S P Setia (OSK Research) buy; target price RM6.58

SP Setia

Ending The Year With a Bang

The company’s FY10 core earnings came in 10% above our estimates but within consensus numbers. FY10 turnover and core net profit, after stripping out an estimated  exceptional gain of RM44m from the disposal of property, improved by 24% (+35% q-o-q) and 28% (+47% q-o-q) respectively.

New property sales in FY10 totaled RM2.3bn while unbilled sales stood at RM1.8bn. Although we are leaving our earnings forecast largely unchanged for now, some changes to the balance sheet items prompt us to adjust our CY11 target price to RM6.58 (from RM6.38), based on 2.8x CY11 P/NTA. SP Setia remains our top sector BUY.

Estimates-beating sales. FY10 new property sales totaled RM2.3bn, beating our RM2.1bn forecast and management’s initial target of RM2.0bn, driven primarily by the remarkable sales of mid- to high-end landed properties in its major townships throughout Malaysia. This is consistent with our view that the current property upcycle, which will last until 2012/13, will primarily be driven by the mid- to high-end landed properties in Malaysia (see our 3 Sept 2010 report, ‘A Brewing Real Estate Mania’). Going forward, SP Setia aims
to achieve a staggering sales target of RM3.0bn for FY11.

The bonus growth kickers. While township development will continue to be a major earnings catalyst for SP Setia, other bonus re-rating catalysts will be the successful launch of its RM6.0bn KL EcoCity (located next to MidValley City), by Jan/Feb ’11. The launch of Phase One of the 6 to 10-year development will likely comprise 12 blocks of boutique offices valued at some RM60m each, which would be sold en bloc.

As we understand that some SMEs are keen in acquiring these office blocks, the launch by 1QCY11 looks likely to be well-received and will provide the necessary momentum to kick-start the entire development. The next growth kicker will be the continuing progress at the RM5bn Setia City, an integrated commercial city in the Setia Alam township.

Setia City Mall, with 60% of the retail space now taken up, is expected to be completed by late-2011 and open by mid-2012 and give the whole commercial city added impetus. Besides the mall, Setia City will also comprise a medical centre, hotels, transportation hub as well as a convention centre.

Maintain BUY. At the peak of the 2007 upcycle, SP Setia’s P/NTA was as high as 2.9x, or approximately 2.5? above its historical mean. Since the mid- to high-end landed properties
are likely to be the sector’s top performers between 2009/10 and 2012/13, we think SP Setia will potentially trade close to, if not surpass, the peak valuation achieved in 2007.

Therefore, we continue to value SP Setia at 2.8x CY11 P/NTA, translating into a target price of RM6.58, slightly higher to our earlier target price of RM6.38 after accounting for
adjustments to some balance sheet items. In terms of the recent merger rumours with other major property developers, the management has strongly denied such prospects.

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