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• Terminated Setia View joint venture
S P Setia announced on March 16 that it has terminated the 50:50 joint venture for the development of Setia View project in Penang. S P Setia has since filed a writ of summons and statement of claim against its joint-venture partner PPH Resorts (Penang) Sdn Bhd to recover RM12.2 million of advances and development project expenditure incurred. In opposing S P Setia’s action, PPH has filed a counter-action for, amongst others, the recovery of the sum of RM5.72 million and damages alleged to have been suffered to be assessed by the court.
• Impact is not material
Recall that S P Setia has entered into this JV in December 2006 to develop a high-end bungalow project on a 45-acre land adjacent to its on-going Setia Pearl Island project. This project, which has a GDV of RM300 million, was subject to, among others, completion of due diligence investigations on the development land including a soil investigation and geotechnical study to the satisfaction of SP Setia. Upon further investigation, management has discovered that the project is no longer feasible due to unsuitable soil condition. As such, it is terminating the joint venture and files a claim for advances made and development expenditure already incurred.
While this is a setback to S P Setia, the impact from the termination of this project is negligible as our RNAV estimate will only be shaved off by a mere 2 sen to RM4.06. Impact to earnings is also negligible. As we have only assumed this project to take off in late FY2012, it will only reduce our FY2012 earnings estimate by 0.9%. However, if S P Setia is unsuccessful in defending its claim against PPH, it may need to writedown
RM12.2 million of receivable as well as incur another RM5.72 million loss.
This could potential shave off 1.8 sen per share or 8.9% of FY2010 earnings.
• Maintain BUY call
We leave our earnings estimate unchanged for now. To note, we have yet to factor in additional sales likely to be achieved this year following an exceptional property sales of RM608 million in 1QFY10. We will review our estimates and target price upon the release of S P Setia’s 1QFY10 results on March 18. For now, we maintain our buy call and target price of RM4.05 (based on upper-end P/E valuation of 20x on CY10 EPS).
