View Credit Analysis Report (6053679)

Date Article2021-06-17 00:00:00
TitleS P SETIA BERHAD - 2021
Rating action     
MARC has assigned a final rating of AAIS to S P Setia Berhad’s (S P Setia) proposed RM3.0 billion Islamic Medium-Term Notes Programme. The rating outlook is stable. Proceeds from the proposed issuance will largely be used to fund capital injections into the group’s joint-venture Battersea Power Station, United Kingdom (Battersea Project) and to refinance earlier borrowings undertaken to fund the Battersea Project.

The key rating drivers are S P Setia's well-established position as a township developer and good sales track record that has continued to provide strong earnings visibility from high unbilled sales. The rating also factors in S P Setia’s sizeable landbank with good transportation connectivity which would provide further prospects for property development. The rating is moderated by the prevailing weak property market conditions in Malaysia as well as in the UK where it has the ongoing Battersea Project in which it has a 40% stake. The assigned rating incorporates a one-notch uplift on the basis of our expectation of support from Permodalan Nasional Berhad (PNB) which has a 62.4% stake in S P Setia as at February 15, 2021.

S P Setia currently has 23 ongoing township and niche developments in Malaysia, focusing on landed residential properties in the mid-range segment. The majority of the group’s landbank of 8,528 acres is in the Klang Valley and has good infrastructure connectivity. Its ongoing domestic projects carried a total gross development value (GDV) of about RM9.4 billion as at end-December 2020 and had an average take-up rate of 68%, which is moderately higher than several of its peers, reflecting its strong market position. This notwithstanding, the group’s inventory of completed properties remains relatively higher than its peers at RM1.0 billion, although it is on a declining trend. Of this, 30% comprises unsold high-rise units from Setia Sky88 in Johor and Setia Sky Vista in Penang which were completed in 2018 and 2019. Relative to the scale of its ongoing property developments, the completed inventory level remains moderate and manageable.

We note the group has steadily expanded abroad since 2007; its major undertaking is the 40% stake in the Battersea Project with the remaining held by Sime Darby Property Berhad (40%) and the Employees Provident Fund (EPF) (20%). The project is being developed in seven phases. The first phase consisting of 867 units of residential and commercial properties has been completed and fully sold while phase 2 and phase 3A are slated for completion by 2Q2021 and 3Q2021. We also note that under phase 2, the commercial components comprising office and retail space have been sold to a PNB and EPF joint venture for about £1.6 billion; proceeds from this disposal will be used to partly fund construction works for ongoing developments.

We are of the view that prospects for upcoming phases in the Battersea Project could be challenging, given the weak property market conditions in the UK, compounded by BREXIT and the impact of the COVID-19 crisis.

Due to these reasons, the Battersea Project recognised an impairment of £62.4 million (RM336.3 million) on its work-in-progress and inventories under development due to expectations of a lower net realisable value under phase 2 and phase 3A. Coupled with some inventory write-downs, the group recorded pre-tax losses of RM156.7 million for 2020. We understand that the Battersea Project is not likely to incur further impairments in the foreseeable future. The group’s earnings visibility over the next two to three years stems from its sizeable unbilled sales of RM4.1 billion from domestic projects, RM2.9 billion from the Battersea Project and RM3.1 billion from other foreign projects as at December 31, 2020. 

S P Setia’s group borrowings rose sharply to part fund the acquisition of I & P Group Sdn Bhd and the remaining stake in Setia Federal Hill in 2018. As at end-2020, total borrowings stood at RM11.9 billion, translating into a gross debt-to-equity (DE) ratio of 0.78x (2019: 0.71x). Its major commitments over the next two to three years would be to meet the funding requirements for the capital call of about GBP128 million (RM720 million) for the Battersea Project by 1H2022. The capital call, which will be partially funded through the sukuk issuance, is expected to increase the group’s gross DE ratio to about 0.80x. S P Setia has retained strong financial flexibility stemming from significant unutilised financing facilities and sizeable unencumbered landbank.

Rating outlook     
The stable rating outlook assumes S P Setia will broadly maintain its sales performance in the current challenging conditions, and that its leverage position would not exceed 0.8x, as projected over the near term.

Rating trajectory

Upside scenario     
While MARC does not expect the standalone rating to be upgraded over the next 12 to 18 months, a substantial improvement in group leverage to less than 0.50x and strong sales performance could lead to a reassessment of the rating and/or outlook.

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 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 high unbilled sales.
Key risks
  • Slow recovery of property market conditions domestically and internationally
  • Increasing leverage level 

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