CREDIT ANALYSIS REPORT

S P SETIA BERHAD - 2022

Report ID 605389004697 Popularity 92 views 19 downloads 
Report Date Apr 2022 Product  
Company / Issuer S P Setia Bhd Sector Property
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Rationale
Rating action     
MARC Ratings has affirmed its AAIS rating on S P Setia Berhad’s RM3.0 billion Islamic Medium-Term Notes Programme with a stable outlook. The initial proceeds of RM800 million from the issuance had largely been used to fund capital injections into the group’s joint venture (JV) Battersea Power Station in the United Kingdom (Battersea Project).

Rationale      
S P Setia's well-established position as a township developer, good sales track record and sizeable landbank in strategic urban and suburban locations remain key rating drivers. The group’s entrenched market position is supported by a landbank of 4,709 acres in the Klang Valley, mainly located around well-developed infrastructure network.

Gross development value (GDV) of S P Setia’s ongoing domestic projects stood at a strong RM9.0 billion as at end-December 2021, with unbilled sales of RM4.0 billion. S P Setia achieved strong domestic sales with most projects recording take-up rates of above 90%, particularly for its landed units priced below RM1.0 million, which remain its mainstay. The good performance has been aided by the government’s Home Ownership Campaign. However, post-campaign, the prospects for the domestic property industry remain uncertain, which is a moderating factor to the rating. Another concern is the group’s high inventory level; as this reflects the aggregate sum of unsold units from its large number of projects that have generally achieved moderate-to-strong response, we view S P Setia’s completed inventory level as manageable at this juncture. 

S P Setia’s major overseas undertaking remains its 40%-stake in the Battersea Project, a JV with Sime Darby Property Berhad (40%) and the Employees Provident Fund (EPF) (20%). The phase 2 residential component was delivered in early 2022; the commercial component will be open for sale in September 2022. Proceeds from the sales of the residential units and the commercial component under phase 2 totalling RM3.9 billion will be used to fund construction works for the remaining phases under the 7-phase development. Demand prospects for the upcoming phases in the Battersea Project could be affected by the challenging economic conditions in the UK, compounded by relatively higher prices of the units.

Group earnings rebounded in 2021 with revenue of RM3.8 billion and pre-tax profit of RM542.5 million, reflecting strong sales performance. The easing of movement restrictions during the year had accelerated construction progress and hence, progress billings. S P Setia registered property sales of RM4.3 billion during the year (2020: RM3.8 billion) and construction works of ongoing projects are progressing within schedule.

Operating profit margin rebounded to 19.2% (2020: 13.2%). Group consolidated cash flow from operations remained strong, recording RM1.1 billion in 2021, in line with the full resumption of construction works and supported by higher property sales.

Group borrowings increased by RM615 million to RM12.6 billion from the drawdown, translating into DE ratio standing at 0.80x and net DE ratio of 0.61x (2020: 0.78x, 0.59x). Its major financial commitment as at end-2021 amounting to RM224 million involves the remaining capital call by the Battersea Project JV and construction of investment properties worth RM99 million which will be funded through internal cash. Its cash balance of RM3.1 billion, coupled with sizeable unbilled sales, will support its financial and contractual obligations. Of the RM3.2 billion maturing loans, about RM1.2 billion will be refinanced through proceeds from further issuance under the IMTN programme. Remaining property development cost for ongoing projects amounting to about RM4.5 billion is well supported by the sizeable unbilled sales.

The rating incorporates a one-notch uplift on the basis of our expectation of support from Permodalan Nasional Berhad (PNB) which has a 61.5%-stake in S P Setia as at February 28, 2022.

Rating outlook     
The stable outlook on the rating assumes S P Setia will broadly maintain its credit profile within the expectation of the rating band over the next 12 months.

Rating trajectory

Upside scenario     
An upgrade on the standalone rating is not likely in the near term given the inherent risk in its foreign property projects and the prevailing uncertain recovery in the domestic property market.

Downside scenario     
The standalone rating will come under pressure if leverage rises sharply from the projected level and/or if the group were to undertake debt-funded acquisitions that will significantly increase its borrowing level.

Key strengths
Well-established market position in township development
Good sales track record particularly in the mid-range property segment
Strong earnings visibility from sizeable unbilled sales

Key risks
Uncertain property market recovery post government campaign
Maintaining balance sheet strength 


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