Key takeaways from S P Setia’s 9MFY24 results briefing are:

Poised for Profit Growth in FY25, Driven by Industrial Development

A key surprise from yesterday's briefing was management's guidance that 2025 is expected to deliver growth, defying most street forecasts (and our earlier view) of a profit decline. We had expected a decline, given the strong FY24 results, which are driven by significant land sales totalling RM1.5bn (with RM1.27bn already recognised in 9MFY24), which seemed unlikely to be repeated.

However, management expects FY25 growth to be driven by the Setia Alam Industrial Park in Shah Alam (GDV: RM3.09bn), which has seen strong demand. Sales to date total RM600mn (9MFY24: RM368mn), with another RM50mn, expected in 4Q, bringing total revenue recognition in 2025 to RM650mn. Assuming a 30% net margin, this could generate an estimated net profit of RM195mn.

Additionally, S P Setia plans to launch the Tanjung Kupang Industrial Park in 2025 (307 acres; GDV: RM1.9bn) through a 50:50 joint venture with a reputable international industrial park developer. This project, aimed at pioneering the circular eco-industrial park concept in Malaysia, will incorporate data centre components to meet growing demand. For the initial launch (20% of GDV: RM380mn) and assuming a 90% take-up rate, we project RM350mn in sales in the first year, yielding an estimated net profit of RM105mn at a 30% margin. Overall, we estimate that industrial plot sales are expected to contribute RM300mn in net profit for 2025.

Over the medium term, S P Setia is set to unveil Setia Fontaines (323 acres, GDV: RM1.7bn) located in the Northern area in 2026. This project underscores S P Setia's commitment to expanding its industrial property portfolio and strengthening its presence in the industrial real estate sector.

Confident in Achieving FY24 Sales Target of RM4.4bn with Stronger Growth Anticipated for FY25

Management remains confident in achieving its FY24 sales target of RM4.4bn, underpinned by 1) 9MFY24 sales of RM3.2bn, achieving 73% of the target, 2) RM556mn in bookings as of September 2024, expected to be converted to sales, and 3) RM1.97bn in new launches planned for 4Q, including the muchanticipated launch of Atlas Melbourne (total GDV: AUD750mn, launched in phases). The Atlas Melbourne launch, strategically positioned to drive 4Q sales, has garnered strong market interest for its prime location and innovative design, which align with current buyer preferences. Impressively, it has already achieved 30% sales within just two weeks of its official launch in Malaysia. Additionally, management revealed that property sales have already exceeded RM4.0bn as of today, reinforcing confidence that the FY24 target will likely be surpassed.

While the official sales target for FY25 has not been finalised, management has indicated that sales are likely to be stronger. This optimism is supported by active landbank management, which is expected to drive significant land sales from Setia Alaman and Tanjung Kupang, along with potential joint ventures for land development in Setia Alam City, where 65 acres of land remain. – see Figure 2. Additionally, FY25 sales will be anchored by the official launch of Phase 1 of Setia Federal Hill in Bangsar (GDV: RM1.4bn) in early 2025. This project, a joint venture with Mitsui Fudosan, recently held an exclusive preview campaign that saw 207 out of 693 units booked, reflecting a 30% booking rate within two days. Despite a premium price of RM1,300psf, the response exceeded management's expectations.

REIT Plan is Part of the De-gearing Initiatives

S P Setia has made significant progress in de-gearing, reducing its net gearing ratio to 0.35x as of September 2024, down from 0.41x in June 2024 and substantially lower than the 0.61x recorded in 2021 – see Figure 3. This improvement is attributed to strategic initiatives, including the monetisation of non-strategic land and the clearance of unsold inventory. As of September 2024, S P Setia reduced its completed inventory by RM380mn, a 22% reduction compared to 4Q23 levels.

Recognising the upcoming capital commitments for key developments such as Atlas Melbourne and Setia Federal Hill, management has highlighted that plans for a real estate investment trust (REIT) are underway. S P Setia aims to monetise its investment properties within the next 12 months, with an estimated valuation of RM1.5bn. The REIT will feature a diversified portfolio spanning malls, offices, schools, convention centres, hotels, and the expanding industrial property portfolio. We estimate that retaining a 40-60% stake in the REIT could generate RM600mn–900mn in cash proceeds, enhancing liquidity to drive S P Setia's growth initiatives.

Target to Achieve Net Profit of >RM700mn in FY29

S P Setia's management aims to achieve a revenue of over RM5bn and PATANCI (Profit After Tax and Non-Controlling Interests) exceeding RM700mn by 2029, showcasing a focused long-term growth strategy. This ambition is underpinned by multiple value-creation levers, including the development and marketing of core townships, catalytic projects, and the expansion of eco-industrial parks alongside a diversified REIT portfolio.

The group’s strategy emphasises operational efficiency, proactive landbank management, and strategic joint ventures. Key initiatives include commercial developments within Setia Alam City and Setia Alam Impian Township, as well as industrial projects such as Setia Alaman, Tanjung Kupang, and Setia Fontaines. These efforts are designed to drive sustainable growth while positioning S P Setia as a leader in creating high-value, sustainable communities.

Forecast

We have revisited our progress billing assumptions while keeping our FY24- 26 property sales projections unchanged at RM4.4bn, RM4.55bn, and RM4.6bn, respectively. The adjustments account for an increased contribution from strategic land sales across three industrial parks, as well as Setia Alam City and Setia Alam Impian Townships. These transactions, aimed at initiating catalytic developments, allow S P Setia to recognise revenue and profit immediately upon completion—typically within a year—unlike the 3– 5-year timeline for traditional development projects.

We now estimate that land monetisation will contribute approximately 20% of sales in FY25 and FY26, compared to none in our previous assumptions. Consequently, we have raised our earnings forecasts for FY25 and FY26 by approximately 120%, incorporating accelerated progress billing recognition and more favourable margin assumptions.

Recommendation

Following the earnings upgrade, we raised our target price from RM1.91/share to RM1.94/share based on an unchanged CY25 P/Bk multiple of 0.7x and a 3% ESG premium. Maintain Buy.

Source: TA Research - 27 Nov 2024