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S P Setia strengthening foothold in Australia

S P Setia Bhd (Sept 26, RM3.10)
Maintain buy at RM3.08 with revised target price of RM3.93 (from RM3.90):
The success of Fulton Land phase 1 (70% take-up) in Melbourne has convinced S P Setia to further strengthen its foothold in Australia via the latest purchase at South Yarra, Melbourne. We raise our RNAV estimate by two sen but leave FY11-13 earnings forecasts unchanged. Our target price is raised marginally to RM3.93 (+three sen) based on higher revised net asset value (RNAV) of RM4.36. Buy.

S P Setia has entered into a conditional contract of sale to buy a 2.23-acre (0.89ha) freehold land in Melbourne's South Yarra suburb for A$25.3 million (RM61.7 million); A$260 psf from Portbridge Pty Ltd. The A$260 psf price tag seems attractive given the A$697-A$800psf paid by Melbourne and China-based developers Buxton Group and Sunnyland Investment Group respectively for development sites at St Kilda Road in 2010.

The land is at a prime corner development site on Australia's premier boulevard with two street frontages: St Kilda Road and Moubray Street. It is surrounded by schools, colleges, retail centres, parks and hospital. Moubray Street tram station is located nearby, providing good connectivity and accessibility. We understand that the land has permit for a multi-staged residential development comprising 329 apartments and 369 underground car parks.

Despite the softening Melbourne property market as buyers grow more cautious amid wild stock market swings, we are mildly positive on the land deal given its good accessibility supported by the Moubray Street tram station and strong followings by S P Setia's existing Malaysian house buyers. The land to be developed into high-rise apartments has an estimated A$250 million gross development value.

Up RNAV but maintain earnings forecasts as we expect the project to start contributing from FY14, beyond our earnings forecast period. Our RNAV estimate of RM4.36 (+two sen) assumes 15% pretax margin and four years of development period for this new Melbourne project. Post land acquisition, S P Setia's net gearing would increase to 3.2%, from 0.7% as at July 2011; remains manageable. — Maybank IB Research, Sept 26

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