By Khairie Hisyam
Sales fall for the second year running at SP Setia, where a permanent CEO has not been appointed for nearly two years now. Can investors find confidence in a fundamentally sound counter with clouds of uncertainties hanging?
Business model: A well-known name in the Malaysian property sector, SP Setia is arguably the foremost property development brand until the past couple of years or so.
While better known as a property developer, SP Setia is technically an investment holding company as it is also involved in construction, infrastructure, wood-based manufacturing and trading businesses.
That said, property development is the largest contributor to earnings by a wide margin – for the 12 months up to Oct 31, 2015, this segment made up 94% of group total revenue and 96% of total pre-tax profit.
SP Setia also has strong overseas presence, with projects both ongoing and completed in Vietnam, Australia, Singapore and the United Kingdom, according to its website.
Notably, it is a 40% shareholder in the high-profile Battersea Power Station redevelopment, which it is undertaking with partners Sime Darby Berhad (40%) and Employees Provident Fund (EPF).
As at Oct 31, 2015, SP Setia has 27 ongoing property development projects with an effective stake of 3,935.99 acres in terms of undeveloped land bank. This translates into RM69.07 billion in terms of gross development value (GDV).
Shareholders and management: The largest shareholder is Bumiputera equity fund Permodalan Nasional Berhad (PNB), whose direct and indirect holdings amount to a total of roughly 66%. Retirement Fund Incorporated (or KWAP) has roughly 9% while the Employees Provident Fund (EPF) has about 5%.
At the moment SP Setia is led by acting president and chief executive officer Khor Chap Jen, who has been with the company since 1995 in various roles. Khor has held the role since the exit of his predecessor Voon Tin Yow, who also held the CEO position in an acting capacity since the exit of Liew Kee Sin, a former long-time CEO of nearly 18 years, in end-April 2014.
It is unclear why the company has not named a permanent chief executive to lead management nearly 20 months after Liew’s exit.
However, a Maybank Research report in January this year said that SP Setia’s present arrangement is part of a transition strategy into a professional management-driven set-up compared to the traditional developer model of being entrepreneur-driven.
For the fourth quarter ended Oct 31, 2015 (4Q15), SP Setia reported RM1.4 billion in revenue, up 14.6% year-on-year (y-o-y), and 9% lower net profit y-o-y at RM119.7 million.
However, for the full 12-month period in 2015 (FY15) the company reported RM709.9 million net profit, up 75% y-o-y from RM405.7 million in FY14, as revenue surged 147% y-o-y to RM5.6 billion compared to RM3.8 billion in FY14.
For the 12-month period, SP Setia recorded property sales of RM3.45 billion, 25% lower y-o-y and less than half a record RM8 billion seen in FY13.
The company has two further months of results to report in FY15 as it is changing its financial year end from Oct 31 to Dec 31.
Share performance: On Dec 17, 2015, SP Setia closed at RM3.11 per share. This is a marginal dip from RM3.13 per share on Dec 17, 2014 (-0.6%) and a -5.8% fall year-to-date, having begun 2015 at RM3.30 per share.
Over the past year, the counter has traded between RM2.92 and RM3.65 per share with a beta coefficient value of 0.57, according to Reuters. A value of 1.0 reflects the average volatility of the overall stock market.
SP Setia traditionally distributes at least 60% of its net profit to shareholders as dividends. It previously announced an interim dividend of 4 sen per share for the current financial year but has not announced further dividends as FY15 has two more months to go before conclusion.
What analysts think: Analysts are leaning slightly towards the positive end of opinion on SP Setia, according to Reuters data, with six out of 17 rating the counter as either “buy” or “outperform”. Only two had “underperform” calls while the rest has the counter at “hold”.
Of the research houses tracked by KINIBIZ, five has an outright “buy” or “outperform” call against one “reduce” rating. The other two research houses put SP Setia on “hold” as at Dec 11, 2015.
