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EPF takes 20% stake in Battersea

KUALA LUMPUR (July 6): The Employees Provident Fund board (EPF) is taking a 20% equity stake in the consortium that will redevelop Battersea Power Station in London — a project expected to have a gross development value (GDV) of £8 billion (RM39.5 billion).

The widely anticipated involvement of the EPF as a financial partner for the Battersea project cuts Sime Darby Bhd and S P Setia Bhd’s equity participation in the joint venture company (JV Co) — Battersea Project Holdings Co Ltd — to 40% each, while bolstering the project company’s credit standing, Sime and S P Setia said in separate statements to Bursa Malaysia yesterday.

This confirms an earlier article in The Edge Financial Daily that the provident fund would be one of the partners in the redevelopment project in London. Shares in the JV Co cannot be transferred or sold within five years, according to a subscription and shareholders’ agreement entered into on Wednesday.

With the 20% stake, the EPF’s wholly-owned Kwasa Global Development Ltd will get up to three board seats in the JV Co, which will have a maximum of 11 board members and £500,000 authorised share capital, comprising 40 million ordinary shares and 10 million preference shares.

“The EPF is pleased to accept the invitation from S P Setia and Sime Darby to join in the consortium,” said EPF deputy CEO and head of investments Datuk Shahril Ridza Ridzuan.

“As a retirement fund and a long-term investor, we are able to appreciate the long gestation period required to extract the full potential of this development project which would ultimately enhance returns for our contributors.”

While the EPF’s exact cash outlay for the project was not specified, the parties agreed that the purchase consideration for the Battersea property would be £400 million, while project development cost for the first two years is estimated at £200 million.

The JV Co is also required to contribute £212 million to a proposed Northern Line Extension which is an extension of the London Underground to Battersea to be undertaken by the government and expected to be operational by 2018/2019.

S P Setia said in its statement yesterday the financial effect of the project on the group’s future consolidated gearing “will depend on the level of borrowings required to be injected into the JV Co”, but the project is expected to boost its net asset per share and longer term earnings.

“The additional £212 million contribution for the underground network is likely to be incurred after the first two years,” RHB Research wrote in a note yesterday, indicating the probability of S P Setia taking “more borrowings and possibly equity calls”.

RHB estimates that S P Setia will need about RM600 million to meet funding commitments in the first two years, assuming a 50:50 debt-to-equity structure for the JV Co. The property developer will have a RM656 million debt headroom if it gears up to 50%, according to RHB.

In a note dated June 22, Hwang- DBS Research estimated that S P Setia would need RM300 million cash up front, assuming a 70:30 debt-to-equity mix, and that a 40% interest in the Battersea project “can easily boost S P Setia’s revised net asset value by 15% or 67 sen per share”. Future capital contribution will be pro-rated based on respective equity holdings in the JV Co with borrowings taken where practicable.

“It is too preliminary to ascertain the total development revenue and costs, expected completion date or expected profits to be derived at this juncture. Nevertheless, the board is confident that the project will be well received,” S P Setia said, citing a robust prognosis for London real estate. RHB Research Institute yesterday downgraded S P Setia to “market perform”.

“Our optimism on this Battersea project has somewhat been abated by the recent exercise of the first tranche of put option by Tan Sri Liew Kee Sin,” RHB said, pointing out that the timing during which the share option was exercised could send mixed signals to the market. Sime Darby which has RM4 billion cash is viewed more favourably.

Sime’s portion of the Battersea GDV is RM16 billion, TA Investment Management Bhd said in a note yesterday, calling the project “the single largest property development undertaken by the group” whose property division is looking to have 20% of income from overseas by 2016. TA has a “buy” call and RM11.92 target price on Sime.

This article appeared in The Edge Financial Daily July 6, 2012.

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