SP Setia - BUY - 21 Aug 2008

SP Setia - Disposal of entire Loh & Loh stake (Company Update)



Price: RM3.20

Target Price: RM5.68

Recommendation: BUY



· SP Setia (SP) disposes its entire 25.07% Loh & Loh Corporation Bhd (LL) stake for RM82.7m. SP, via its wholly owned subsidiary, SP Setia Management Services Sdn Bhd, is accepting UBG Bhd's take-over offer to acquire 17.0m ordinary LL shares at RM4.85 each. The expected gain should amount to RM27.9m or RM1.64 per LL share, based on SP's average cost of RM3.21 per LL share.

· Rationale for disposal. In FY02, the property development scene was very depressed, and hence, SP considered venturing into the, then, more vibrant construction/infrastructure business via the strategic stake in LL. However, the construction/infrastructure business conditions look less than favourable now, given rising material costs and global economic uncertainties. Furthermore, it is apt that SP refocuses all available resources into their new frontiers, such as, expanding product range into commercial and high-end residential properties and geographically diversifying income into Penang, Sabah and Vietnam. However, SP have no intentions about disposing SP's construction arm because management views its construction arm as a support to its property development business, rather than a strong earnings driver.

· SP is getting a fair 12.6x PER for disposing LL based on the offer price of RM4.85 and Bloomberg's consensus of LL's FY09E EPS of 38.0sen. Although the offer prices was a mere 1.5% premium to LL's last trading price of RM4.78, we believe that at such prices, LL is already fairly valued via-a-vis the sector's FY09's PER of 12.7x.

· Upward revision in FY08E net profit by 9% to RM264m as we account for the gains on disposal of LL share. However, FY08E recurring net profit remains unchanged at RM243m. As a result of this one-off gain, we believe SP will reward its shareholders with a gross dividend per share (GPDS) of 20.3sen (6.3% dividend yield), which is a 9% increase from our previous forecasts.

· Reiterating BUY call with unchanged target price of RM5.68, as the above exercise only adds on a mere 2sen to our fully diluted sum of parts RNAV. Although there is no significant impact to valuations, we would like to draw upon the fact that resources are freed-up for more effective usage. FY09E and FY10E PERs are reasonable at 12.3x and 11.6x, respectively.