• Upgrade to BUY from Neutral, with new MYR1.24 TP from MYR0.93, 47% upside, c.2% yield. SP Setia’s 4Q23 results widely beat estimates with sequentially stronger earnings coming from higher contributions from its UNO (Stage 2) project in Melbourne and improved margins. FY23’s total sales of MYR5.1bn exceeded management’s MYR4.2bn target. We upgrade our call and lower our discount to RNAV to 60% (from 70%) premised on its convincing turnaround plans and improving net gearing level.

• 4Q23 results. The sequentially stronger QoQ revenue growth was mainly due to the handover of UNO Melbourne (Stage 2), and as EBIT margin improved YoY to 26.5% (4Q22: 15.4%) from the sales of land and cost savings upon project accounts finalisation. Net interest expense was 13% lower QoQ as part of the group’s debt reduction plans, which saw net gearing drop to 0.49x (Sep 2023: 0.53x, Dec 2022: 0.57x). Management is targeting to further lower its borrowings to MYR9.4bn in FY24 (from MYR10.1bn as at FY23) supported by further land disposals. Unsold inventory increased slightly to MYR1.77bn from MYR1.72bn in 3Q23 (FY22: MYR1.72bn).

• Beating its sales target. SP Setia’s total sales of MYR5.1bn exceeded its sales target by 21%, with MYR836m (16%) derived from land disposals – mainly from Glengowrie, Semenyih (MYR392m), followed by Setia Alam (MYR229m). Local projects constituted most of the total sales at 86%, with 61% coming from the central region, followed by the southern region (17%). Management has set a reasonable sales target of MYR4.4bn for FY24.

• Outlook. Setia Federal Hill, SP Setia’s landmark project with an expected GDV of MYR20bn will have its maiden launch of Phase 1 (GDV: MYR1.4bn) in 3Q24 via a JV with Mitsui Fudosan. Phase 1 will comprise of two residential towers with 1,300 units. SP Setia will also look to execute its industrial expansion plans, beginning with Setia Alaman, which should start in 2Q24. This expansion could drive further land disposals or JVs for industrial developments. This should, in turn, help pare down debts further, easing the company’s financial burden going forward. The ending of the interest rate upcycle should also help lower finance costs over the next 1-2 years.

• Forecasts. We increase our FY24F-25F earnings by 40-41% after updating our sales and margin assumptions. Unbilled sales fell to MYR5.64bn vs MYR6.76bn as at 3Q23.

• ESG. We lower our discount to RNAV to 60% from 70%, with a 0% ESG discount/premium based on SP Setia’s ESG score of 3.0. Key downside risks: Weaker-than-expected property sales, margins, and market conditions.

Source: RHB Research - 1 Mar 2024