SP Setia’s 2Q23 results missed expectations, with revenue largely flat and earnings negatively affected by higher financing cost and higher share of losses from JVs.
“Nevertheless, we think the worst is behind it as management has put in place a disciplined debt reduction plan, while the recent sizeable land disposals should help to achieve the target. Given the lifting of the political overhang post state elections, we raise our Target Price to reflect better market sentiment ahead,” said RHB Research (RHB) in the recent Malaysia Results Review Report.
2Q23 earnings were largely affected by higher interest expense arising from interest rate hikes, as well as higher share of losses from JVs. 2Q23 property sales achieved RM1.53bn, bringing 1H total to RM2.56bn, out of which RM504m came from land disposals.
Projects in the central region remained the largest contributor, making up 58% of the total, followed by the southern region (RM589m), and northern region (RM74m).
“Completed inventory sales contributed RM498m. Bookings in the pipeline are worth RM470m. Given the strong sales momentum, we believe management’s RM4.2bn target will be met by year end,” said RHB.
While investors may still be concerned over the high gearing and hence the expensive interest expense affecting earnings ahead, RHB believes 2H23 results will start showing some fruition from the ongoing debt reduction programme.
Already, the company has sold two parcels of sizable non-core land that is worth a combined RM940m, and the proceeds should kick in in late 2023 to mid-2024.
In addition, management is repaying some older borrowings that carry high interest rates, and potentially more disposal of smaller land plots may ensue.
Operationally, management is also merging the operation and sales teams by region/clusters to better manage overhead costs given the company has a total of 44 ongoing projects.
“We make no changes to our FY23F-25F earnings, and we are hopeful that earnings in 2H23F will improve given the continuing efforts on land disposals, potentially lower finance costs as well as strong property sales momentum. Unbilled sales fell to RM6.82bn, vs RM7.17bn as at 1Q23,” said RHB, maintaining the Buy rating and the Target Price of RM0.93.