In a Dec 11 report, Maybank Research said SP Setia’s 12-month results for FY15 “positively surprises” with locked in sales coming in at 86% of 14-month expectations and “on-track”. However the research house is also lowering its sales expectations for FY16 by 38% in anticipation of a more challenging property outlook, it said.
Another plus is SP Setia’s strong earnings visibility underpinned by its unbilled sales of RM9.5 billion, said AllianceDBS Research.
The lone negative rating was from CIMB Research, which highlighted the company’s two straight years of declining sales after setting a record of RM8 billion in sales for FY13, the last full financial year it had under former chief Liew Kee Sin.
While weakening Malaysian sales is not unique to SP Setia as its peers are also facing turbulence, CIMB said SP Setia’s overseas sales have also fallen by 31% y-o-y, largely driven by a 96% y-o-y drop in sales in Australia. “London sales eased 8% y-o-y.”
In addition a key re-rating catalyst for SP Setia – a potential merger with PNB’s other property holdings – remains nowhere in sight, said CIMB, also pointing out that the current weakness in the Malaysian property market “makes it difficult to execute property deals”.
Earnings forecast:
StockStalk: The property market has been facing turbulence for a while owing to, among others, market cooling measures imposed by the government. Things are unlikely to get easier for most Malaysian developers in the near-term and this company is no exception.
Fundamentally SP Setia looks alright. Its unbilled sales remain large at RM9.5 billion and its landbank remain sizeable and well-located. It still boasts some marketing prowess as a legacy of the brand built by former chief Liew over nearly two decades, which indicates a likely resilience going forward in terms of earnings.
Well-being, however, is relative in SP Setia’s case. As highlighted by CIMB Research, sales figures have been on the decline for two years, although the RM8 billion record set by Liew in FY13 is unlikely to have been matched in any case.
A weakening domestic market is felt by most developers. However stalwart SP Setia investors may be left disappointed that Eco World Development Group Berhad, an emerging rival led by Liew Kee Sin’s son and close associates, is among a few big developers bucking market trend to meet their sales targets this year.
This begs the question on why SP Setia, having held strong market leadership up to Liew’s departure and arguably remain in pole position vis-a-vis branding despite Eco World fast catching up, appears to be struggling like the rest of the pack in Malaysia, with 12-month sales in FY15 falling 22% y-o-y.
In addition, some 36% of 12-month sales for FY15 so far came from overseas and 87% of this portion came from the Battersea project in London. With an 8% easing in sales from London so far and the uncertain outlook on the London property market going forward, it remains to be seen if SP Setia will also suffer further dips from overseas sales going forward to compound weakening performance domestically.
These factors paint a picture of a fundamentally sound developer that is struggling to find its true north. With this in mind, a worry for any potential investor – as well as existing ones – is the absence of a permanent chief executive to take charge of SP Setia going forward.
Having chiefs in acting capacity is not conducive towards investor confidence and carries the risk of a business going on auto-pilot in absence of executives willing to take ownership of crucial decisions.
This in turn may lead to the company stagnating and ultimately decline as unbilled sales cannot support SP Setia forever – indeed its unbilled sales have declined by nearly RM2 billion in the past year or so.
In respect of a potential merger with PNB’s other property concerns, market talk on the possibility has gone on for more than a year without anything substantial materialising. Nor has PNB has substantially clarified its position on that possibility either way.
The apparent stasis on a potential merger exercise has been reflected by the counter’s sideways movement over the past year as investors remain uncertain on where SP Setia is heading and who is going to take it there.
Overall, the counter as well as the company is unlikely to start a sustained upward movement again until its leadership vacuum is satisfactorily addressed. While it has good fundamentals as a proverbial race car, it also needs a good driver to start winning races.
The longstanding questions on whether PNB will initiate a merger involving SP Setia or not should also be concluded beyond doubt to remove a lot of uncertainty among investors.
This means that until these issues are addressed, investors seeking growth-story investments in the property sector may do well to look at other counters with greater certainty in terms of driving philosophy and managerial leadership.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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