KUALA LUMPUR, Aug 23 — The completion and handover of certain office towers at the Battersea Power Station (BPS) development has triggered profit guarantee obligations from SP Setia Bhd, leading to RM100 million in losses in its second quarter financial year ended 2024 (2Q FY2024).

In a research note today, Kenanga Investment Bank Bhd said the group will conduct a quarterly assessment.

“The eventual rentals to be generated from these towers could minimise its obligations going forward,” the investment bank said.

“SP Setia’s first half financial year 2024 (1H FY2024) earnings beat our forecast due to heavy land bank disposals. This is expected to persist up until 2H FY2024. This led us to raise our FY2024 forecast earnings by 144 per cent,” it said.

“However, the consensus estimate also missed (the fact that) losses from the Battersea development have widened after certain profit guarantee clauses were triggered upon handover,” it said.

Kenanga has maintained an “Underperform” call the counter but with a higher target price of 90 sen versus 85 sen.

There was an under-recognition of profits from land sales completed in 2Q FY2024. At the same time, consensus numbers were missed, no thanks to extended losses from Battersea, the note said.

“SP Setia’s RM4.4 billion sales target for the FY2024 remains intact, albeit with a strong allocation towards land sales. Two upcoming deals at Setia City, Shah Alam at RM229 million, and Taman Pelangi, Johor at RM167 million, are slated to be completed in 2H FY2024, with total disposals of RM1.13 billion for FY2024,” according to Kenanga.

Kenanga said SP Setia appears to be satisfied with its land bank rationalisation for now.

“On a full-year basis, land disposals could contribute RM569 million (1H FY2024: RM371 million) to net profit.

“Property development sales are expected to be supported with township developments in the Klang Valley and Johor Baru. Aware of the competition from adjacent plots, the group is evaluating its strategies with regard to launches,” it said.

It was reported earlier today that the Employees Provident Fund (EPF), Sime Darby Property Bhd and SP Setia are likely to incur losses of some RM250 million a quarter, or RM1 billion a year, from a five-year rental guarantee at the Battersea development.

SDP and SP Setia Bhd each have 40 per cent in the venture and the EPF, 20 per cent, it was reported.

Meanwhile, SDP expects minimal future impact from the accounting adjustments related to International Financial Reporting Standards 17 (IFRS 17) despite incurring a wider share of joint venture losses due to a rental guarantee.

Its group managing director Datuk Azmir Merican said the significant losses in 1H 2024 were primarily driven by the negative accounting impact of IFRS 17 related to the five-year rental guarantee.

With the new building’s occupancy rate starting at just 20 per cent, the accounting impact for 2024 has been notably large.

In a press conference, he said SDP does not foresee further impact due to a prudent move undertaken to account for the major effects in the current quarter. He does not foresee substantial additional impacts for the rest of the year. — Bernama