JPMorgan SP Setia Overweight 03/17

FY08 property sales guidance cut - ALERT (Simone Yeoh)

Impact of elections: The group has obtained development orders (first stage of key approval) for most of its key projects in Penang and Selangor (60% of its total sales) where there has been a change in state governments. However, some projects still need the next stage or building plan approvals, which may take longer with exco members for the new state governments yet to be appointed.

FY08 sales guidance cut from M$1.8B to M$1.5B (M$1.2B in FY07). First four months' sales of M$646MM is on target with the initial M$1.8B guidance. But with uncertainty, potential delays in project approvals, and softer consumer sentiment in the short term – given the recent turn of events – management has cut its FY08 sales guidance by 17% to M$1.5B. The group maintains guidance for flat FY08 profit growth (consensus: 10% net profit growth).

The stress tests in our earlier reports have assumed for SP Setia from our base assumptions: 1) Lower property revenue by 15% pa over FY08E-09E. 2) A drop in operating margin by 3ppt pa over FY08E-09E in view of rising costs. The impact is a more severe 12% Y/Y drop in FY08E net profits versus guidance of flat growth.

Valuations: Net yield is 3.2% for FY08E and 3.6% for FY09E on our stress-tested earnings. Finances are strong with FY07 net gearing of 14% and M$500MM bonds raised earlier this year. The stock is now trading at a 12% discount to our stress-tested or bear market RNAV of M$4.50/share. (Since 2005, the stock's RNAV ranged from a discount of up to 40% to a premium of up to 20%.).