S P Setia (AmResearch) maintain buy; fair value RM8.10

Investment Highlights

• We maintain our BUY rating on SP Setia and raise our fair value from RM7.38/share to RM8.10/share, at parity to our revised fully-diluted (FD) NAV of RM8.10/share.

• We lifted our FD NAV from RM7.77/share to RM8.10/share to reflect more aggressive pricing assumptions, and removed the 5% discount to our FD NAV to arrive at our new fair value, given a strong scope for further NAV growth.

• We have also raised our earnings estimate for FY11F by 3% to RM310mil, and by 5% for FY12F and FY13F. This is to account for higher average selling prices, translating into an increase in presales to RM3.1bil this year, from the previous forecast of RM3.0bil.

• SP Setia has again demonstrated its slick execution and uncanny ability to strike ‘deals’, despite the soft condominium and office sub-markets. At KL Eco City, it has completely sold out the 12 boutique office blocks (NSA: 750,000sf) for RM800mil and a 30-storey strata-titled office tower (NSA: 300,000sf) for RM300mil.

• The average selling price was RM1,067psf and RM1,200psf for the boutique and strata-titled offices, respectively. This is about 7-8% higher than the previous guidance.

• In May 2011, SP Setia will be soft launching some 750 condominiums (GDV: RM650mil) under Phase I of KL Eco City. The average selling price has been raised by 10% from RM1,070psf to RM1,180psf. We expect Phase I to be another sell-out project, paving the way for Phase II to be launched towards end-2011.

• Phase II comprises 1,000 condominiums with a combined GDV of RM1bil. The average selling price will be raised by a further 10% to RM1,300psf. The built-up area, however, will be scaled down to 500-600sf (Phase I: 800sf) to support absolute affordability and lower entry cost.

• Aside from its strong fundamentals, we expect land acquisitions to be the primary valuation driver. Based on township track record, SP Setia would be the leading candidate to co-develop a parcel of the prime residential land in Sungai Buloh with EPF-owned Kwasa Land, leveraging on its successful ‘Eco Park’ brand.

• Further, we believe that SP Setia may play a pivotal role in transforming Jalan Bangsar into a modern commercial-cum-residential hub. It was recently awarded the privatisation of the Ministry of Health land opposite KL Sentral. More land deals in the locality may be imminent.

• We remain committed to our investment thesis on SP Setia: it is embarking on an accelerated growth cycle where a combination of strong pricing trends and value-accretive land acquisitions should fuel significant NAV expansion and by extension, the share price.

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