Should We Still Be Looking At SP Setia Berhad?

On 29 October 2018, SP Setia Berhad is crowned as the top property developer in Malaysia. Indeed, it is an amazing feat considering that S P Setia Bhd is winning the top spot of The Edge Malaysia Top Property Developers Award (TPDA) for a third consecutive time this year.

Is that good news to its shareholders?  

Not really, I suppose. Its stock price has fell to its 5-Year Low since 2014. Today, S P Setia Bhd is trading at RM 2.09 a share, almost a 50% dip from its highest of RM 4.00 at the end-2017.


Source: Google Finance

Like always, the question is: ‘Should we dismiss S P Setia Bhd as an investment or do we view this as an opportunity to grab some of its shares?’

To me, I believe the answer lies in its fundamental strength and its current plan to grow in the near future. Here, I’ll share how I would assess S P Setia Bhd as a potential candidate for investment. Therefore, here are 5 things to know about S P Setia before you invest.

#1: The Business

S P Setia Bhd is a pure-play property developer in Malaysia. It is recognised as a master developer of townships, eco-sanctuaries, luxury enclaves, and high rises mainly in the Klang Valley. Beginning with its flagship township development of Setia Alam, S P Setia Bhd presently has 46 ongoing projects located in the Klang Valley, Johor and Penang in Malaysia and abroad namely Singapore, the United Kingdom, Australia, China, and Vietnam.

#2: The Management

Dato’ Khor Chap Jen is the President and CEO of S P Setia Bhd. He took over the helm of leadership from Tan Sri Dato’ Sri Liew Kee Sin, a figure widely known as the man behind the success of S P Setia Bhd. Presently, Liew is the Chairman of Eco World Development Group Bhd.

Nevertheless, Khor himself is not a new kid on the block. He has been a staff of S P Setia Bhd since 1995 and had worked alongside with Liew to build S P Setia Bhd to where it is today. However, Khor is not a substantial shareholder of the company as he owns 911,706 shares or 0.02% shareholdings of S P Setia Bhd.

The other directors do not own any shares of S P Setia Bhd.

As at 12 March 2018, the major shareholders of S P Setia Bhd is as followed:

– Permodalan Nasional Bhd: 25.60%

– Amanah Saham Bumiputera: 23.69%

– Employees Provident Fund Board: 9.20%

– Kumpulan Wang Persaraan (Diperbadankan): 7.65%

– Amanah Saham Malaysia: 3.21%

Essentially, the Malaysian government is the main shareholder of S P Setia Bhd.

#3: Financial Results

Overall, S P Setia Bhd has delivered growth in both sales and profits for the last 10 years. Revenues increased from RM 1.47 billion in 2008 to RM 6.75 billion in 2015 before recording a back-to-back-decline to RM 4.52 billion in 2017. This is due to a repositioning of its new property launches as a response to a soft local property market since 2016.

Still, S P Setia had recorded its highest profits in 2016 – 2018, averaging RM 900 million in shareholders’ earnings per annum. Overall, it has recorded a 10-Year Return on Equity (ROE) of 9.39% per annum. In other words, S P Setia Bhd had, on average, RM 9.39 in annual earnings from every RM 100.00 in shareholders’ equity from 2008 to 2017.

Source: Annual Reports of S P Setia Bhd

As at 30 June 2018, S P Setia has non-current liabilities of RM 7.71 billion, thus, has a gearing ratio of 48.2% when calculated based on total equity of RM 16.01 billion. S P Setia Bhd has a current ratio of 1.85 and a cash balance totalling RM 3.68 billion. They would be used to fund its ongoing and pipeline of projects in the immediate future.

#4: Future Prospects

Moving forward, S P Setia Bhd remains committed to its sales target of RM 5.0 billion for 2018. It has sold RM 2.1 billion worth of properties in H1 2018 and is planning to launch properties worth RM 4.05 billion in H2 2018. This includes a new launch of Daintree Residence in Singapore worth S$ 485 million.

Source: Corporate Presentation of S P Setia Bhd

In the longer term, S P Setia Bhd has an effective remaining land bank of 9,587 acres worth a potential gross development value (GDV) of RM 155.94 billion as at 30 June 2018. This provides income visibility to S P Setia Bhd in the long run.

Source: Corporate Presentation of S P Setia Bhd

#5: Valuation

From above, S P Setia Bhd is trading at RM 2.09 a share.

In 2017, it has made RM 0.243 in earnings per share (EPS). Thus, its current P/E ratio is 8.60. It is below its 10-Year P/E Average of 13.61.

As at 30 June 2018, it has reported to have net assets a share of RM 3.05. Thus, its current P/B ratio is 0.685. It is below its 10-Year P/B Ratio Average of 1.18.

In 2017, it paid out RM 0.155 in dividends per share (DPS). Thus, I would expect a dividend yield of 7.42% if S P Setia Bhd is able to maintain its DPS at RM 0.155 for subsequent years.

VIA’s Verdict

So, what is my verdict?

Frankly, an investment in S P Setia Bhd has both merits and demerits. They are:

Merits:

  1. Proven Track Record as a Premier Developer in Malaysia

  2. Strong Past Financial Results over the Past 10 Years.

  3. 46 Ongoing Projects with Unbilled Sales of RM 8.11 billion.

  4. More Property Launches in 2H 2018.

  5. 9,583 Acres of Land Bank worth RM 155.94 billion in GDV.

Demerits:

  1. Consistent Dilution of Shares due to Regular Rights Issues, ESOS, DRPs, and Redeemable Convertible Preference Shares (RCPS). They would be affecting the calculation of EPS for S P Setia Bhd in the future.

  2. Contingent Liabilities of RM 74.4 million in additional income taxes and RM 33.5 million in penalties served by the Inland Revenue Board to S P Setia Bhd. Upon consultations from tax solicitors, the directors now are of the opinion that no provision for these taxes is required as there are meritorious grounds and case law to appeal against these assessments of additional income taxes and penalties.

Like always, I wouldn’t give you a definite final answer. I believe, as an investor, we should first understand and assess both the potential rewards and appetite for risks before venturing into an investment.

You call the shots.

Ian Tai

Ian Tai is the founder of Bursaking.com.my, a platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks. It is an essential tool that sifts out stocks that grow profits consistently from a database of over 900+ stocks listed mainly in Malaysia. As a Malaysian with close family ties in Singapore, Ian publishes a series of newsletters on how anyone can invest profitability in both countries.

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