CIMB Research Report: SP Setia Bhd - Sector core holding

Upgrading all developers

In view of our increasingly bullish stance on the property sector and our upgrade of the sector from Trading Buy to Overweight, we are also upgrading all developers including SP Setia from Trading Buy to OUTPERFORM. SP Setia remains the core blue-chip holding in the property sector given its market leadership, size and management.

Potential share price triggers include 1) continued strong sales in FY10, 2) renewed appetite for landbanking, both domestically and internationally, and 3) a return in investor appetite for property developers in 2010. We make no changes to our earnings forecasts but raise our target price from RM5.05 to RM5.51 as we now apply a 20% premium (10% previously) to its unchanged RNAV of RM4.59.

Upgrading property sector

Despite all the problems faced by the sector including squeezed margins, poor sales for most developers, rising unemployment and the economic recession, the property sector was one of the best performing sectors last year. This was because property stocks came from a very low base, having been bashed down in 2008. Share prices also enjoyed a big rebound because the sector is considered to be cyclical and highbeta,
and would benefit from the rebound of the stock market and economy. The sector, however, was dealt a temporary blow at end-Oct when the government announced a 5% RPGT that took effect on 1 Jan 2010.

Property stocks reacted negatively to the RPGT announcement and have been languishing since then. While we were also shocked by the move, we believe that the market has overreacted. Fundamentals are looking up as 1) the economy is forecast to return to growth in 4Q09 after being mired in recession in 1Q-3Q09, 2) the stock market’s spectacular 40%+ rebound in 2009 will help strengthen confidence and sentiment on properties, and 3) affordability of properties is near its all-time best and the low interest rate regime will encourage property purchases, especially with
inflation preying on some consumers’ minds.

Valuation and recommendation

2009 was a mixed year for SP Setia as sales hit a new high of RM1.65bn but margins faced a squeeze. FY09 profits fell for the second year in a row. However, we believe earnings have bottomed out and should improve from FY10 onwards. SP Setia’s FY10 sales target of at least RM1.6bn should be within reach as the maiden launch of the long-awaited RM6bn KL EcoCity project next to Bandar Mid Valley is in the offing and the group is actively scouting for more landbank domestically and internationally. We make no changes to our earnings forecasts but raise our target price from RM5.05 to
RM5.51 as we now apply a 20% premium (10% previously) to its unchanged RNAV of RM4.59. The 20% premium is still the lower end of the 20-70% range that sector proxies have traded at during property upcycles. We also upgrade SP Setia from Trading Buy to OUTPERFORM as the company remains the core blue-chip holding in the property sector. Potential share price triggers include 1) continued strong sales in FY10, 2) renewed appetite for landbanking, both domestically and internationally, and 3) a return in investor appetite for property developers in 2010.