SP Setia - TRADING BUY - 26 Oct 2009

SP Setia - Prime beneficiary of Budget 2010 (Company Update)



Price: RM3.88

Target Price: RM4.25

Recommendation: TRADING BUY



· Budget 2010 promotes home ownerships. The government will be launching a scheme, enabling EPF contributors to utilize current and future savings in Account 2 to finance one home. It means buyers 1) have more disposal income 2) home affordability increases. Although details have not been revealed, more information should be available closer to targeted commencement in Jan 2010. The scheme will mainly appeal to first-time home buyers (RM150,000-RM500,000 per unit range) and up-graders/those housing more than one generation under one roof (RM500,000-RM1.2m per unit range).

· Townships to benefit from higher EPF withdrawals. By virtue, the mentioned target markets are price sensitive, prefer larger built-ups and more land, as well as, require family orientated amenities. Townships, more specifically, those in its infancy or growing stages fit these criteria and will likely be in locations like Shah Alam, Meru, Puchong, Klang, etc. As a result, we expect SP Setia (SP) Setia Alam, Setia Eco Park, its Johor Bahru and Penang townships/projects to benefit given those products’ demands are mainly from owner-occupancy buyers.

· Reintroduction of RPGT at 5% will have minimal impact on SP Setia’s townships. Although a negative surprise, but it is aimed at property investors or those owning multiple properties. It singles out popular real-estate investment hot-spots, like KLCC and Mont Kiara, where a slew of luxury condominiums are flooding the market, whilst occupancy rate remains low. It is worthwhile noting that 75% of SP’s Ytd sales are derived from townships while remaining is from high-end residential (Sky Residence) and integrated commercial projects (Setia Walk).

· Stepping-up FY10E-11E net profit by 6%-11% to RM170m (+10% YoY) -RM198m (+16% YoY), based on the above. SP is likely to introduce new promotional schemes for its FY10E sales, if other developers continue with theirs. FY09E net profit of RM155m remains unchanged.

· Fair value of RM4.25 unchanged, based on SOP RNAV or 10% upside to last traded price. Although 23x FY10E PER and 1.9x PBV is expensive vs. 12x and 1.3x peer’s, 11x and 1.2x historical forwards, respectively, as well as, 15x FY10E PER for FBMCI, SP’s last traded price of RM3.88 is 16% lower than Ytd-CY09 peak of RM4.62. Over FY09, SP has also persistently traded at an average 23x forward PER and 1.8x PBV to reflect market’s excess liquidity. Current price weakness provides investors with good accumulation opportunities, especially when we expect share price to re-rate upwards in the near future from more positive news flow (e.g. finalization of the China project, more Vietnam projects and improved sales, commencement of Abdullah Hukum project). Upgrade to Trading BUY.