Maybank IB Research said the property group’s improved earnings outlook is supported by potential land sales in Selangor, which should improve the company’s net gearing.
PETALING JAYA: S P Setia Bhd will likely see stronger earnings from the second quarter of its financial year ending Dec 31, 2023 (2Q23).
According to Maybank Investment Bank (Maybank IB) Research, the property group’s improved earnings outlook is supported by potential land sales in Selangor, which should improve the company’s net gearing.
The brokerage said S P Setia was in advance stage of negotiation for the sale of its non-core land bank, with transaction likely to materialise between 2Q and 4Q this year.
“With non-core land sale, S P Setia expects net gearing to decline to 0.5 times by end-2023,” the brokerage noted.
Maybank IB Research said S P Setia’s current share price has more than priced in the company’s relatively-weak balance sheet which showed a net gearing of 0.56 times as at the end of 1Q23.
It upgraded S P Setia to “buy”, citing undemanding valuations at 0.18 times price-to-book and 0.12 times revalued net asset value (RNAV).
Maybank IB Research maintained its target price for the counter at 70 sen.
S P Setia posted a net profit of RM55.45mil in 1Q23 on revenue of RM967.67mil, compared with RM67.5mil on revenue of RM867.1mil in 1Q22.
It achieved sales of RM1.03bil in 1Q23, which put it on track to meeting its FY23 sales target of RM4.2bil.
As of end-March 2023, S P Setia had RM512mil worth of bookings, and unbilled sales stood at RM7.2bil.
Meanwhile, TA Research said it continued to see challenges in S P Setia’s earnings performance, primarily due to elevated operating expenses and financial obligations (such as interest expenses and preference dividends).
It said while the disposal of non-core land parcels and monetisation of development land through joint ventures could potentially improve the group’s earnings, the realisation of these benefits could be delayed due to the lengthy process involved.
“In addition to meeting the sales target, the management has stated that de-gearing will remain a key focus for 2023. This will be achieved through measures such as repatriating cash from overseas projects, monetising non-strategic landbank, and clearing unsold inventories,” it said.
The brokerage maintained its “buy” call on S P Setia, but it had ascribed a lower target price for the counter to 60 sen from 76 sen previously.
Hong Leong Investment Bank (HLIB) Research had also cut its target price for S P Setia to 53 sen from 64 sen previously, while maintaining “hold” on the counter.It said its lower target price was based on a higher discount of 89% (from 87%) to RNAV of RM4.84.
“We lower our RNAV discount due to the challenging outlook for the group. Given the recent share price weakness, we note that some of the downside risks are likely to be priced in already,” HLIB Research said.
“The group is currently caught between a rock and a hard place due to the competing use of its available cash flow to pare down debt versus fund new developments to sustain sales and top line growth. The elevated net gearing level put the group in a vulnerable position susceptible to external demand or supply shocks,” it added.
Similarly, Kenanga Research said it remained cautious on S P Setia as prospects of the property sector appeared to be lacklustre, clouded by eroding affordability due to rising interest rates and elevated input costs.
It added that S P Setia’s high debt servicing obligations and high-cost structure could continue to weigh on the company’s near-term performance.
Kenanga Research maintained “underperform” on S P Setia, with an unchanged target price of 38 sen.
