January 22, 2014

'Hold' call placed on SP Setia shares

Stock Name: SPSETIA
Company Name: SP SETIA BHD
Research House: MAYBANKPrice Call: HOLDTarget Price: 3.38

KUALA LUMPUR: Maybank IB Research placed a 'hold' recommedation on SP Setia Bhd shares with its RM3.38 target price now under review given the earlier-than-expected departure of its three senior executives.

Co-founder President and Chief Executive Officer (CEO) Tan Sri Liew Kee Sin, Chief Financial officer (CFO) Datuk Teow Leong Seng and non-independent non-executive director Tan Sri Lee Lam Thye tendered their resignations on January 21, but current Chief Operating Officer (COO), Datuk Voon Tin Yow will assume the role of acting CEO for one year from May 1 to Apr 30 next year.

The departure of Liew and the senior executives came in earlier than expected and it is believed Liew would leave by March this year as he exercise of the last tranche of his put option ahead of the March 2015 timeline, Maybank IB noted.

Liew was given a put option which gives him the right to sell his eight per cent stake in SP Setia to Permodalan Nasional Bhd (PNB) progressively at MYR3.95 per share pricing in seven tranches between February 2012 and March 2015.

Over the next year, the Board of SP Setia will actively seek the views of its major shareholder, PNB, before the formal terms and conditions of appointment are agreed and finalised with the identified successors.
This is despite an existing management succession plan that is in place whereby Voon is supposed to replace Liew as president and CEO upon his resignation.

According to the research house, the upside of the share price may be capped in near term due to attractive valuations on execution/staff retention risks, but noted that re-rating is possible in event of a clear strategy and potential asset injections from PNB.

Meanwhile, Liew have agreed to stay on as the Chairman of the Battersea Project Holding Co Ltd and Managing Director of Qinzhou Development (M) consortium Sdn Bhd. Teow will remain Chairman of Battersea Power Station Development Co Ltd until September next year to ensure the smooth and successful implementation of these international projects.

SP Setia's share price has declined 4 per cent year-to-date, despite record unbilled sales of MYR9.6 billion (2.5 times of FY10/14 revenue forecast) as at end FY10/13.

"While we think a large portion of the management risk is already factored into its share price, the upside may be capped in the near term by execution risk and the risk of more senior staff departures. We understand that about 15 per cent of the 1,600-1,700 staff has left the company since 2013. We value SP Setia at 0.7 times price revalued net asset value negative 0.1 times below its historical average of 0.8 times."

Maybank IB said valuations are undemanding at 13.4 times compared to its historical means of 15.8 times price-earnings ratio, 1.6 times price over book value and 0.8 times price over revalued net asset value.

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