S P Setia (OSK Research) maintain buy; target price RM7.23

SP Setia
Testing The Post-Asian Crisis High

SP Setia’s share price looks set to surpass our TP of RM6.58 and test the post-Asian crisis high of 3.1x P/NTA, an indication that investors concur with our robust sector outlook.

 If the impending boom is indeed bigger than the 2007 upcycle, and given the stock’s currently low foreign shareholding of 25% vs >40% in 2007, our current target valuation of 2.8x CY11 P/NTA appears conservative. Hence, we re-peg SP Setia to a higher P/NTA multiple of 3.1x, i.e. at its peak valuation in 2007, and arrive at a higher TP of RM7.23.

Maintain as top sector BUY.

The coming Super Cycle. In our 3 Sept ’10 sector report, ‘A Brewing Real Estate Mania’, we had said that the quest of the 1970s subtle baby boomers to buy trade-up homes today coincides with the 1950s Baby Boomers’ eager search for real estate investment opportunities.

Fuelled by the twin demand from these two groups of baby boomers, the upcoming boom in mid- to high-end residential properties, particularly landed ones, promises to be more than just an ordinary upcycle. As demonstrated recently, banks have been eager to fund and fuel the boom by encouraging society and the financial system to leverage further and switch from traditional financing to more speculative financing.

This has in turn created a sense of euphoria, which is fuelling the country’s biggest residential real estate boom since the Asian Financial Crisis between 2009/10 and 2012/13.

Target Price upgraded. In the above-mentioned report, we had identified SP Setia as the primary beneficiary of this phenomenal upcycle, as well as upgraded its valuation from 1.7x to 2.8x CY11 P/NTA (vs 2.0x at that time), based on about +2.5? above its 11-year historical mean. The only time the stock ever traded close to this sort of valuation post-
Asian crisis was during the 2007 boom when it hit a high of 3.1x P/NTA, or about +3.0? above its historical mean. Not surprisingly, the stock nearly hit this target within a mere 4
months of our call, which clearly reflects investors’ acknowledgement of our robust outlook for the Malaysia residential property market for 2011.

If the coming boom would indeed be even more powerful than the 2007 upcycle, it would make our current targeted valuation of 2.8x CY11 P/NTA appear a tad too conservative. As such, leaving our earnings forecast unchanged, we re-peg SP Setia to a higher P/NTA multiple of 3.1x - similar to the peak valuation it achieved in 2007 - and arrive at a higher target price of RM7.23.

WILDCARD: Inflow of foreign hot money. While the stock’s current valuation is nearing our target and is about to test the post-Asian crisis high of 3.1x P/NTA, its latest foreign
shareholding is a mere 25%, which is a far cry from >40% during the 2007 boom.

Hence, there is a high possibility that the next wave of foreign hot money pouring into Malaysia to ride on the residential property “super cycle” may shove SP Setia’s valuation to surpass even the peak level it attained in 2007, and perhaps even our new target price of RM7.23.