SPSETIA: Outlook Adjusted on Project Timelines, Buy Rating Reiterated

A recent investment bank research report has provided an updated assessment of a major property developer’s financial outlook, setting its target price at RM0.25 and reiterating a “BUY” recommendation. The revision comes as the bank cuts its FY25 earnings forecast by 33% due to timing delays in land sale recognition and higher expected losses from a key overseas project. Despite these near-term headwinds, the investment bank believes current valuations are undemanding and structural growth drivers remain intact.

Performance Review and Forecast Adjustments

The developer’s recent financial performance saw its 2Q25 sales achieve 40% of its FY25 target, although overall revenue was lower year-on-year due to fewer land sales. Management remains confident in meeting its full-year sales targets, supported by ongoing and upcoming launches. However, a key concern is the delayed earnings recognition from projects like Setia Alaman Industrial Park, where RM642 million in unbilled sales are unlikely to be fully recognized in FY25 due to pending land titles and infrastructure requirements. This led to the significant FY25 earnings forecast reduction, while FY26 and FY27 forecasts were marginally raised by 3% and 2% respectively.

Challenges and Strategic Responses

The Battersea Power Station (BPS) project continues to be a drag on results, with the developer’s 2Q25 share of loss from BPS widening to RM47 million, partly exacerbated by less favorable foreign exchange rates. The losses comprised recurring operating expenses and one-off reconciliation costs related to mall construction, with recurring quarterly losses of RM20-30 million expected to persist in the near term.

However, relief is anticipated with the commencement of BPS Phase 3C, which is expected to allow the recovery of front-loaded infrastructure costs. While not recognized as profit under UK accounting standards, it will provide liquidity support and ease operating losses, bringing BPS closer to operational breakeven by 2027. Phase 3C, designed by Gehry Partners, will deliver 306 homes and enhance long-term cash flow visibility.

Future Outlook and Growth Drivers

The developer is strategically positioning for future growth, particularly in industrial development. A joint venture for a 42-acre smart warehouse campus, combined with other partnerships and potential government-linked company ventures, is set to anchor industrial-led earnings growth from 2025 to 2029.

Asset monetisation remains a key strategy to strengthen the balance sheet, with total debt declining to RM8.2 billion by end-June 2025. The group also disposed of non-core land worth RM235 million in 1H25. Furthermore, a REIT listing, targeted for 2026, will unlock RM700-800 million from a portfolio of eight investment properties valued at RM2.5-3.0 billion. This initiative is expected to provide a recurring income platform and act as a catalyst for further de-gearing.

Investment Recommendation

Despite the clouded near-term earnings visibility due to slower land sale recognition, the fundamental demand story remains robust. Housing sales are resilient, industrial ventures are gaining traction, and balance sheet discipline is evident through steady deleveraging. While the target price has been adjusted to RM0.25, reflecting execution risks and a cut in the target P/B multiple, the investment bank maintains its “BUY” recommendation. Current trading levels are considered undemanding, offering investors with a medium to long-term horizon exposure to structural growth in industrial development and recurring income assets. Potential upside exists if land sale recognition for Setia Alaman materializes earlier than assumed.