SP Setia - BUY - 18 Aug 2008

SP Setia - July 2008's sales commentary (Company Update)



Price: RM3.30

Target Price: RM5.68

Recommendation: BUY



· Take-up rates at Setia Alam (SA) and Setia Eco Park (EP) showed fast recovery in July 08, registering 47% and 29% MoM growth in units sold versus June 08's MoM decline of 26% and 22%, respectively. We are relieved to see buyers' confidence strengthening for both projects, being SP Setia's (SP) key income earners. The recovery can be attributed to SP's announcement of Setia City with a renowned retail partner, Land Lease Investment Management Pte Ltd.

· RM55m sales from Putrajaya project boost July 08 entire sales value by 45% MoM to RM133m. SP sold 119 residential units for RM55m to a single-buyer. Management attributes this success to the project's unique attributes of being a gated and guarded residential project in Putrajaya. The large sale to a single purchaser clearly reinforces SP's foresight in spotting niches where it can maximise return via product differentiation.

· Slow-down in launches for Setia Walk (SW), Setia Pearl Island (SPI) led to lower take up rates. In July 08, SW registered no sales while the number of units sold at SPI fell 44% to 14 units. This is could be a result of the medium term demand being soaked up as SP last launches of SW and SPI were in March 08 which current take-up rates are 92% and 82% respectively. This explanation is also applicable to the Johor Bahru townships which showed a 31% MoM fall in July 08 take-up rates. Existing launches at Bukit Indah, Setia Indah and Setia Tropika recorded high take-up rates of 97%, 98% and 83% as at 31/7/08, respectively.

· Setia Nexus recorded no sales for July 08. Current take-up rate since its launch of 132 units in June 08 is 15%. Setia Nexus was being sold on an en-block basis, at RM3.6m each. However, potential buyers are finding it tough to raise that amount of capital under current stricter borrowing conditions. Therefore, SP is "re-tooling" its marketing strategies to sell by strata title basis which results in a more affordable unit price of RM760,000.

· We continue to like SP as it is one of the rare few developers with strong holding power (healthy cash balances of RM596m with net gearing of 0.1x and strong unbilled sales of RM2b) to a) sustain earnings in the next 2 years b) deploy Build-then-Sell strategy to lock-in building cost and selling completed products at a premium in the medium to long term. FY08E and FY09E PERs are fair at 12.5x and 10.8x, respectively. Reiterating BUY call with a fair value of RM5.68.