Monday, November 08, 2010

SP Setia Moving Up To The Next Level

On the eve of Merdeka Day, I blogged on SP Setia as my best stock to hold for 3 months. Readers would have had ample time to buy the warrants below 50 sen. Its now barely 2 months and the warrants have scaled to RM1.32. Is it still my best buy and hold?

Short answer, Yes. Long answer also a resounding Yes. Good memory can help you lock in 100% gains, but what about the 200% or 300% gain? Because investors tend to get fixated on their entry price, they will lose sight of the news flow.

In fact, I am more bullish today than I was on August 30, 2010.

SP Setia has a net gearing of only 0.29x and can comfortably raise it to 0.5x or a maximum of 0.75x. This would enable the group to borrow up to RM1bn for landbanking purposes. It is eyeing landbank in Peninsular Malaysia, particularly the Klang Valley and Johor. It is highly likely that SP Setia will be participating in land privatisations by the government such as parcels within the 3,000-acre Rubber Research Institute land in Sungai Buloh.

Foreign shareholding remains low at 25% vs. peak periods of >40%. At bull-run periods, SP can trade as high as 2.9x Fwd PBV and 25x Fwd PER. Possibly the most attractive stock being loaded up by foreign funds.

The market may have under-appreciated the deep embedded value of Eco City, given current bearish consensus view on condominium and office space due to oversupply concerns. The soft launch of three boutique office buildings (net saleable area: 720,000sq ft) and one signature office tower (NSA: 300,000 sq ft), with a combined GDV of RM1.05bil, has been well received despite the premium pricing of RM1,000psf. Not many even know what the Eco City is all about - imagine Mid Valley, multiply by 3x and add in a substantive residential element as well.

The under appreciation is due to the supply picture. About 14 million sq ft of purpose-built office space is in the pipeline in Kuala Lumpur between 2010 and 2013. This is worrisome as only 1.8 million sq ft of new office space is absorbed every year. To make things worse, the government recently announced the plan to build a 100-storey tower in ‘Warisan Merdeka’ and to develop the RM26bil Kuala Lumpur International Financial District near Jln Tun Razak. Further to that, the completion of the KL International Financial District would mean some re-location of other financial institutions from existing buildings, which should mean more vacant space in the market.

It is easy to be over optimistic and take the mantra "If You Build, They Will Come" as the rally cry. However, the big development is on the opposite side of Federal Highway and links Bangsar, KL city and PJ easily - you cannot find a more lucrative site for an integrated commercial residential mega development. Knowing that they themselves lack a suitable track record in such big planning works, S.P. Setia has entrusted Jerde Partnership as the master planner for this development. Jerde, based in Los Angeles, US, is a world-renowned architect and master planner for integrated mixed-use commercial and residential development. Its high profile projects include Namba Parks in Osaka, the wonderful Roppongi Hills in Tokyo, Zlote Tarasy in Poland and Kanyon in Turkey.

SP Setia is trading at a 25% discount to the fully diluted NAV of RM6.80 – which is unjustified given its solid track record and the most liquid property stock in the market. Tack in the Eco City and potential involvement in RRI-Sungai Buloh and maybe even the 100 storey tower by PNB, you have liftoff.

When you consider the excellent merger between Sunrise and UEM Land, there are a host of possibilities of something of that nature happening to SP Setia. You can do the possibilities especially with PNB and EPF running the ship at SP Setia.

Past Postings On SP Setia:

SP Setia - When I put this as my best pick for a 6 month hold, I am sure most would have gone into the warrants. That would have chalked up a return of more than 100% in less than 2 months. If you wish to hold or buy more, indications are still good for further upside. Sometimes good memory will get you to keep 100% gain but lose out on 200% gain. Despite the recent surge, indicators still good for a trade or hold.

Klang river project (potential beneficiaries: SP Setia (Buy; TP RM4.80), YTL Power (Hold; TP: RM2.50), MRCB).

The drive to improve Kuala Lumpur’s attractiveness would also benefit large landowners in the greater KL area such as SP Setia, Bolton (Buy; TP: RM1.50) and DNP (Buy; TP: RM2.25).

Tuesday, August 03, 2010

Best Stock To Buy For A 1-3 Month Trade

The most frequent question friends and acquaintances would ask me is which is the best stock to buy - used to make me frown as its like asking a medical doctor during a dinner party about the gout problem you have and how to treat it - just because you are in a casual setting does not mean you can ask "professional" questions and not getting a fee for it.

