S P Setia posts strong earnings that will get stronger

S P Setia Bhd (Mar 18, RM6.14)
Maintain buy at RM6.11 with fair value of RM7.38: S P Setia Bhd turned in a strong net profit of RM62 million (+62% year-on-year [y-o-y]) for 1QFY11, which was spot on — although covering only 20% of our estimates but 23% of consensus' — as earnings will be stronger in the subsequent quarters with strong progress billings. So far, the group has chalked up whopping unbilled sales of RM2.6 billion.

Earnings were underpinned mostly by Setia Alam, Eco Park, Sky Residences, Bukit Indah and Eco Gardens. Margins were also stronger at 17% against 14% last year given the stronger prices. However, income slid by 18% quarter-on-quarter mostly due to the lumpy recognition of the disposal of Tesco Hypermarket in Bukit Indah, Johor, in the last quarter.

The group is targeting new sales of RM3 billion this year, which we believe is rather conservative given the exciting projects in the pipeline. We are targeting new sales of RM3.1 billion to RM3.2 billion this year.

In fact, in 1QFY10, the group managed to generate new sales of RM737 million against RM608 million previously, or a 21% jump y-o-y. Sales were driven by its bread and butter residential projects and there will be further upside from the launch of the highly anticipated integrated commercial development, KL Eco City (gross development value: RM6 billion) in Jalan Abdullah Hukum.

We understand the group has already secured about RM1 billion in sales from the boutique offices and SOHO units, while interest in the first phase of the residential units (711 units) has been overwhelming with pricing at an average selling price of RM1,000 to RM1,200 psf.

We believe the recent share price retracement has more than priced in the market's concern over the potential share overhang and earnings dilution stemming from its proposed placement of shares.

In any case, we believe the share overhang risk has been significantly overplayed given the firm commitment from its major shareholders, and the potential net asset value growth from NAV-accretive deals.

We reaffirm our "buy" rating on S P Setia with our fair value unchanged at RM7.38, pegging a 5% discount to our NAV estimate of RM7.77. At its current price, S P Setia is trading at an attractive 21% discount to its NAV. — AmResearch, March 18