S P Setia: Takeover offer an acceptable one

S P Setia Bhd (Dec 12, RM3.86)
Maintain accept with target price RM3.90 from RM3.20: Net profit for 12MFY11 of RM 318.3 million was within expectations due to property development activities carried out in Klang Valley, Johor Bahru and Penang. Property sales momentum remained intact as S P Setia reported 12-month sales of RM3.2 billion. Management is confident of achieving its RM4 billion sales target on the back of more launches in FY12, including Setia Eco Cascadia in Johor and Aeropod in Sabah.

S P Setia posted positive earnings as 12MFY11 net profit of RM318.3 million achieved 95% of house and 108% of consensus full-year estimates.

The profit before tax (PBT) margin increased to 27% from 24% for the current FY. This is mainly due to the flow-through effect of overall increases in selling prices achieved for new launches since FY10 and the general stabilisation in prices of construction materials experienced during the FY. However, 4QFY11 PBT decreased by 20% year-on-year (y-o-y) and 30% quarter-on-quarter (q-o-q) despite improved margins from the preceding financial year.

A final net dividend of 6.75 sen was declared, which was lower than previous year's seven sen.

Sales momentum remains firm as S P Setia achieved RM1.2 billion of new property sales in 4QFY11 which was 122% higher y-o-y and 56% q-o-q. The 12-month sales came up to RM3.2 billion.

The launch of KL EcoCity, S P Setia's intergrated green commercial and mixed residential development, is expected to contribute strongly to the group's sales. Its maiden project in Melbourne, Australia, and second project in Vietnam (EcoXuan), are expected to help augment sales in FY12, which will also benefit from planned project launches like Setia Eco Cascadia in Johor and Aeropod in Sabah.

The group faces a risk of a slowdown in property sales in FY12 should external uncertainties derail economic growth and dampen property buyer sentiment. Estimated current unbilled sales of RM2.8 billion (FY10: RM1.7 billion) should underpin near-term earnings viability. We have made no changes in earnings at this juncture. Although S P Setia has enjoyed brisk property sales recently, its valuation is still not compelling yet considering market risk aversion and a potential property sector downcycle.

In the absence of a competing offer, we advise investors to accept the takeover offer which we view as fair and attractive since it values S P Setia at upcycle valuations when current market conditions are on a downtrend. The offer is also attractive given current conditions in which equity market risk aversion is pervasive while the property sector may  enter a cyclical downturn due to weakening economic outlook, deteriorating housing affordability and policy risks.

We raise our target price to match the takeover offer price of RM3.90 from RM3.20 previously (based on mid-cycle price earnings of 15 times). — ECM Libra, Dec 12