PETALING JAYA: Kenanga Research has maintained its “underperform” call on SP Setia Bhd as the property developer disappointed by posting a 35.5% drop in net profit for its third quarter ended Sept 30 (Q3 FY2023) to RM51.8 million from RM70.19 million previously.

Revenue was, however, higher at RM1.08 billion compared to RM861 million a year ago.

The research house flagged the group’s significant exposure to less sought-after high-end residential segments, high gearing with increased debt obligations in a high-interest environment, and sustained losses in joint venture (JV) projects.

“We remain cautious given its high debt level and maintain our forecasts, TP (target price) of 68 sen and underperform call,” Kenanga said.

According to its latest annual report, the group’s net debt is a massive RM8.78 billion in 2022, down from RM9.52 billion in 2021.

SP Setia, one of the country’s largest property developers, is majority-owned by Permodalan Nasional Bhd (PNB).

Its Battersea JV in the UK continued to sustain losses, stemming from impairments related to unsold units, a decline in rental income, and increased interest rates in the country.

Profitability from this venture is not expected in the short-term, but the group affirms the robustness of cash flows, allowing for repatriation this year, Kenanga said.

Besides, there is anticipation of recognising unbilled sales for its Australian assets, particularly UNO in Melbourne, in the fourth quarter of FY2023, potentially resulting in fluctuating earnings.

Kenanga said the upcoming months may see a surge in interest for its Johor products, thanks to the anticipated completion of the Singapore-Johor Bahru RTS Link in 2026.

“On top of that, the support from the RM548 million Tebrau land sales to Scientex would be in place, albeit in FY2024,” it added.

More land sales to cut gearing

Meanwhile, Public Investment Bank (PublicInvest) has maintained its “outperform” call on the stock with a TP of RM1.20, on the back of its undemanding valuations and well-located landbank.

“The group sold another tract of land, with the latest being the sale of 17.99 acres of land in Setia City, Selangor to KSL Bestari Sdn Bhd for RM228.8 million,” it said. KSL Bestari is a subsidiary of real estate group KSL Holdings Bhd.

It noted that sizeable land assets have been divested, including transactions with Mah Sing Group Bhd (500 acres for RM392 million in June) and Scientex JV (959.7 acres for RM547.7 million).

Anticipated to generate approximately RM1 billion in cash, these deals aim to alleviate existing debts and fund new ventures as part of a broader initiative to stimulate additional projects.

“We are positive on the group’s commitment to bring down its debt load,” said PublicInvest.

AmInvestment Bank Bhd has maintained its “hold” call on SP Setia with a lower TP of 75 sen from 81 sen previously.

The research house also placed a lower fair value (FV) of 75 sen per share from 76 sen per share previously.

This revision is based on a lowered projection of core net profit (CNP) for the fiscal years 2023-2025, (FY2023F/FY2024F/FY2025F) with a decline of 27%/10%/8% respectively, reflecting potential delays in product launches.

In a note, the research house took into account the delay in the recognition of unbilled sales from its UNO Melbourne project.

“We understood that the recognition of 80% of unbilled sales from UNO Melbourne amounting to RM557 million will be deferred to FY2024F,” it said.

The research house said year-on-year, (y-o-y) SP Setia’s 9M FY2023 core net profit fell 9% despite a 9% increase in revenue.

“The increase in revenue recognition from its Australian projects from the handover of UNO Melbourne (Stage 2) were more than offset by an increase in the finance cost,” it added.

The research house expects an acceleration of progress billings for the group’s Malaysian projects in FY2024F, given the improvement in labour market conditions.

Notably, SP Setia’s Malaysian projects have an unbilled sales of RM5 billion – 74% of the group’s total.

Its shares were down 3.5 sen or 4.14% to 81 sen at the close, valuing the group at RM3.34 billion.