S P Setia going from strength to strength

S P Setia Bhd (Apr 12, RM6.50)
Maintain buy at RM6.56 with revised fair value of RM8.10 (from RM7.38): We maintain our "buy" rating on S P Setia and raise our fair value from RM7.38 to RM8.10 per share, at parity to our revised fully-diluted (FD) net asset value (NAV) of RM8.10.

We lift our FD NAV from RM7.77 to RM8.10 to reflect more aggressive pricing assumptions, and remove 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 RM310 million, and by 5% for FY12F and FY13F. This is to account for higher average selling prices, translating into an increase in pre-sales to RM3.1 billion this year, from the previous forecast of RM3 billion.

S P 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 (net sellable area: 750,000 sq ft) for RM800 million and a 30-storey strata-titled office tower (NSA: 300,000 sq ft) for RM300 million.

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

In May 2011, S P Setia will soft launch some 750 condominiums (gross development value: RM650 million) under Phase I of KL Eco City. The average selling price has been raised by 10% from RM1,070 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 RM1 billion. The average selling price will be raised by a further 10% to RM1,300psf. The built-ups, however, will be scaled down to 500 to 600 sq ft (Phase I: 800 sq ft) to support absolute affordability and lower entry cost.

Aside from S P Setia's strong fundamentals, we expect land acquisitions to be the primary valuation driver. Based on its township track record, the developer would be the leading candidate to co-develop a parcel of the prime residential land in Sungai Buloh with the Employees Provident Fund-owned Kwasa Land, leveraging on its successful Eco Park brand.

We believe S P Setia may play a pivotal role in transforming Jalan Bangsar in Kuala Lumpur into a modern commercial and 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 S P 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. — AmResearch, Apr 12