Why did SP Setia incur RM100 million in losses last quarter?

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SP Setia Incurred RM100 Million in Losses Due to Profit Guarantee Obligations at Battersea Development

SP Setia Bhd reported a loss of RM100 million in its second quarter financial year ended 2024 (2Q FY2024). This financial setback was primarily a consequence of profit guarantee obligations arising from the completion and handover of specific office towers within the Battersea Power Station (BPS) development in London. While these obligations have impacted the company's short-term earnings, the eventual rental income generated from these properties is anticipated to mitigate SP Setia's future financial commitments related to the project.
Battersea Development Triggers Profit Guarantee Clauses

The RM100 million loss for SP Setia in 2Q FY2024 was directly linked to profit guarantee clauses within the Battersea development project. These clauses were activated upon the handover of certain office towers, necessitating SP Setia to fulfil its commitments to guarantee a certain level of profit. This situation led to a widening of losses associated with the Battersea development, an aspect that was not fully anticipated by consensus estimates.
Land Disposals Bolster First Half Earnings

Despite the losses from the Battersea project, SP Setia's earnings for the first half of FY2024 (1H FY2024) exceeded expectations. This outperformance was driven by substantial land bank disposals, a strategy that is projected to continue through the second half of FY2024. Kenanga Investment Bank revised its FY2024 forecast earnings upwards by 144 per cent, acknowledging the significant contribution from these land sales.
Land Sales and Property Development Sales Remain Key Focus

SP Setia's overall sales target of RM4.4 billion for FY2024 remains on track, with a significant portion allocated to land sales. The company has identified two upcoming deals in Setia City, Shah Alam (RM229 million) and Taman Pelangi, Johor (RM167 million), scheduled for completion in 2H FY2024, contributing to a total projected disposal value of RM1.13 billion for the fiscal year. These land disposals are expected to contribute RM569 million to net profit on a full-year basis. Property development sales are also expected to be supported by ongoing township developments in the Klang Valley and Johor Baru.
Broader Impact on Joint Venture Partners

The profit guarantee at the Battersea development also affects other partners in the venture. Employees Provident Fund (EPF), Sime Darby Property Bhd (SDP), and SP Setia are collectively expected to incur losses of approximately RM250 million per quarter, or RM1 billion annually, due to a five-year rental guarantee. SP Setia and SDP each hold a 40 per cent stake in the venture, with EPF holding the remaining 20 per cent. SDP has indicated that while it incurred a wider share of joint venture losses due to this guarantee, the impact of accounting adjustments related to International Financial Reporting Standards 17 (IFRS 17) is expected to be minimal going forward, as the major effects have been accounted for in the current quarter.

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Why did SP Setia incur RM100 million in losses last quarter?

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