SP Setia 1Q10 broadly in-line

• 1Q10 net profit of RM38m was broadly in-line, making-up 19% of street’s FY10E net profit of RM198m and 18% of our estimate of RM208m. Typically, SP Setia (SP) 1Qs and 1Hs are seasonally weaker while 2H makes up 53%-55% of full year net profit. 4M10 sales of RM760m (+288% YoY) accounts for 38% of SP’s and our FY10E sales target of RM2.0b, largely driven by Setia Alam, Setia Eco Park, Johor Bahru townships and Sky Residences constituting 31%, 26%, 22% and 16% of 4M10 sales, respectively. As there were no new launches for Feb 2010, sales for the month declined 12% MoM to RM152m .

• YoY, 1Q10 net profit increased 23% on the back of higher sales garnered from promotions (5/95 home loan and “Best for the Best” schemes) and better overall sentiments.
Although topline grew 40% YoY to RM364m, net profit growth was muted by higher financing costs (+275% YoY to RM2.3m) as borrowings grew 33% to RM1.3b. Higher short term construction financing, higher interest rates supported SP’s aggressive launches over the last 12 months. Additionally, property operating margins were eroded by 0.9ppt to 14.2% by promotional costs (e.g. interest over construction period).

• QoQ, 1Q10 pretax profit decreased 25% to RM52m mainly due to 4Q09’s seasonally high base effect. But 1Q10 EBITDA margins improved 1.3p pt to 15.3% due to positive operating profit from wood -based manufacturing division of RM2.1b from 4Q09’s operating loss of RM8.3b .

• Obtained Investment Certificate for Lai Thieu land (26.8ac; GDV USD250m) @ Binh Duong Province, Vietnam project (refer to 27/10/09 report for details). Launch is expected in 2H10, pending master plan approvals.

• Maintain FY10E net profit of RM208m (+21 % YoY). We lower FY11-12E net profit by 3%-7% to RM268m-RM274m as we take-out Setia View from our estimates since JV has been terminated (see below). We do expect margins to improve in 2H10 as recent launches price-in promotional costs into selling price. RM1.9b unbilled sales provides slightly more than a year’s earnings visibility.

• Fair value slightly lower at RM4.88, from RM4 .90 previously. We are no longer accounting for Setia View from our FD SoP RNAV (see below). Fair value implies FY10E PER of 24x. We reiterate BUY in view of 1) lower FY11-12E PER of 19x- 18x based on our fair value (16x-15x based on last traded price) as the stock has persistently traded above 15x PER since FY07 2) 3-yr CAGR of 17% 3) foreign shareholding at all time low of 24%. PNB total shareholding remains slightly under 32%. Immediate catalysts lie with realization of KL Eco City (awaiting final approvals) and finalization of the China project.
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