ECM Libra Research has lowered its target price for S P Setia Bhd to RM2.65 from RM2.80 after the company scaled back the development of a retail mall via a 50:50 joint venture with Lend Lease Asian Retail Investment Fund 2 Ltd.

Maintaining a sell on the stock at RM3.90, ECM Libra said the revised target price was derived by tagging an upper-mid cycle price earnings (PE) multiple of 15 times to FY10 earnings.

“At current price, S P Setia is trading at forward PE of 22 times, which is similar to peak valuation seen during past property bull runs, which is not justified. As such, we maintain our sell call on S P Setia,” the research house said in a report yesterday.

Pursuant to an announcement by S P Setia on Wednesday, ECM Libra said the revised plans would now see the retail mall being developed in two phases instead. The first phase on a 14.31-acre land will involve the development of a mall with a net lettable area of 700,000 sq ft over two years at a cost of RM450 million. A 70% financing has already been secured for the first phase.

ECM Libra said based on initial plans in July 2008, a retail mall of 1.23 million sq ft will be jointly developed at a cost of RM750 million with Lend Lease over three years on a 30.5-acre land in Setia Alam. The said land will be sold to the JV for RM119.6 million.

It said development of the second phase on the remaining 16.19 acres of land would only commence once the occupancy and performance of the first phase stabilised, which is estimated to take two years after completion.

ECM Libra lowered its earnings estimates for FY09 by 18.5% mainly as a result of the removal of land sale gain which has previously been factored in based on a 30% pre-tax margin assumption.

It said S P Setia management had indicated that land sale gain would have a minimal impact to bottom line as there would be significant infrastructure cost allocations.

It also lowered earnings for FY10 and FY11 by 3.2% and 4.9% respectively as it lowered its expectation of the pace of margin recovery due to higher cost from the 5/95 financing scheme as well as start-up costs in new projects.

ECM Libra said the effect of slower margin recovery was however partially offset by its revised sales expectation of RM1.1 billion (previously RM0.9 billion) for FY09.

Meanwhile, Kenanga Research, which is positive on the latest development, said it demonstrated Lend Lease’s commitment to the project amid the global uncertainties.

It said the revised plans allowed the joint venture company to ensure better value extraction from the mall. Kenanga also said that the JV company had accepted the offer to take up RM315 million syndicated loans involving CIMB, Affin Bank and Public Bank.

Kenanga maintained a trading sell on S P Setia with an unchanged fair value of RM4.25. It advised investors to take profit amidst good news flow.
 
Kenanga said S P Setia was expensive as it was trading at 26 times FY10 PER versus forward averages of 11 times for its peers, 12 times against the markets, historical 11 times and 22 times in FY07.

S P Setia closed at RM3.96 yesterday, up six sen.