SPSETIA has entered into a conditional SPA with SCIENTX to dispose of its land in Tebrau, Johor measuring 959.7 ac for RM518m, which will be executed in three phases over FY22- 24, subject to approvals. As such we estimate FY22E CNP could increase by 24%, imputing the gains from Phase 1. Additional land sale deals remain a possibility but are subject to the right pricing, while we expect FY21-22 to be recovery years from Battersea contributions and improving local sales momentum. Upgrade SPSETIA to OUTPERFORM and increase TP to RM1.19 (from RM0.94) post increasing valuation to -1.5SD (from -2.0SD) on improving earnings prospects.

Land disposal of RM518m to be done in phases. SPSETIA’s indirect wholly-owned subsidiary, Pelangi Sdn Bhd (PSB) entered into a conditional SPA with SCIENTX’s wholly-owned subsidiary Scientex Quatari Sdn Bhd (SQSB) to dispose 8 parcels of development land measuring 959.72 ac (41.8m sf) in Mukim Tebrau Johor, for RM518.2m. The disposal will be done in three phases with targeted completion of Phase 1 (RM236.1m) by 1Q 2022, Phase 2 (RM141.3m) by 2Q 2023, and Phase 3 (RM140.2m) by 2Q 2024. Additionally, the disposals are subject to approvals by the Economic Planning Unit for the acquisition of the lands by SQSB, Estate Land Board for the sale of the lands by PSB; and any other relevant authority and/or party, if required, with all phases to be completed by FY24.

Positive on the disposal. We were not surprised by the announcement as the Group had previously highlighted that they were not discounting the possibility of land sales. We believe the disposal price is decent at RM12-13psf given that most transactions of agricultural land within the Johor region range from RM8.50 psf to RM15.00 psf. We are positive on this disposal as impact to earnings is significant to FY22 and beyond. We like the fact that SPSETIA is monetising land banks in Johor which has been a challenging market, freeing up cash for its other development projects. Meanwhile, we believe impact to gearing in FY22E is minimal, lowering it marginally to 0.63x (from 0.65x) once the disposal materialises.

Outlook. The Group expects flattish sales of RM3.8b in FY21. Management remains cautious but expects improvements in 2H 2021 which are reliant on the economy recovering from the pandemic with the roll-out of mass vaccinations currently. For now, the Group will continue to focus on stock clearing and acceleration of its digitalisation journey, while we do not discount the possibility of additional land sales in the near term. Unbilled sales of RM10b provide two years of earnings visibility providing some buffer during this challenging period.

Maintain FY21E CNP of RM294m but increase FY22E CNP of by 24% to RM509m on expectations that Phase 1 of this land disposal will be completed successfully, while subsequent phases will contribute in FY23- 24 and on an improved outlook for its property markets both domestically and overseas. For now, FY21-22 will be driven by steady recognitions from ongoing projects and unbilled sales as well as more significant contributions from Battersea which is expected to be completed by Aug 2021 for Phase 2 and Mar 2022 for Phase 3A.

Upgrade to OUTPERFORM (from MARKET PERFORM) with a higher Target Price of RM1.19 (from RM0.94) based on an unchanged FY21E BV/share of RM2.94 but on a higher P/BV of 0.41x @ -1.5SD (from 0.32x @ -2.0SD). We increase our valuations as we believe the Group’s prospects are turning increasingly positive as the land sales would help alleviate the burden on the balance sheet, whilst FY21 and FY22 are expected as recovery years for the Group on increased contributions from overseas market and improving local demand.

* Note our CNP is based on profit attributable to ordinary shareholders i.e. after deducting Perpetual Bonds and iRCPS (A & B) interest costs. Note that consensus’ estimates have defined their CNP as before iRCPS interest costs, resulting in higher estimates.

Source: Kenanga Research - 10 May 2021