MARC Ratings has affirmed its AA_IS rating on S P Setia Berhad’s RM3.0 billion Islamic Medium-Term Notes (IMTN) Programme with a stable outlook. The outstanding under the programme currently stands at RM2.0 billion. 

The affirmed rating primarily reflects S P Setia's entrenched market position in township development and healthy sales track record, underpinned by sizeable landbank in strategic locations which provides strong developmental opportunities. The rating incorporates a one-notch uplift on MARC Ratings’ assumption of support extended by parent Permodalan Nasional Berhad (PNB) to S P Setia if needed. The rating is moderated by the potential impact of the challenging economic conditions and higher interest rate environment following recent hikes in the overnight policy rate (OPR) on the domestic property market.

Ongoing domestic projects carried a gross development value (GDV) of RM7.8 billion and recorded an average take-up rate of 72% as at end-2022. S P Setia’s continued focus on developing landed residential projects in matured locations with good infrastructure connectivity and prices ranging from RM500,000 to RM1.0 million per unit has been the key sales driver. It had sizeable unbilled sales amounting to RM3.6 billion. In 1Q2023, it launched developments worth RM683.0 million in GDV, mainly comprising landed homes in its existing townships.

S P Setia has recorded moderate-to-strong take-up rates for its foreign projects. Its two high-rise projects in Melbourne, Australia — the 325-unit Sapphire by the Gardens project (GDV: RM1.20 billion, 97% take-up) and Phase 1 of the 635-unit UNO Melbourne project (overall GDV: RM1.39 billion, 88% overall take-up) were fully completed by end-2022. Phase 2 of the UNO Melbourne project, comprising 432 units, is expected to be completed in 3Q2023. For its Battersea Project in the United Kingdom — in which it holds a 40%-interest — completed residential projects under Phase 2 and Phase 3A have achieved a combined take-up rate of 91% while 90% of available commercial space has been fully leased. 

In 1Q2023, group pre-tax profit y-o-y remained largely unchanged at RM116.0 million, on the back of RM1.0 billion worth of new property sales which is in line with its full year target of RM4.2 billion. Contribution from its build-then-sell developments in Australia boosted group revenue by 18.4% y-o-y to RM4.5 billion in 2022. However, higher construction costs and interest expense led to a marginal increase in pre-tax profit of 4.0% y-o-y to RM564.1 million.

MARC Ratings understands that management will incorporate the higher construction costs in its pricing to improve margins. The group will also limit exposure to floating-rate borrowings by refinancing some of its term obligations through new issuances of up to RM1.0 billion under the rated programme. 

Completed inventories rose marginally to RM1.2 billion as at end-1Q2023, mainly due to the build-then-sell nature of the Melbourne projects, where some units are to be delivered. The strong sales for the ongoing domestic projects alleviate concerns of a marked increase in inventory over the near term. 

As at end-1Q2023, group borrowings reduced to RM10.9 billion (end-2021: RM12.6 billion), with its gross debt-to-equity (DE) ratio improving to 0.71x from 0.80x as at end-2021; this is expected to decline further in the near term mainly through proceeds from repatriation of profit from foreign projects and planned sales of land parcels. Cash balances of RM2.4 billion as at end-March 2023 provide buffer to meet its upcoming financial and contractual obligations. 

Umar Abdul Aziz, +603-2717 2962/ umar@marc.com.my 

Cyndy Goh, +603-2717 2941/ cyndy@marc.com.my 

Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my