KENANGA : SP Setia - BUY - 14 Apr 2008

SP Setia – Effects of new state governments (Company Update)



Price: RM3.40

Target Price: RM5.62

Recommendation: BUY



We visited SP Setia (SP) yesterday and took home the following interesting points:

· The state government’s involvement in property development approval process. Stage 1 (Fig1) of the property development approval process involves zoning permits, land conversions, followed by the Master Planning approval. These are decided by the state government. Stage 2 (Fig1), which involves planning permissions and building plan, are approved by state-appointed local councils which are subjected to Federal guidelines. The advertising permit (Stage 3) is only issued by the Ministry of Housing and Local Government if the developer has obtained Stage 1 and Stage 2 approvals.

· Pre and post effects of recent general elections. Prior to the recent general election, developers used to apply for project approvals under a single party system (both state and Federal government are from the same party) in states like Selangor and Penang. Now, developers have to accustom themselves to different administrations as these states operate under different parties. Therefore, it could take 3 months or longer for developers to grasp changes.

· Minimal impact on SP. Unlike other developers, SP has already obtained all the zoning permits and land conversion approvals. As such, they have passed the toughest “state administrative approval” hurdles. Thus, the approval process for projects already in the pipeline, like Setia Nexus in Klang and Setia Vista in Penang, should go smoothly within the timeframe under the “one-stop centre” (Fig1).

· Other updates. 1) SP expects to finalize the submission for the plans for Aeropod at Tanjung Aru (TA), Sabah project DO plans by end CY08. The new RM110m JKNS headquarters will be funded on 64%:36% debt-equity basis. 2) Target launch for Eco Lakes at My Phuoc, Vietnam will be in mid CY08, comprising of link houses with an average of USD100,000 per unit. 3) Setia Eco Park, Shah Alam will see commencement of the international school by September 2008. The school is part of SP’s value enhancing strategy for its premium township living experience. 4) Current foreign shareholding is still strong at 40% versus 56% in July 2007.

· Unchanged target price of RM5.62. We are also maintaining our FY08E to FY10E forecast as we have conservatively factored in any potential slow down in earnings due to uncertainties in local political scene and global economic outlooks. FY08E and FY09E PER are fair at 12x and 11x, respectively. BUY.







KENANGA INVESTMENT BANK BERHAD (15678-H)