SP Setia - MARKET PERFORM - 16 May 2012

News    Proposed an acquisition of 21.3ac freehold First Grade land for RM185.6m (RM200psf) in Penang Island. The land is located between Batu Ferringhi and Tanjung Bungah and is accessible via Jalan Lembah Pantai (refer to map). 

Comments   GDV of RM1.1b was indicated by SPSETIA and would be largely high-end residentials (landed and condo). However, details on pricing, duration, etc. are not available pending firmer plans. The land will be financed by up to 80:20 debt-equity, which is not an issue given its strong balance sheet as net gearing will only inch up to 0.14x from 0.08x in 1Q12. 

 We are medium to long term positive on the acquisition as it is tough to buy sizeable parcels  of land in the area. It will also replenish its Penang landbank, which currently has a remaining GDV of RM1.0b. Land comparables are plenty, but the price range is wide (RM90psf-RM400psf) depending on proximity to the sea and density/plot ratio. However, since land cost is only 17% of GDV or less than our 20% threshold, it implies a fair land cost.  

Outlook   The group will be launching its 50% owned Setia City Mall this weekend, which augurs well for the value and demand of Setia Alam and Setia Eco City. 

 SPSETIA is on schedule to meet its FY12E sales target of RM4.0b (ours: RM3.8b), which will be mainly driven by its Johor townships, Setia Alam/Eco City and KL Eco City (refer overleaf for sales updates).

Forecast   There is no change to our FY12-13E earnings of RM359m-RM424m with significant contributions more likely from FY14 onwards. Unbilled sales of RM4.5b provide 1.5 years of visibility.  

Rating  MAINTAIN MARKET PERFORM

 Inline with our NEUTRAL sector call.

Valuation    The project will increase our FD SoP RNAV by 3 sen to RM5.11. However, we are  lowering our TP to RM3.90 (RM4.18 previously*), which is back to its recent GO price, as we apply a wider 24% discount (18% previously)* to our FD SoP RNAV of RM5.11. Earlier, we thought the market would react positively to news flow from its G2G project in China. However, we understand the market is concerned about SPSETIA meeting the public shareholder requirement since the shareholding is still c.78%, which has more than eclipsed positive prospects, including strong sales, landbanking and overseas ventures. It appears SPSETIA is finding it tougher to command premium valuations without sufficient liquidity. 

Risks   Sector risks and liquidity issues.   

Source: Kenanga