How will S P Setia fare after Liew?

By Khairie Hisyam

With S P Setia Bhd chief executive officer Liew Kee Sin expected to step down by 1Q14, concerns are brewing as to whether Malaysia’s top developer can stay ahead of the pack in the days that follow his departure.

Analysts cautious

Last month, Liew exercised his second put option which saw his shareholding in the company reduce from 4.6 percent to 2.76 percent. His final put option tranche at RM3.95 per share would be due in March 2014, and Terence Wong of CIMB Research believes that Liew would retire around this time.

“We view his potential departure negatively as he is synonymous with S P Setia and it was under his stewardship that the group emerged as Malaysia’s only true multinational property company,” said Wong.

Accordingly, CIMB Research last weekend downgraded its call for S P Setia from ‘buy’ to ‘neutral’ due to uncertainty surrounding the expected departure and the risks that follow.

While the research house’s target basis remains unchanged at par with the company’s revalued net asset value (RNAV), it has reduced its targeted earnings per share (EPS) for FY2013–2015 down by one to 11 percent in light of S P Setia’s long-term incentive programmes, which could amount to RM80–RM90 million, as well as a shift towards products with lower profit margins. Wong also highlighted in a note today that there is a downside risk to the target basis given uncertainties facing S P Setia.

The downgraded call to neutral contrasts sharply with those of other property companies such as Eastern and Oriental (E&O), Mah Sing Group, UEM Land Holdings and  UOA Development — all expected to ‘outperform’ by CIMB Research. This is despite the company’s sales and international reach still far beyond those of its peers.

But for the expected departure, S P Setia’s performance as a company appear capable of commanding strong expectations of further growth on all fronts. Notably, CIMB Research recommends buyers keen on the property sector to look towards S P Setia’s challengers such as Mah Sing Group and UEM Land.

Downhill from here?

While there seems to be a clear succession plan with deputy president Voon Tin Yow named by the board to succeed Liew upon the latter’s retirement, what is unclear is whether the man’s qualities can be replaced.

Ranked the 38^th richest man in Malaysia by Forbes as at February this year with a net worth of over RM690 million, Liew is widely regarded as key for S P Setia becoming the property giant it is today. He is said to have brought vision and cohesion and has been instrumental in creating and developing a strong organisation that excels on all fronts,  from identifying good landbanks with potential to creating added-value via construction and improving access to strong marketing and sales capability — evident from the superb take-up rate of the Battersea Power Station redevelopment project launched earlier this year.

It is important to bear in mind the extent of S P Setia’s rise. From a net profit of just RM7 million in 1993, S P Setia commanded a fifty-fold increase of RM394 million for the year ending 2012. The Battersea project alone may boost profits by three or four times in the coming years.

Its targeted new sales of RM5.5 billion for financial year ending October 2013 is a staggering RM2.5 billion ahead of its closest rival. What’s more, the extent of S P Setia’s successful diversification internationally is yet to be matched by any other Malaysian developer.

S P Setia’s visible rise for the past ten or so years appear to coincide with Liew becoming CEO in 1996. According to Wong, Liew’s leadership brings a competitive edge to S P Setia through his personal qualities that filter down to the rest of his crew, especially his “entrepreneurial zeal and risk-taking appetite in matters of landbanking, entering new markets and pushing the envelope in development”.

“He was willing to risk his own equity to drive growth and enter new markets as he would share in the rewards of success. Importantly too, he acted as cheerleader and pacesetter for the firm and instilled a can-do attitude,” said Wong.

The personification of those traits being at the helm has resulted in an era of dominance over the past decade or so. Is that era about to end? The Malaysian property industry has seen it happen before.

In the 1990s, Land and General led the industry but overextended itself via diversification overseas and was hit hard by the 1997/98 Asian financial crisis. It never fully recovered.

MK Land, once the largest developer by market capital in early 2000s also succumbed due to operational and financial difficulties. That MK Land owned some of the most prime land areas in the Klang Valley was not enough of a help.

The story is similar for Talam and Larut, the former now a taboo name among investors and bankers alike, such is its reputation.

The question here is whether Liew’s departure will have a similar effect on S P Setia.

Impending talent exodus?

Worryingly, S P Setia has already seen long-serving members of the current management team leaving.

S. Rajoo, S P Setia’s General Manager (Northern Region) left last year, followed by Chang Kim Wah, his counterpart for the southern region, early this year. Given that S P Setia is known to be reward performers well via meritocracy — the company won Aon Hewitt’s Best of the Best Employer Award Malaysia twice — the fact that the departures seem to associate with Liew’s coming exit does not bode well. Worse, the exodus may accelerate when he does leave, eroding the excellent human capital and talent currently possessed by S P Setia.

