SP Setia – Take profit

January 12, 2009 at 6:53 am Leave a comment

Outperformed the market so far
Since we initiated coverage on 21 Nov 2008, SP Setia has risen by 37% and is significantly above our target price of RM2.62. It has also outperformed the KLCI which rose by 7% over the same period.
• Valuation is rich now
At current share price, valuation is rich as it is trading at forward P/E of 17.1x as compared to the market and sector average P/E of 11.7x and 5.3x respectively. It is also trading above its historical P/E of 12.5x. SP Setia’s premium valuation is not justified given more moderate earnings growth going forward on the back of a property sector cyclical downturn. Based on technical charts, SP Setia has also moved into overbought territory as its current Relative Strength Index reading of 82.4 is above the overbought threshold of 80.
• No change to fundamental
Since we initiated coverage on SP Setia, there has been no change to its fundamental. Our RNAV estimate of RM3.50 remains unchanged. We tweaked our earnings estimate for FY09 and FY10 marginally for housekeeping purpose while introducing our estimate for FY11. Earnings growth going forward is going to be moderate as property sales has slowed down considerable. While risk to earnings downside for FY09 is minimal as it is backed by unbilled sales of RM1.1bn, earnings for FY10 and FY11 are exposed to risk of slower than anticipated sales take-up and/or delay in property launches.
• Take profit and switch to Sunrise and Sunway City
We downgrade our call on SP Setia to a sell (from hold previously) as we recommend investors to take profit on this stock which has overrun its fundamental. Our target price however remains unchanged at RM2.62. We also recommend switching to Sunrise (SUN MK, Buy, TP: RM2.32) for
a laggard-play. Sunrise is massively undervalued with forward P/E of just 4.1x. Even if we impute our worst case scenario of 30% earnings downside (refer to our property sector report on 24 Nov 2008), adjusted forward P/E of 5.9x remains undemanding. For more risk-averse investors, we recommend Sunway City (SCITY MK, Buy, TP: RM3.60) for its more resilient earnings from property investment.

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Entry filed under: Business, Finance, Stock Market. Tags: , , , , , , , .

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