Stock to Watch: SPSETIA (8664)

Hi Readers,

Budget 2020 is around the corner and there are several sectors that were not doing well for the past one year and especially the bearish property sectors as shown in Image 1. Apart from huge properties overhang, we are also seeing strict lending requirements. There are growing calls from the industry for government intervention to help with the properties overhang situations including lowering the minimum requirement for foreigner to purchase properties in Malaysia. Nevertheless, there are some signs that recent downtrend is significant enough that its forming a falling wedge patterns. Yet to be known on whether reversal is in the horizon. 

Image 1: Bearish property sectors

Knowing that the overall sector is bearish, the question here is that are there any value hidden in property stocks. Value investing focuses on strong financials within the company while the share price offers attractive margin of safety. Hence, the requirements would be share price going down while value going up. Strong financials to be would be improving operating cash flow, free cash flow and value to shareholders from dividend perspective. 

As such, I started digging into SPSetia (8664) after reading its recent quarter report and corporate presentation for 2019. SP Setia Bhd is a general real estate company that reports in three segments: property development, construction, and other operations. The vast majority of Setia’s revenue is generated by its property development business, which focuses on developing residential and commercial facilities, followed by its construction segment. Setia’s construction segment focuses on building and highway construction. The company considers merger and acquisition investment as a component of its operational growth strategy.

It is not a surprise that current share price of SPSetia continues to be on a downtrend as shown in Image 2. The downtrend is significant enough that a falling wedge is also forming based on the recent price actions. Looking at the trend in the image, SPSetia attempted breakout from downtrend line and only to fall into sideway consolidation within the range of $1.39 to $1.50. It is also good to take note that overall trading volume is on the rise recently which is good. 

Image 2: SPSetia falling wedge formation and entering sideway consolidation

Next is to look at the overall financials from cash flow perspective and corporate strategy. To do this, I have extracted the financial information from its annual report, recent quarter report and also information from its 2019 corporate presentation summarize in Image 3 and Image 4. Looking at the summary in Image 3, the operating cash flow and free cash flow for SPSetia is growing at a rate of 12.4% and 28.1% respectively at the back of declining share price. Additionally, there are 4 key areas that SPSetia is focusing on currently especially on the clearing unsold stocks and disposal of non-strategic land banks. Both of these actions will further strengthen its financial in future. It is progressing well thus far as we are seeing a reduction by 12% in its unsold stocks shown in Image 4. 

Image 3: Financial information extracted from annual report, quarter report and 2019 corporate presentation

Image 4: Strategies adopted by SPSetia extracted from 2019 corporate presentation

SPSetia has been paying dividend yoy as shown in Image 5 and 2019 dividend payout is trending at $0.09 cents. There is also a range of target price (TP) provided by investment banks (IB's) recently. While I have my own calculations on what is the appropriate target price in the long term, I have included both calculations in Image 5 to determine its intrinsic value. Using the lowest target price by Kenanga IB which is $1.85, the intrinsic value is at $1.54 while using my own target price, the intrinsic value is at $1.78. In both cases, the current share price is below its intrinsic value based on 0.09 cents dividend payout yearly.

Image 5: Dividend payout yoy and IB's TP. Calculating intrinsic value using IB's target price and my own TP

Going back to value investing, current share price is on the downtrend well below its intrinsic value while cash flow is going up which is meeting my own criteria. Combining both the technicality and financial aspects of SPSetia, few possible trade setups that I am considering:

• SPSetia as Dividend stocks
• Entry: Buy below intrinsic value
• Exit: When it reaches the target price
• Remarks: One can leverage the power of zero cost averaging when the price hits your own target or when it hit the target valuations to generate additional cash flow. 

• SPSetia as Trading stocks
• Entry: Breakout above the upper line sideway consolidation (>$1.50). 
• Stop Loss: $1.39 and below
• Exit: According to your own rate of returns or the levels (Image 1)
• Remarks: Aggressive trader can consider to buy at lower range of sideway $1.39 if the support here is not broken. 

Good luck and all the best!!!

Disclosure: The information above is for sharing purposes without any understanding of investment targets and needs of readers. References to the price movements is informational based on my analysis and data obtained from sources believed to be reliable at the point of writing. Please do your own due diligence as this article is not a recommendation to buy/sell.