larger interest rate risk.

Meanwhile, sustained losses from its JV projects could remain a cause for concern. There is no adjustment to our TP based on ESG given a 3-star ESG rating as appraised by us (see Page 4).On the flipside, positive re-rating catalysts for the stock could be tied to: (i) better-than-expected performances from Battersea, (ii) more launches and stronger take-up rates for the group, and (iii) softer financing pressures should interest rates see some easing. Maintain UNDERPERFORM.

Source: Kenanga Research - 26 Nov 2024