Investment Highlights

• We upgrade S P Setia (Setia) to BUY from HOLD with a higher fair value (FV) of RM1.09/share (from RM0.75/share previously) based on a lower discount of 45% (from 50% previously) to our rolled-forward 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.

• Setia is presently trading at a compelling price-to-book value ratio (P/BV) of only 0.29x, significantly below its peers’ average P/BV of 0.5x-0.6x following the property rally in mid-FY23. Given the improving outlook for Setia and its favourable debt management strategy, we anticipate a re-rating in Setia's valuation.

• Our FV also implies FY25F PE of 15x, close to the average of larger-cap property stocks currently.

• Setia’s FY23 CNP of RM336mil came in way above expectation. It was 44% above our forecast and 50% above street’s.

• The variance to our forecast was mainly due to higher- than-expected revenue recognition of land sale in FY23.

• Nevertheless, we made no changes to our forecast. We expect the group’s FY24F revenue and CNP to be largely supported by unbilled sales of RM5.6bil (-17% QoQ) as at end-December 2023, which represents a cover ratio of 1.2x of 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 RM4.9bil- 86% of the group’s total.

• Furthermore, in FY23, Setia recorded land sales totaling RM836mil, with RM86mil of these sales recognised in FY23 revenue. We estimate that the remaining RM750mil will largely be recognised in FY24F, subject to approvals by relevant parties .

• YoY, Setia’s FY23 CNP rose 27% despite a 2% decline in revenue. The slight decrease in revenue recognition resulting from the completion of Daintree Residence in Singapore in FY22 was mitigated by higher margin from land sale, cost savings from finalisation of project and higher interest income.

• The revenue contribution from land sales in FY23 was RM197mil vs. RM79mil in FY22. In FY23, Setia registered a PBT of RM110mil from gain on land sales.

• In FY23, Setia registered new sales of RM5.1bil (+24% YoY), exceeding its earlier target of RM4.2bil . The new sales include proceeds from land sales of RM836mil in FY23 .

• Local projects remain the main contributor, making up 86% of FY23 new sales. The central region in Malaysia accounted for 65% of total sales, in which the townships of Setia Alam Impian, Setia Eco Hill 2 and Bandar Kinrara as well as sale of Glengowrie land were the major contributors. The remaining sales in Malaysia came from regions in the south (17%), north (4%) and east (1%).

• The main contributors for international projects, which accounted for the remaining 14% of the group’s FY23 new sales, was the Battersea Power Station in London together with Sapphire by the Gardens and UNO Melbourne in Australia.

• For FY24F, management is setting a lower sales target of RM4.4bil (-14% vs. actual FY23 sales), supported by planned launches of RM4.5bil-5bil.

• QoQ, Setia’s 4QFY23 CNP surged 4.2x despite only 28% growth in revenue. The surge was mainly due to increased revenue recognition from UNO Melbourne (Stage 2) and higher margins from land sales. Particularly, revenue from land sales in 4QFY23 amounted to RM73mil, compared to absence of land sale in 3QFY23.

• Despite concerns on rising finance cost (+4% YoY), we anticipate the uptrend of interest rate to peak in the near term with the approaching end of global monetary policy tightening. As at 31 December 2023, Setia has 80% of borrowings denominated in MYR, 13% in GBP and 7% in AUD with the remainder in JPY and USD.

• Notably, Setia’s net gearing ratio has improved significantly to 0.49x in FY23 from 0.57x in FY22. Management targets to pare down its bank borrowings to RM9.4bil by end of FY24 from RM10.1bil as at 31 December 2023 through ongoing efforts to monetise non-strategic land banks and divestment of non-core assets.

• The stock currently trades at an attractive FY25F PE of 12x vs. its 4-year peak of 25x.

Source: AmInvest Research - 1 Mar 2024