Review

• S P Setia’s 1H24 net profit of RM372.4mn came in within expectations, accounting for 69% of both ours and the consensus' full-year earnings estimates. We view the results as in line with expectations, given the substantial land sales gain recognised in 2Q.

• The 56% YoY increase in 1H24 revenue to RM2.97bn was driven by higher land sales revenue (RM989mn in 1H24 versus RM124mn in 1H23) and increased contributions from property development in Klang Valley and Johor. Net profit soared 278% YoY to RM372.4mn, driven by lucrative land sales margins (EBIT margin up 7.9 percentage points to 31.3% in 1H24) and a RM56mn gain from the sale of its 50% equity stake in Retro Highland Sdn Bhd to MMC Land Sdn Bhd, related to the Taman Ikan Emas redevelopment project in Cheras.

• However, the positive performance was partially offset by a higher share of joint venture (JV) losses, which amounted to RM121.8mn in 1H24 compared to RM46.6mn in 1H23. The increased losses were primarily due to issues with the Battersea Power Station JV, including the impact of MFRS 17 (Insurance Contracts), and inventory and bad debt write-downs.

• Sequential net profit jumped 282% to RM295.0mn, driven by the same factors that boosted 1H results.

• 1H24 new property sales fell 10% YoY to RM2.3bn, with domestic projects accounting for 96% of total sales. This figure includes RM731mn from land sales in Johor. Excluding these land sales, property sales would have declined further by 23% YoY. The decrease in property sales was primarily due to a lack of new launches during the period under review, with only RM1.1bn in new launches introduced in 1H24, reflecting a significant 26% YoY decline.

• As of June 2024, unbilled sales totalled RM4.2bn, with RM3.8bn coming from local projects. This provides just over 12 months of earnings visibility.

Impact

• Maintain FY24-26 earnings forecasts. Conference Call Highlights

• The conference call primarily addressed the widening losses at Battersea Power Station, which reported RM125mn in losses for 1H24. Management indicated that half of these losses were attributable to the adoption of MFRS 17: Insurance Contracts. This standard applies to the sale of Phase 2 Battersea Power Station Commercial Property, in which Battersea Group provided the purchaser with a 5-year rental guarantee. Under this arrangement, if the net operating income (NOI) falls below a specified threshold, Battersea must compensate the buyer, while an upside adjustment is possible if the NOI exceeds a prescribed yield at the end of the fifth year. Due to the current softness in the UK property market, the office has not yet achieved the required NOI, resulting in a loss this quarter to account for the rental guarantee.

• The management maintains its sales target for FY24 at RM4.4bn and this appears achievable given that YTD sales represent 52% of the target. Key launches for the second half of the year include various landed homes in the central and southern regions, as well as Phase 1 of Setia Federal Hill in Bangsar, a joint venture with Mitsui Fudosan. The management plans to launch this project in 4Q24, with a project GDV of RM1.4bn.

• The management reiterated that the group is actively pursuing investment opportunities and strategic partnerships for their lands earmarked for industrial park development, particularly in Setia Alam and the Southern Region, to capitalise on the rising market demand for industrial development. Additionally, the upcoming 307-acre managed industrial park in Tanjung Kupang, Johor, may include data centres, as the group is currently in discussions with several data centre operators.

• Through de-gearing strategies like monetising non-strategic land and clearing unsold inventory, S P Setia successfully decreased its net gearing to 0.41x in June 2024 from 0.45x in March 2024. The group is expected to recognise a gain of RM198mn from two land disposals in 2H24 – see Figure 2. That said, the group remains on track to achieve its target of reducing net gearing to 0.4x by year-end through the utilisation of proceeds from these land sales.

Valuation

• Despite the wider losses from Battersea Power Station, we believe these should be offset by the stronger performance in Malaysia. We maintain our Buy recommendation on S P Setia with an unchanged target price of RM1.91/share. Our valuation is based on P/Bk multiple of 0.7x against its CY25 BPS and a 3% ESG premium incorporated into our TP. The valuation remains undemanding, as the group is currently trading at a CY25 P/Bk of 0.55x, compared to the average P/Bk of 1.1x for larger developers under our coverage.

Source: TA Research - 15 Aug 2024