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S P Setia (AmResearch) maintain buy; fair value RM6.80

SP SETIA

Investment Highlights

• We reaffirm our BUY rating on SP Setia Bhd and raise our fair value from RM6.50/share to RM6.80/share, based on a 5% discount to our revised fully diluted (FD) NAV estimate
of RM7.16/share. The higher NAV estimate is mostly underpinned by the stronger pricing assumptions for Setia City (GDV: RM5bil).

• We also raise our earnings for FY11F and FY12F by 14%- 15% to RM301mil and RM361mil, respectively. This follows the stronger-than-expected earnings of RM252mil for FY10F – beating our and street estimates by 8% and 16%, respectively.

• Earnings jumped by a massive 47% YoY despite having seen sales growing by 24% due to a recovery in margins – FY10 EBIT margin of 19% versus FY09’s 16%. Main contributors to earnings include Setia Alam, Setia EcoPark, Setia Walk, Bukit Indah and Setia Sky Residences.

• SP Setia gave a bullish guidance for FY11F during the analyst briefing. As highlighted in our report dated 21 October 2010, the group is targeting FY11F presales of RM3bil (FY10: RM2.3bil) which we believe may appear conservative.

• We gather that KL Eco City will be officially launched in January or February 2011 where the group would kick off things with strata and boutique offices at an average price of RM1,000psf.

• We continue to be bullish about this grand development. In our opinion, the market may have under-appreciated the deep-embedded value of KL Eco City, given current bearish consensus view on condominium and office space due to concerns of oversupply.

• Given its design niche, first mover advantages and market reach, Eco City may usher a new era for SP Setia, propelling its annual presales to a record high of RM3bil starting from FY11F (FY10F: RM2bil).

• The group’s focus would remain on township and integrated commercial developments - KL Eco City and Setia City – and we view positively that the group would pace itself for overseas ventures such as in China and Vietnam.
 
• Lastly, Tan Sri Liew dismissed recent rumours on the possibility of a merger exercise for SP Setia. While we agree there will be bigger property entities later on, we are certain SP Setia would remain as investors’ favourites given its excellent track record and solid execution.

STRONGER THAN EXPECTED EARNINGS

We reaffirm our BUY rating on SP Setia Bhd and raise our fair value from RM6.50/share to RM6.80/share, based on a 5% discount to our revised fully diluted (FD) NAV estimate of RM7.16/share. The higher NAV estimate is mostly underpinned by the stronger pricing assumptions for Setia City (GDV: RM5bil).

We raised earnings for FY11F and FY12F by 14%-15% to RM301mil and RM361mil, respectively. This follows the stronger-than-expected earnings of RM252mil for FY10F – beating our and street estimates by 8% and 16%, respectively. We introduce FY13F earnings at RM422mil which would be driven by sales from its township developments Setia Alam and Eco Park and also new products such as KL Eco City and Setia City in Setia Alam.

Earnings jumped by a massive 47% YoY despite having seen sales growing by 24% due to a recovery in margins – FY10 EBIT margin of 19% versus FY09’s 16%. Main contributors to earnings include Setia Alam, Setia Eco Park, Setia Walk, Bukit Indah and Setia Sky Residences.

Unbilled sales of RM1.8bil and proposing dividends of 20sen/share

SP Setia’s earnings going forward would be secured by strong unbilled sales of RM1.8bil (about 1x FY09 sales) which were mostly contributed by sales from its bread and butter township development Setia Alam and Eco Park. Setia Sky Residences is also doing well with take-up now reaching close to 70% from 65% earlier with average pricing at a staggering RM1,000psf from RM680- RM700psf. Setia has certainly done well despite the nottoo- sexy location.

Johor’s sales accounts for about 30% of property sales for Setia but management guided that competition remains tough with other developers offering similar products.
The group also proposed a 20sen/share for FY10 versus 16sen for FY09. We are estimating a dividends per share of 25sen – 32sen based on a payout policy of 65%-70%
for FY11F-FY13F.
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