S P Setia Berhad is grappling with increasing financial challenges, as revealed in its recent earnings report, despite achieving higher-than-expected revenue through land sales. The company's net profit for the first half of 2024 (1H24) surged significantly due to successful land disposals, yet the persistent losses from its joint venture in the Battersea Power Station project have raised concerns about its future performance.
Analysts maintained a "BUY" recommendation on S P Setia with a target price of RM1.72, representing a 13% upside. However, they cautioned that the company's profitability was largely propped up by one-off land sales, which might not be sustainable in the long term. The investment firm also highlighted the growing losses from the Battersea Power Station project, which contributed to a gloomy outlook for the company's core property development activities.
The second quarter of 2024 (2Q24) saw S P Setia's revenue climb due to a significant land disposal in Taman Pelangi Indah, valued at RM564 million. This sale led to a substantial boost in the company's earnings, pushing the quarter's earnings before interest and tax (EBIT) margin to an impressive 39.9%, up from 18.9% in the first quarter. Despite this, the company's joint venture with Battersea Power Station recorded a staggering loss of RM101 million in 2Q24, further exacerbated by an income guarantee agreement for an office tower within the development.
The Battersea project, which was supposed to be a landmark development, has become a financial burden due to low occupancy rates and high-interest rates in the UK. S P Setia's management acknowledged that the project might continue to post losses in the coming quarters, compounding investor concerns.
Looking ahead, the company is on track to meet its sales target of RM4.4 billion for the year, bolstered by its land monetisation strategy. However, the reliance on land sales to drive earnings has raised questions about the sustainability of its growth, especially as its core property development revenues have shown signs of weakness.
In addition to the challenges posed by Battersea, S P Setia's unsold inventory remains a concern, with RM1.5 billion worth of properties still on the market, including significant portions from Aspire Tower in KL Eco City and Uno Melbourne. The company's gearing has improved slightly, dropping to 0.44x from 0.50x in FY23, but it remains higher than its peers, which could expose the company to further financial pressures in a rising interest rate environment.
Despite these challenges, the company's management remains optimistic, with upcoming land sales in Setia City and Taman Pelangi Johor expected to further support earnings in the second half of 2024 (2H24). However, the question remains whether these one-off gains can offset the ongoing struggles in its core operations, particularly the Battersea project.