SP Setia announced that Petaling Garden Sdn Bhd, an indirect wholly-owned subsidiary of the Group, had entered into three inter-conditional sale and purchase agreements with three wholly-owned subsidiaries of Mah Sing Group Berhad to dispose approximately 500 acres of freehold land (Glengowrie land) located at Daerah Ulu Langat, Selangor for a cash consideration of RM392m. Though gain from the land sale is only expected to be about RM31m, the sale more importantly in our view, shows the Group’s commitment to right-size its huge landbank (about 7,500 acres with estimated RM128bn gross development value (GDV)) and its burdensome debt load. We estimate the land disposal could reduce its net gearing from 0.56x to 0.53x. To recap, the Group aims to lower it to 0.5x by end-FY23, which, among others, will be supported by sale of non-core assets such as land and investment properties (with estimated total value of RM5bn). The deal is expected to be concluded in 2QCY24. All told, we keep our earnings estimates for now pending the completion of the deal. Maintain Outperform and TP of RM0.95 pegged at c.60% discount to book value.

• Selling part of Glengowrie land for RM392m. The Glengowrie land, which measures about 805 acres as a whole, was purchased back in 2016 from Sime Darby Bhd for RM429m or about RM12.23psf. The latest deal transacted prices the land at about RM18psf. The freehold land, we understand, was earmarked for a township with estimated GDV of RM4.5bn. While earnings impact is minimal (at about RM31m only), we perceive the move as an important step in its de-gearing exercise which aims to reduce Group’s net debt from 0.56x to 0.5x by end-2023.

• Asset-light model. The disposal is in line with SP Setia’s strategy to improve its capital efficiency by offloading non-core assets. To recap, the Group still has other assets that could be disposed, which among others, include the Taman Pelangi Indah land (about 960 acres) that was initially to be sold to Scientex (for RM518m) but was aborted due to non-fulfilment of the conditions relating to the approval by the Economic Planning Unit (EPU). Current investment assets such as hotels, malls and schools worth about RM5bn could also be monetized, we believe, via outright disposals or sale of minority stakes. The Group, in our view, should have no problem to de-gear which will put it on stronger footing (with lower debt burden), and see earnings profile strengthen in the next 1-2 years.

Source: PublicInvest Research - 20 Jun 2023