However, a balancing counter-argument is that Liew’s replacement, Voon, has been at the company for as long as he has. Their personal history go way back to 1990 when they became colleagues in a development company.

Additionally, Teow Leong Seng, current CFO who is set to become deputy president when Voon becomes president and CEO, has also been at S P Setia for nearly as long as Liew and Voon. When Liew and Voon set out into development in 1990 and set their sights on their first land acquisition in Ampang, Teow was the banker who facilitated the financing and he was invited to S P Setia in 1997 to join the duo.

Therefore while the signs of a talent exodus is worrying, there is also some confidence in Voon and Teow’s capability to maintain S P Setia’s position at the top of the hill given their long history at the company. Indeed, they received glowing endorsement from Liew himself.

“My job of pushing Setia has come to an end. Now, it’s more of consolidation, more of continuity, more of delivering, which they (Dato’ Voon and Dato’ Teow) are good at. Not me,” Liew was quoted as saying.

Therefore the big question mark is on how any potential talent exodus will be dealt with so as to ensure S P Setia maintains its competitive edge on the human talent department.

Competition heating up

That competitive edge would be vital for S P Setia to maintain its position as industry leader, a position affirmed by it being named the top developer in Malaysia for the seventh time last year at The Edge Top Property Developers Award. It should not forget that Mah Sing Group and UOA Development among others are hot on its heels.

Even though S P Setia ranks ahead in terms of management dynamics and Strengths, Weaknesses, Opportunities and Threats (SWOT) analyses by CIMB Research, it is important to note that Mah Sing and UOA Development are not far behind. Notably, S P Setia is only ahead of Mah Sing in terms of management dynamics on the basis of its stronger brand name loyalty, whereas Mah Sing is found to be on par with S P Setia on all aspects of the SWOT analysis.

After recording RM2.5 billion in property sales in 2012, Mah Sing is shooting for RM3 billion this year and is expected to exceed that figure. UEM Land also recorded similar sales in 2012 and has its crosshair trained on the same sales target for 2013, building on its acquisition of Sunrise in 2011 which catapulted it further up the developer ranks.

UOA Development has also been improving its competitiveness and transparency after an eye-opening experience of going public in 2011, during which the realities of competition and analyst demands sunk in. In 2012, UOA Development sold RM1.7 billion worth of properties and is shooting for RM2.5 billion this year. Given that it sold RM929 million worth of properties in the first quarter of this year alone, that target appear rather unambitious in hindsight and is expected to be surpassed.

Similar tales of increasing competitiveness and aggressiveness abound in terms of landbanking.  Given the intensifying competitive landscape, S P Setia cannot afford to take its foot off the pedal and at the very least has to keep matching its competitors’ growth to stay ahead of the pack.

The PNB factor

Amid all these considerations, another factor that could come into play is S P Setia’s controlling shareholder, Permodalan Nasional Berhad (PNB).

PNB is the majority shareholder in S P Setia with 63.8 percent of shares. Comparatively, in S P Setia’s 2012 annual report PNB reportedly held 51.41 percent, pointing to an increase of 12.39 percent since last year.

Although PNB had publicly declared that it will not be involved with S P Setia’s management after its hostile takeover of the developer in 2011, it is worth noting that PNB has taken several property companies private in the past. Privatisation or other corporate action such as injection of property assets into S P Setia cannot be dismissed as a possibility.

The numerous property companies under its control aside, it is notable that PNB also controls Sime Darby, one of the largest plantation companies in the world owning an estimated 12,000 acres of land with development potential and an undeveloped gross development value (GDV) of RM60 billion. Therefore any injection of property assets by PNB may boost S P Setia further up as the largest property company by assets and market capital. Additionally, there were also reports that PNB CEO Hamad Kama Piah may head its property division with S P Setia as the flagship company.

Time shall tell

S P Setia has risen fast and high for more than a decade, surpassing even its proponents’ expectations in terms of both domestic and international success. The perfectly executed  Battersea Power Station project defies all expectations and have raised the bar for other Malaysian developers, in addition to opening potential doors worldwide.

However, with so much uncertainty and so many possibilities surrounding S P Setia’s future in light of Liew’s expected departure by March 2014, will S P Setia be able to enter those doors? Only time can tell, and time is fast running out on Liew’s stewardship of the company.

One thing investors may be wishing for right now is a crystal ball to gaze into. Lacking it, however, it remains to be seen whether S P Setia’s continued success hinges on the leadership of one man — admittedly a very influential one at that.