Losing its competitive edge?

S P Setia Bhd
(May 20, RM3.75)
Downgrade to neutral at RM3.75 with a target price of RM3.99:
S P Setia’s position as Malaysia’s top developer is under threat with the likely departure of its CEO Tan Sri Liew Kee Sin. Although there is a succession plan in place, Liew is, in our view, irreplaceable and we could see more erosion of the company’s valuation premium.

Given the uncertain prospects due to management and execution risks, we downgrade S P Setia from trading “buy” to “neutral”. No changes to our valuation basis of parity with revised net asset value.

We are lowering 2013 financial year (FY13) to FY15 earnings per share by 1% to 11% to factor in the cost of the long-term incentive programme which could amount to RM80 million to RM90 million as well as the shift to lower margin products.

For exposure to the property sector, we prefer Mah Sing Group Bhd and UEM Land Holdings Bhd.

In March 2013, S P Setia’s board named its deputy president Datuk Voon Tin Yow as the successor to Liew when he retires. Its CFO Datuk Teow Leong Seng was named Datuk Voon’s successor as deputy president. In April, Liew exercised a second put option which cut his stake in S P Setia from 4.6% to 2.76%. His put option for the third and final tranche is due in March 2014 and we believe he may retire around that time.

We view his potential departure negatively as he is synonymous with S P Setia and it was under his stewardship that the group emerged as Malaysia’s only true multinational property company.

S P Setia is head and shoulders above the competition in terms of sales and international exposure. The group proved sceptics of its Battersea Power Station redevelopment project in London wrong when the maiden launch of its properties this year met with an overwhelming response.

S P Setia is targeting new sales of RM5.5 billion in FY13 ending Oct 31, which is RM2.5 billion ahead of its nearest rival. Malaysia’s dominant and best developer looks set to beat its ambitious target as first half of FY13 sales, including contribution from the massive Battersea project, has already surpassed RM4 billion mark.

With the likely departure of Liew by 2014, S P Setia’s competitive edge may start to erode. Liew brings ambition, vision, cohesion and a never-say-die attitude to S P Setia and his leadership will be sorely missed. — CIMB Research, May 20

This article first appeared in The Edge Financial Daily, on May 21, 2013.

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