CIMB Research: Outperform maintained for S P Setia

G’day mate

We are neutral on S P Setia’s acquisition of a 1.07-acre piece of land in Melbourne for A$30 million (RM92.4 million) as the strong potential earnings contribution offsets our concern that the Melbourne property market may be close to its peak. The A$644 psf (RM1,982 psf) price tag appears fair given its strategic location. However, this is a brand new market for S P Setia, which may have to pay the price of going through a learning curve as it did in Vietnam. We make no changes to our earnings forecasts as this project is only likely to start contributing in FY13. We maintain our OUTPERFORM call and target price of RM5.51, based on a 20% premium over its fully diluted RNAV of RM4.59. Factors that could catalyse the stock include 1) continued strong sales in FY2010, and 2) S P Setia’s renewed appetite for land banking, both domestically and internationally.

The news

Yesterday, S P Setia announced its acquisition of a 1.07-acre piece of land in Melbourne, Australia, for A$30 million or RM92.4 million, via a tender process conducted by Savills Australia. The land is located on the central spine of Melbourne’s Central Business District within the northern precinct, between A’Beckett Street and Franklin Street, and between Elizabeth and Queen Streets. It is a short walk to Melbourne Central Shopping Centre and Railway Station as well as the Queen Victoria Market. Subject to Australia’s Foreign Investment Review Board approval, the acquisition is expected to be completed within FY10/10. S P Setia plans to launch the project within 18-24 months from the date of acquisition.

Comments

We are surprised by the acquisition as S P Setia had not given any inkling that it was looking for landbank as far south as Australia. Overall, we are neutral on the purchase as the strong potential earnings contribution offsets our concern that the Melbourne property market may be close to its peak. The A$644 psf (RM1,982 psf) price tag appears fair given its strategic location. However, this is a brand new market for S P Setia, which may have to pay the price of going through a learning curve as it did in Vietnam. On the surface, the venture looks attractive. The GDV of the project is estimated at RM1.3 billion to 1.4 billion and pretax profit margins should be around 20%. A total of 850 apartments and a retail podium will be developed. The apartments will be priced around A$1,000 psf or around A$0.5 million each. We have not factored in contributions from Vietnam or China and likewise will only factor in contributions from Australia when the project is closer to fruition and earnings visibility is stronger.

Valuation and recommendation

As the project will only be launched in 1½-2 years’ time at the earliest, it is unlikely to start contributing to earnings before FY2013. We, therefore, make no changes to our earnings forecasts. But we note that profit contribution from FY2013 onwards could be significant. Assuming a four-year construction period and a take-up rate that improves from 30% in the first year of launch to 60% in the second year and 90% by the third year, net profit by FY2015 would be around RM70 million. Although we are neutral on this acquisition in the short term, we are positive about it over the longer term as it will help broaden S P Setia’s earnings base and open up a new market for the group. We maintain our OUTPERFORM call and target price of RM5.51, which we continue to base on a 20% premium over its fully diluted RNAV of RM4.59. Factors that could catalyse the stock include 1) continued strong sales in FY10, 2) S P Setia’s renewed appetite for land banking, both domestically and internationally, and 3) a revival in investors’ appetite for property developers.