We lower our fair value on SP Setia to MYR3.54. 2QFY13 results were within expectations. Leadership and human capital remain the key company specific issues. Meanwhile, outlook on the property sector could be challenging. We believe the reversal in liquidity flow and rising bond yields will dent sentiment on the sector. In addition, the sector may not outperform the market in 3Q, given its outperformance in 1H.

- Within expectations. SP Setia’s 2QFY13 results came in within expectations. Key projects in the Klang Valey and JB continued to contribute to the earnings. A 4 sen (1.6 sen taxable and 2.4 sen single-tier) dividend was declared for the quarter. This is comparable to the 5 sen taxable dividend declared in 2QFY12.   

- Sales from Battersea started coming in. 7 months into the financial year, SP Setia has achieved MYR4.37bn sales. Out of which, MYR1.25bn was contributed by the Battersea project (reflected 40% share). Locally, sales were largely made up by its flagship Setia Alam, Setia Eco Glades, KL EcoCity and Setia Sky 88. Given the amount of sales secured, we believe SP Setia will easily attain another MYR1.2bn sales by end FY13 in order to achieve its full year target of MYR5.5bn.

- Human capital the key issue. Concern on human resources was raised during the briefing. We believe the confirmed departure of Tan Sri Liew has not only dampened investors’ sentiment on the stock, but also the work morale within the company. Thus far, management has received about 200 resignations since the beginning of 2013 (total head count is 1,700 currently), and we believe it will somewhat affect the operations of the company this year. New leadership and human capital issue will take time to be proven and solved. This has also largely explained our neutral view on the stock all the while.

- Maintain Neutral with a lower fair value of MYR3.54. No change to our forecasts. While we maintain our Neutral rating on the stock, our fair value is revised down to MYR3.54 (from MYR3.76), by widening the discount to RNAV to 20% (from 15%). Risk and return profile for the sector is no longer attractive, given the concern on liquidity reversal as well as rising bond yields. The US QE tapering has already affected the global financial markets and tightened market conditions. We are turning cautious on the sector.

Source: RHB