SP Setia - 9M09 within ours, but below markets

Price: RM4.60
Target Price: RM4.25
Recommendation: TRADING SELL

· 9M09 net profits of RM114m was within our forecast but below street’s estimates, accounting for 74% of our FY09E net profit of RM155m and 66% of street’s RM173m. SP Setia (SP) results were mainly buoyed by the 5/95 home loan scheme
offered to its Klang Valley, Johor Bahru and Penang projects/townships.

· YoY, 9M09 net profits was 17% lower. Stripping out preceding period’s RM26m land disposal gain to AEON Co. (M) Bhd, 9M09 net profits fell 3% YoY. 9M09 EBITDA margins were compressed by 4.3ppt to 15.1% because of high building material cost (particularly in 1Q09), as well as, lower margin product mix (e.g. more Johor Bahru township products were sold in 9M09 vs 9M08).

· QoQ, 3Q09 pretax profits fell marginally by 1% to RM53m. Although 3Q09 topline grew 2% QoQ to RM317m, margins were compressed by the 5/95 home loan scheme promotional cost (e.g. interest over construction period).

· 79% take-up achieved for Sky Residence Phase 1 (211 units), at 31/7/09, since signage of SPAs in June 2009. Phase 2 (211 units) is open for preview sales/bookings; note that Phase 1 SPAs were signed upon 70% booking sales. Launch of Setia Walk Phase 2 (253 units) in June 2009 was very promising given 82% take-up in total (338 units).

· No changes to our FY09-10E net profit of RM155m-RM160m. Termination of the 5/95 home loan scheme promotions may cap future sales performance in the near term. Since ceasing promotions on 19/7/09, July 09 sales fell 23% MoM to RM217m (refer to 17/8/09 report). Nonetheless, SP’s 9M09 sales of RM1.3b have exceeded its FY09 sales target of RM1.1b. RM2.1b unbilled sales gives 1.5 years visibility. We do not discount possibility of new and more innovative promotional programs to boost FY10 sales.

· Maintain Trading SELL and fair value of RM4.25, based on FD SOP RNAV. We believe SP is expensive at 29x FY10E PER vs. 1) 2007 property bull-run year forward PER of 22x 2) 10x peer averages 3) 14x FY10E market PER 4) 11x historical averages. Similarly, 2.3x PBV is a premium to its 1.0x peer averages and 1.2x historical averages. We advice profit taking based on good news flow; (e.g. finalization of the China project, more Vietnam projects and improved sales, commencement of Abdullah Hukum project), we believe significant contributions will only be felt post FY10.