I mean, you never ask a mechanical engineer at a dinner party how deep you need to lay the foundation for your house, as if you are going to do it yourself, ... though it seems for certain professions, doling out free advice is OK. Thats human nature I guess.

If the other person is a good friend, I would then ask how long they want to hold their stocks - the reply usually will be:
"as short a time as possible, contra better still". Of which my sarcastic self will morph and say "IF I can do that confidently, why bother telling you the stock at all ... you might as well tell me how many lots you want to buy NOW ... and I will just give you the cash right now".

OK to be fair, you have to at least be willing to pick up the stock for 1-3 month. Since I think that the markets are going to be good for 2H2010, my best pick is .... (drum roll please) ....

SP Setia

a) 2Q net profit of RM51.2m (+26% YoY, +34% QoQ) was mainly contributed by strong property sales recorded, on track construction works as well as an improving operating margin,
b) EBIT margin improved from 13.6% in 1QFY10 to 16.2% in 2QFY10 due to lower construction costs
c) the company chalked up commendable sales of RM598m in 2QFY10, vs RM608m in 1QFY10. Inclusive of May ‘10 sales, total property sales are around RM1.4b, accounting for 70% of its FY10 sales target of RM2b

Major Shareholders:
Skim Amanah Saham Bumiputera 20.6%

EPF 16.1%

Tan Sri Liew Kee Sin 11.1%

PNB 7.0%

Shares Issued: 1.016bn

If you look at the shareholding structure, its evolving rapidly into a major GLC. I expect PNB and EPF to continue to up their stakes in the company. Just last few weeks alone, EPF has upped its stake from 15.8% to 16.1%. Strategically I believe EPF and PNB have planned to use a reputable, proven and branded mixed developer to lead some major property development projects in the future. Just think of the bigger planned land developments over the next 2-4 years.

Made RM171m net profit for year ended Oct 2009 (eps 16.7 sen), I think they will make RM220m (21.6 sen) net for year ending Oct 2010. EV/EBITDA will go down to 12x based on this year's expectations. P/BV is at 2x, not cheap but not expensive for a company like SP Setia. Fully diluted RNAV is RM4.59 according to CIMB. The shares should move a lot higher than the fully diluted RNAV figure.

Reasons why I think RM5.00 (1-3 month view) is an easy target, a longer term target would be RM5.40 (6-9 month view):

1) The free float is technically at 59% but PNB has been gobbling up shares, and so too are long term funds, hence the effective free float should be less than 30%.

2) Though I think there has been some froth in Malaysian major cities' property market, I think there is no danger of a major correction. The strong liquidity in the system and regional Asian wealthy blanket should keep intense interest in good developers.

3) Anecdotal evidence that their major upcoming launch near Mid Valley was hastily postponed following some smaller development launching in the same area recently. The silly thing was the launch was 30% higher in price than SP Setia's proposed launch prices - and SP Setia's development is of a "higher value band".

4) Regional funds are looking to get a proper exposure into Asian property markets. A number of major private investors have been collecting good property shares in a big way (over the past few weeks) - think of it this way, if you are a Singaporean or HK private investor worth US$100m, you are not going to buy 2 condos here and 3 houses there, think of the logistics, costs and fees ... better off buying good developers' shares, plus its more liquid.

5) This is the key to my liking the shares, there is a dearth of choices for funds to plow their funds into Malaysia even though they might like equity exposure here in general. Ringgit looks positive and many want to have a double whammy exposure as well.

6) The final catalyst is quite silly in reality. If you get hold of most analyst reports, you will find that those which follow or has an international rating template will have almost the same target price for SP Setia (i.e. around RM4.00-4.05). That has been surpassed easily, but even when an analyst is still bullish on the company, they cannot just simply upgrade target price as that would mean having to upgrade the projections. Usually there is a 15% band limit in upgrades. They will only be able to do an upgrade till the next quarterly results are out. As things stand, many houses are stuck at a target price of RM4.00-4.05, but having talked to some, many are preparing to improve that to RM5.00 as soon as practicable.

The houses that are not contrained by that template, such as CIMB, have much higher target prices. CIMB has a RM5.51 target price.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

1 comment:

Mr ICICI said...

good call.

i totally overlooked this stock back in august. hard to foresee it could be such a favourite right now.