Its shares fell as much as 17% or 26 sen to RM1.26, prompting Bursa Malaysia to suspend intraday short selling of the stock for the rest of the day.
It pared its losses to close 15% or 23 sen lower at RM1.29, valuing the Permodalan Nasional Bhd-owned group at RM6.27 billion. The sharp drop wiped RM1.12 billion off the company’s market capitalisation.
The counter had opened 2 sen higher, buoyed by the previous day’s announcement that its net profit for the second quarter ended June 30 (Q2 FY2024) surged almost 585% to RM295 million from RM43.1 million a year ago.
This was its highest quarterly net profit in six years, thanks largely to land sales in Johor which grew more than sixfold to RM564 million from RM86 million a year ago.
However, a closer scrutiny of SP Setia’s latest results revealed the profit surge arising from the land sales masked several red flags that nevertheless caught the attention of analysts and astute investors.
Battered by Battersea losses
Several research houses highlighted the heavy losses sustained by SP Setia’s 40%-owned Battersea Power Station (BPS) joint venture project in London, UK. The other JV partners are Sime Darby Property Bhd and the Employees Provident Fund.
This could have precipitated the profit-taking in the stock, which prior to yesterday’s plunge, had surged 90% year-to-date. Despite the price drop yesterday, the stock is still up 61% YTD.
TA Research said while SP Setia’s first half (H1 FY2024) net profit of RM372.4 million came in “within expectations”, it was partially offset by a higher share of JV losses, which amounted to RM121.8 million in the first half of this year compared to RM46.6 million in H1 FY2023.
“The increased losses were primarily due to issues with the Battersea Power Station JV,” it said in a note yesterday.
The research house highlighted that the company’s recent conference call with analysts primarily addressed the widening losses at BPS redevelopment project, which reported RM125 million in losses for H1 FY2024.
Meanwhile, RHB Research pointed out that the JV losses widened during the second quarter due to a five-year income guarantee agreement for a newly completed office tower in BPS.
“However, due to soft market conditions and the resulting low occupancy rates, the JV recorded a total loss of RM125 million.
“This was also partially attributed to higher interest rates in the UK which raised the project’s interest payments. The management acknowledged the subsequent quarters may see similar results until the building’s occupancy rates improve,” it said.
SP Setia’s debt problem
Another major challenge facing SP Setia is its huge debt which totalled some RM10 billion at the end of 2023. To its credit, the group has been working hard on reducing its debt burden, primarily through land sales.
In its statement on Wednesday, SP Setia touted the success of its de-gearing strategies. “From RM10.1 billion borrowings in Q4 2023, it has declined significantly by RM700 million within six months to RM9.4 billion as of Q2 2024.
“Net gearing ratio has consistently strengthened over the past few quarters to 0.41x per Q2 2024, compared to 0.49x in Q4 2023 due to the effectiveness of the group’s debt management and capital allocation strategies,” it added.
TA agreed the company has successfully decreased its net gearing through de-gearing strategies like monetising non-strategic land and clearing unsold inventory.
“The group is expected to recognise a gain of RM198 million from two land disposals in H2 2024. It remains on track to achieve its target of reducing net gearing to 0.4x by year-end through the utilisation of proceeds from these land sales,” it said.
Some market observers say the group should not be overly reliant on land sales to reduce its borrowings or cover a shortfall from declining property sales. It is certainly not sustainable over the long-term.
In its note, TA highlighted that SP Setia’s H1 2024 new property sales fell 10% year-on-year to RM2.3 billion. “This figure includes RM731 million from land sales in Johor. Excluding these land sales, property sales would have declined further by 23% y-o-y.”
It said the drop in property sales was primarily due to a lack of new launches during the period, with only RM1.1 billion in new launches introduced in the first half, reflecting a significant 26% y-o-y decline.
RHB said that moving forward, the company’s earnings should be “more normalised” – driven mainly by its township developments and industrial expansion – rather than land sales.