Kenanga Research: ‘Buy’ call on S P Setia

S P Setia: Buying land in Melbourne Australia

* Purchasing 1.07 acres in Melbourne, Australia for A$30 million or c.RM92.4 million (RM1,978psf). S P Setia (SP) has entered into a conditional contract sale with vendors (S.L. Nominees Pty Ltd and Jonquil Pty Ltd), conditioned on Australia’s Foreign Investment Review Board’s (FIRB) approvals. Purchase should be completed by Oct 31, 2010. Acquisition will likely be internally funded given S P’s large cash pile of RM699 million and low net gearing of 0.27x as at Jan 31, 2010.

* In heart of Melbourne’s CBD. The site is a few blocks away from Melbourne Central (tower, shopping centre and railway station) and is surrounded by A’Beckett Street, Franklin Street, Elizabeth Street and Queen Street. Neighbouring landmarks include Bourke Street Mall, RMIT University, University of Melbourne, La Trobe University and Flagstaff Gardens. Currently, the site is a car park lot.

* High GDV per acre project. Preliminary plans for the site may be a miniature version of  “Setia Walk” with indicative GDV of RM1.2 billion to RM1.4 billion based on our estimated plot ratio of 10x-13x. Development plans are still in its infancy with estimated 850 high-rise apartment units (c.400 sq ft to 500 sq ft built-ups) with a price-tag around A$1,000psf (RM3,080psf) or A$400,000 to A$500,000/unit; initial market check indicates neighbouring apartments of similar sizes are being sold a similar price per unit. Further details (e.g. GDP margins, exact plot ratio, etc) will be made known later. Expected launch date is in 18 to 24 months from date of acquisition with four-year project duration.

* Maiden project in Australia, inline with the group’s strategy to expand overseas. Currently it has 2 projects in Vietnam , one of which has been launched (Eco Lakes), and is in the midst of finalizing its Hangzhou, China project. S Pintends to leverage on its close ties with Lend Lease Group to tap on networks and experiences when embarking on the Australian development.

* Fair value maintained at RM4.88 for now, pending FIRB approvals. The land acquisition potentially increases our SoP RNAV by 2% to RM4.98 (assuming RM1.2 billion GDV, 20% GDP margin, six-year project duration, 8.4% WACC). Similarly, FY1010-11E net profit of RM208 million to RM268 million is unchanged; even at earliest launch, significant earnings contributions likely post FY12. We reiterate BUY in view of low foreign shareholding and catalysts from realization of KL Eco City and overseas projects.

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