What’s New

• Memorandum of Intent to acquire I&P Group Sdn Bhd (I&P) from Permodalan Nasional Berhad (PNB)

• Proposed acquisition of 342.5-acre land in Bangi for RM447.58m or RM30psf

• Maintain HOLD and RM3.50 TP

Riding on township development

Subdued earnings growth. Despite SP Setia’s diversified product offerings to cater to various target markets, the relatively challenging property market in Malaysia and London may weigh on its new property sales. We believe slow property sales is the new norm going forward which will result in subdued earnings growth prospects. We reiterate our HOLD rating.

Challenges in both Malaysia and London property markets. SP Setia achieved RM3.82bn sales in FY16, exceeding its FY16 sales target of RM3.5bn (revised earlier from RM4bn), thanks to strong demand from Malaysian projects. Nevertheless, this is SP Setia’s lowest sales since FY12. Also, sales of the Battersea Power Station project in London which contributed 44% of its RM8.25bn unbilled sales have slowed down considerably in the aftermath of Brexit.

Weakening visibility following completion of overseas projects. We estimate that RM1.4bn worth of overseas projects in the UK and Singapore will be recognised by 1H17, representing 18% of total unbilled sales (as at end-Dec 16) or 37% of overseas unbilled sales. Weaker sales replenishment thereafter could pose earnings downside risk. SP Setia’s sales will be mainly driven by township developments in Malaysia which remain well-received as the group focuses on launching more affordable and midrange housing

Valuation:

We reiterate our HOLD rating with RM3.50 TP, based on 40% discount to our RNAV. Nevertheless, its FY17 dividend yield is the highest among large-cap developers under our coverage which will help support its share price.

Key Risks to Our View:

Weak sentiment towards property market. The relatively soft property market could lead to weaker sales.

Source: Alliance Research - 17 Apr 2017