SPSETIA’s 9MFY23 results met expectations. It guided for a strong 4QFY23 on recognition of lumpy property sales in Australia upon completion. However, we remain cautious given its high debt level and maintain our forecasts, TP of RM0.68 and UNDERPERFORM call.

9MFY23 within expectations. SPSETIA’s 9MFY23 core net profit of RM53.0m (adjusted for RCPS distribution of RM101.5m and forex gains of RM4.1m) came in at only 39% and 32% of our full-year forecast and the full-year consensus estimate, respectively. However, we consider the results within expectations as we expect a bumper 4Q on lumpy sales recognition from both its domestic and international (mainly Australian) projects.

YoY, its 9MFY23 revenue increased by 9% contributed largely by the recovering of the property market with local projects contributing RM3.37b (87%) sales and RM523m (13%) from international sales, thanks to clearance of certain property inventories. This elevated gross margin to 29.1% (+2.8ppt) which supported operating profits (+19%). Nevertheless, the group’s joint venture, primarily Battersea, continued to incur losses. Together with higher financing cost and higher effective taxes, 9MFY23 core net profit fell 9% after adding back RCPS dividends (which we deem as financing cost).

Briefing highlights. The group opines that its full-year targets would likely be met given the encouraging traction seen so far. The key takeaways from its analyst briefing yesterday are as follows:

1. In relation to the group’s RM4.2b FY23 sales target, it has reported sales of RM3.9b in 9MFY23. The upcoming months may see a surge in interest for its Johor products, thanks to the anticipated completion of the Singapore-JB RTS Link in 2026. On top of that, the support from the RM548m Tebrau land sales to SCIENTX would be in place, albeit in FY24.

2. The net gearing ratio showed improvement, declining from 0.55x in 2QFY23 to 0.53x in 3QFY23. The group aims to further improve its net gearing to 0.51x, with considerations pending for the impact of the Tebrau land sale on the gearing position. Subsequently, in the upcoming years, as the income is factored in, its net gearing is anticipated to decrease to 0.48x.

3. The Battersea JV continued to make losses, primarily attributed to impairments arising from unsold units, decreasing rental income, and higher interest rates in the UK. Profitability is not anticipated from this joint venture in the near future. However, the company assures that cash flows are robust enough to allow for repatriation this year.

4. Unbilled sales recognition for Australian assets (specifically UNO, Melbourne) is expected in 4QFY23, potentially leading to lumpy earnings.

5. Following its recent announcement on the sale of 18.0 acres land to KLS Bestari Sdn Bhd in Setia City for RM228.8m, the group anticipates a positive impact on the development of Setia City and a contribution to the overall profitability. The generated proceeds will be allocated towards funding new projects and debt reduction, consequently benefiting profits, net assets, and cash balance.

Forecasts. Unchanged.

We also maintain our TP of RM0.68 on unchanged RNAV discount of 75%, lower than 60% we ascribed to the sector to reflect its high gearing ratio. There is no adjustment to our TP based on ESG given a 3-star ESG rating as appraised by us (see Page 5).

We remain cautious on SPSETIA due to: (i) its significant exposure to the high-end landed and high-rise residential segment, which is not highly sought after by buyers at present, (ii) its high gearing and hence debt servicing obligation amidst a high interest environment, and (iii) losses at its JV projects. Maintain UNDERPERFORM.

Risks to our call include: (i) strong recovery in the property sector, (ii) decline in mortgage rates boosting affordability, (iii) construction costs stabilise/decline, and (iv) lower risks associated with overseas operations.

Source: Kenanga Research - 24 Nov 2023