A golden opportunity to buy S P Setia

S P Setia Bhd (Mar 23, RM6.18)
Maintain buy at RM6.15 with lower target price RM7.10 (from RM7.20): The recent selldown of S P Setia shares represents a golden opportunity to buy the stock given the company's excellent sales performance and earnings growth prospects.

S P Setia will very likely exceed its RM3 billion sales target for FY11, a new record, given strong bookings and responses to its KL Eco City offices and residential tower. We fine-tune our earnings forecasts and tweak down our target price to RM7.10 (-1%) based on an unchanged 10% premium to our new RM6.47 realisable net asset value (RNAV) post-placement. S P Setia ramains our top buy for the sector.

Recent strong bookings for KL Eco City's strata and boutique offices did not surprise us given the prime location and the excellent connectivity offered by the MRT-LRT-Kommuter hub. We are heartened by the record RM1,100 to RM1,200 psf average selling price (ASP), which surpasses KL Sentral's RM850 to RM1,100 psf. S P Setia now plans to launch the residential tower Phase 1 by early April (RM1,100 psf ASP).

In view of the high number of registrants (3,500) for the 711 units, we expect RT1 to be another sell-out, bringing in sales of RM650 million.

However, our RM3.7 billion sales assumption is 23% above S P Setia's. We believe it is attainable given: (i) stunning ex-KL Eco City sales of RM953 million in 4MFY11; (ii) RM1 billion in recent bookings for KL Eco City's strata and boutique offices; (iii) the upcoming RM650 million RT1 launch; and (iv) estimated RM1 billion to RM1.2 billion sales from the ongoing local townships and Melbourne projects.

The current scenario is different from the 2002 placement of new shares, where the proceeds were used to fund the greenfield Shah Alam land. S P Setia is now moving into high-catchment urban developments which are further supported by the Greater KL/Klang Valley's new integrated transport system.

This would provide greater upside potential with lower take-up risks compared with its 2002 venture. Also, we see lower risks due to lower upfront costs.

We fine-tune our net profit forecasts by circa 1% post-placement. Earnings per share dilution is about 20% to 21%, while the impact on RNAV is minimal (-1.2%). We expect S P Setia to scale record profits this year with a strong 36% growth over FY10.

Our RM6.47 RNAV has upside potential from: (i) further land banking exercises; (ii) an upward revision in gross development value for existing developments; and (iii) circa RM600 million en bloc sales for the KL Eco City corporate towers. — Maybank IB Research, Mar 23