S P Setia (AmResearch) buy; fair value RM7.38

• SP Setia Bhd turned in a strong net profit of RM62mil (+62% YoY) for 1QFY11, which was spot on - although covering only 20% of our estimates but 23% of consensus’ – as earnings would be stronger in the subsequent quarters with strong progress billings. So far, the group has chalked up whopping unbilled sales of RM2.6bil.

• Earnings were underpinned mostly by Setia Alam, Eco Park, Sky Residences, Bukit Indah and Eco Gardens. Margins were also stronger at 17% versus 14% last year given the stronger prices. However, income slid by 18% QoQ mostly due to the lumpy recognition of the disposal of Tesco Hypermarket in Bukit Indah, Johor in the last quarter.

• The group is targeting new sales of RM3bil this year, which we believe is rather conservative given the exciting projects in the pipeline. We are targeting new sales of RM3.1bil to RM3.2bil this year.

• In fact, in 1QFY10, the group managed to generate new sales of RM737mil versus RM608mil previously or a 21% jump YoY. Sales were driven by its bread and butter residential projects and there will be further upside from the launch of the highly anticipated integrated commercial development, KL Eco City (GDV: RM6bil) in Jln Abdullah Hukum.

• We understand the group has already secured about RM1bil sales from the boutique offices and SOHO units while interests in the first phase of the residential units (711 units) have been overwhelming with pricing at ASP of RM1,000psf-RM1,200psf.

• We believe the recent share price retracement has surely more than priced-in the market’s concern over the potential share overhang and earnings dilution stemming from its proposed placement of shares.

• In any case, we believe the share overhang risk has been significantly overplayed given the firm commitment from its major shareholders, and the potential NAV growth from NAV-accretive deals.

• We reaffirm our BUY rating on SP Setia with our fair value unchanged at RM7.38/share, pegging a 5% discount to our NAV estimate of RM7.77/share. At current price, SP Setia is trading at an attractive 21% discount to its NAV.