KUALA LUMPUR: Kenanga Research remains cautious on SP Setia Bhd's outlook as the company will continue to be weighed down by high debt servicing obligations. 

Kenanga Research noted that SP Setia's nine-month 2022 core net profit of RM35 million had missed expectations at only 13 per cent and 12 per cent of the firm's full-year forecast and consensus estimates respectively, weighed down by core net loss of RM26 million.

The variance against its forecast came largely from the higher-than-expected financing cost and the wider-than-expected losses from 40 per cent-owned joint venture in Battersea. 

"SP Setia has repatriated 36 million pound (or RM195 million) from Battersea with the intention to pare down RM1 billion worth of borrowings by year end (currently RM12.5 billion borrowings) and the goal of bringing net gearing down to 0.4 times by financial year 2024 (FY24) (currently 0.71 times). 

"Such targets will be achieved through  land sales, debt settlement in Singapore and Australia upon project completion, and continuous repatriation of monies from Battersea," said Kenanga Research. 

It added that the losses at Battersea (40 per cent joint venture) would narrow on reducing market expenses as the take-up inched towards 100 per cent. 

The company's sales conversion rate remains at 50 per cent. 

SP Setia, it said, intended to continue pushing landed properties within its matured townships to achieve its RM4 billion sales target. 

Kenanga Research expects SP Setia's fourth quarter net profit to come in strong at RM135 million upon the handover of Sapphire Melbourne. 

The contribution from Sapphire will spill over to FY23 on gradual handovers while UNO Melbourne will also start to contribute on completion in FY23. 

Nonetheless, with rising rates, the firm forecasted absolute financing costs to rise in FY23 despite the lower debt levels as 85 per cent of its existing debts are secured at floating rates. 

Kenanga Research cut its FY22F and FY23 net profit forecasts for SP Setia by 36 per cent and 21 per cent respectively.

"We remain cautious on SP Setia as prospects of the property sector seem to be deteriorating further, clouded by eroding affordability due to rising interest rates and elevated input costs, and its near-term performance will continue to be weighed down by high debt servicing obligations and high-cost structure," it added. 

Kenanga Research maintained an "Underperform" call on the stock and reduced its target price by 34 per cent to 38 send from 58 sen previously.