SP  Setia’s  3QFY13  earnings  missed  estimates,  partly  dented  by expenses relating to an employee LTIP. Its new sales totaling MYR6.3bn as  at  August  has  already  hit  management’s MYR5.5bn  target  for  FY13. As  it  will  continue  to  incur  LTIP  expenses,  we  lower  our  FY13-14 earnings  forecasts  by  9-12%.  A  potential  asset  injection  is  the  stock’s sole catalyst. Due to the timing uncertainty, maintain NEUTRAL for now.

- Below  expectations.  SP  Setia’s  3QFY13  earnings  came  in  below expectations as it incurred expenses amounting to MYR11.5m in relation to  an  employees’  long-term  incentive  plan  (LTIP)  in  May.  EBIT  margin YTD  weakened  slightly  to  20%  from  22%,  due  partly  to  the  higher contribution from sales of high-rise developments compared with landed projects  in  FY12,  as  well  as  higher  marketing  and  admin  expenses  for the company’s overseas projects.  

- New  sales  exceed  target.  New  property  sales  jumped  34%  to MYR6.3bn  in  August  from  MYR4.68bn  sales  last  updated  in  June.  This was  largely  driven  by  maiden  sales  contribution  from  the  Setia  EcoHill bungalow  land  plots,  Setia  Putrajaya,  Setia  Greens  from  July-Aug  and higher sales from Eco Sanctuary (Singapore) from July-Aug.

- Forecasts. As the LTIP expenses are expected to continue up to FY16, we lower our FY13-14 earnings forecasts by 9-12%.

- Assets injection likely to accelerate. As a large number of SP Setia’s staff has moved to EcoWorld, which is said to be linked to the company’s current  CEO  Tan  Sri  Liew  Kee  Sin,  and  given  that  Tan  Sri  Liew's impending  departure  (estimated  around  Mar/Apr  2014)  is  getting  close, we  think  PNB may  expedite its  asset  injection exercise. We  see  this  as the  only  positive  catalyst  for  the  stock.  The  property  assets  that  PNB could  inject  include  those  held  under  I&P  Group,  Sime  Property  under Sime  Darby  (SIME  MK,  BUY,  FV:  MYR10.73)  and  E&O  (EAST  MK, TRADING  BUY,  FV:  MYR2.70)  –  via  the  32% stake  held  by  Sime.  This may  lead  to  the  formation  of  a  property  giant.  Should  this  materialize  – despite the change in leadership and culture within SP Setia  - its sheer size would be too big for investors to ignore. For now, pending clarity on the  potential  corporate  exercise,  we  keep  our  FV  unchanged  at MYR3.54, based on a 20% discount to RNAV. More details and news of the potential asset injection may prompt an upgrade in our call and FV.

Source: RHB