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Saturday, March 22, 2008

Of projections and revisions - SP Setia attempts to reassure investors

BLUE chip property counter SP Setia came under the harsh spotlight of investors over the week. Indeed, that's a rarity for a company, helmed by group managing director Tan Sri Liew Kee Sin. The company is well liked for its track record on strong earnings delivery and ability to turn non-prime areas into comfortable residential homes.

Stock-wise, it is arguably one of the must-haves for portfolio managers.

Still, the week revealed that no stock, blue chip or otherwise is immune from the uncertainties that are currently weighing down the market.

The trigger happened when the company indicated to analysts a week ago that it is revising sales projections from RM1.8bil to RM1.5bil. It was three months ago when the company made the initial guidance of RM1.8bil sales projection. The outcome of the lower revision for sales projection by RM300mil resulted in the counter losing some RM726mil in market value over six trading days.

The heavy selling, largely led by foreigners, compelled the company to issue another note that stressed that the lower sales target of RM1.5bil made in the immediate aftermath of the general election was based on assumption of worst case scenario in the event of delays in the formation of local councils. “Given the company’s Oct 31 year end, a delay of one to two months would have resulted in a timing difference of sales being made in FY2009 instead of FY2008,” it said.

It added that in view of the successful transition of state governments in Penang and Selangor and the pro-business stance expressed by both Chief Ministers in the press, the group is confident that its original sales target of RM1.8bil for FY2008 can still be met.

In this regard, it is of noted that the group’s sales for the first four months of FY2008 amounts to RM646mil which is significantly higher than the RM290mil recorded in the corresponding period in FY2007.

Investors were still cautious and this showed in the shares' performance the next day following the announcement.

An analyst says investors perceived the note to be one aimed at “damage control.” Still, she is confident that the group will achieve its initial sales target, adding that the concern is simply one related to a timing issue.

“Most of the delays, if any, will be recognised in FY09 as a bulk of SP Setia's launches are targeted in the second half of 2008. In any case, a delay of two months means a recognition of profit in the following financial year,” she adds.

Although 14 out of 23 analysts are maintaining their “buy” recommendation, most have revised SP Setia's target price and earnings forecast downwards.

Investors' general cautiousness can be attributed to worry that there may be a delay in the launch of Setia Vista project in Penang, an expected muted sales at Setia Eco Gardens in Johor and to some extent, the recent termination of a deal to acquire land in Cyberjaya which was perceived as a weak signal for the broader property market.

Furthermore, concerns on the macro economy and higher inflation risks are expected to reduce consumer discretionary income.

Citigroup is expecting private consumption to slow from 11.7% in 2007 to 8% in 2008, hence mass property buyers are expected to adopt a wait-and-see attitude.

AmResearch's property analyst Chong Tjen-San opines that the delay in SP Setia's launches are not due to poor sentiment on the broader property sector but more project specific issues.

For instance, he points out that SP Setia strategically delayed the launch of Setia Vista as it recently obtained approval for the release of 167 units of bumi units from Phase 1 and Phase 2 of Setia Pearl Island.

“SP Setia has done well in Penang. In the Setia Pearl project, it sold Phase 1 terrace houses for RM600,000 per unit. As for Phase 3, it sold 49 units at RM750,000 per unit. As it has additional supply from Setia Pearl and pricing was already raised quite aggressively, it had adopted a wait and see to gauge the take-up rates,” says Chong.

While the overall property market outlook is expected to grow, analysts remain cautious on the back of the global financial turmoil.

They worry that most of the price appreciation in 2007 was due to speculation and in hindsight, analysts say that the price spurt was unsustainable.

With that, many potential home buyers are holding out in anticipation of better prices.

“Investors who bought high end homes have benefited from the bullish cycle in financial markets in the last few years. With the sharp correction in markets, the purchasing powers of these buyers will also be affected,” says the property analyst.

She adds: “While there will be demand for lower to middle-class houses, buyers may hold off from purchasing high end homes. Last year, it was mainly the high end developments that drove the euphoria in property markets.”

By The Star (by Tee Lin Say)

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