SP Setia - Expect higher earnings

Stronger upcoming quarterly results but recent sales trend has softened. SP Setia’s 3QFY09 net profit could have increased 10-13% qoq and yoy due to an across-the-board higher sales in Klang Valley, Johor and Penang (please refer to table overleaf). The strong sales were mainly attributable to deferred payment scheme such as the 5/95 programme and low mortgage rate of less than 3.5%, which helped to boost the affordability of home buyers. The Group has achieved new sales of RM1.3b as of 9MFY09, which is RM100m higher than the corresponding period of 9MFY08 and exceed its full-year target of RM1.1b, and it can easily match FY08’s sales of RM1.4b.

However, we understand that the new bookings have slowed down since the 5/95 scheme ended in mid-July.

Margin likely to be 2-3ppt lower. Nonetheless, these new sales were achieved at the expense of margins. We expect FY09’s EBIT margin to decline to 16% (vs FY08’s 19%) as a result of the margin compression of around 2-3ppt from the 5/95 scheme, which requires SP Setia to absorb documentation and interest costs during the 2-year construction period. We note that EBIT margin has dropped from 17% in 4QFY08 to 15% in 2QFY09 since the introduction of the scheme earlier this year.

No new launches. Going forward, we understand that the Group has no plan for any new launches in the next 3-6 months. However, should consumer sentiment improve significantly, the Group will bring forward its launches such as: a) second block of Sky Residences which is selling at RM730-750psf (10% higher than its first block of RM680psf with 50-60% bookings), b) serviced apartments in Setia Pearl Island, which has a target selling price of RM320psf, and c) serviced apartments in Setia Walk.

Commercial project in Abdullah Hukum still preliminary. The RM5b-6b GDV mixed development project (JV with a local partner) with estimated GFA of 5-6m sf, which consists of retail, office, hotel and serviced apartments is still awaiting necessary approvals and pending land privatisation. The project is located at a 24-acre of land next to the Abdullah Hukum LRT station and nearby the Mid Valley City. We understand that the Group targets to launch the project in 2H10. Should the project materialise, we believe that it will further enhance the Group’s earnings as we still have not factored in our earnings forecast.