News

• SP Setia has entered into a head of terms (HOT) with PNB and EPF to explore the potential sale on completion of the commercial assets currently being developed within Phase 2 of the Battersea Power Station. This is a non binding agreement with an exclusivity period until 30 April 2018.

• The commercial assets under Phase 2 of the redevelopment project include 633k sqft of offices, 446 sqft of retail and 100k sqft of events space and a boutique hotel.

Financial Impact

• The indicative disposal pricing of GBP1.61bn (c.RM8.8bn) will generate an outright gain and cash inflow as compared to substantial holding cost on the assets until it matures and generates recurring income.

Highlights

• We are neutral on the news as we believe the proposed disposal will provide a certainty of investment return to the company with cash inflow in the short term and also avoiding any potential cost overrun.

• SP Setia can then redeploy the working capital to focus on the development of remaining development phases 3–7 of the Battersea Power Station project.

• However, an early cash out before the assets mature and losing out on recurring income of commercial assets (470k sqft office space has been taken up by Apple Inc.) in the future are the downsides of this deal.

Forecasts

• Unchanged pending further details on the deal and finalized pricing.

Rating

BUY ↔

• We believe investor’s sentiment towards SP Setia will improve after the overhang issue of fund raising which is expected to complete in 1QFY18. The completion of RNAV accretive acquisition of I&P Group will potentially provide the earnings cushion in FY18 and drive Setia to become the largest pure property player in the market. Consistent dividend yield of circa. 5% is another positive point.

Valuation

• Maintain BUY with unchanged TP of RM4.00 based on unchanged 30% discount to RNAV of RM5.71 given the earnings accretive acquisition with I&P long-run synergy.

Source: Hong Leong Investment Bank Research - 19 Jan 2018