News

• SP Setia has proposed to acquire the remaining 50% equity in Setia Federal Hill (a 50%-owned JV with Mekar Gemilang) for RM431.9m, which in turn owns two parcels of leasehold land in Bangsar, KL with the total size of 51.6 acres (~2.3m sqft).

• The land will be developed into an integrated development project which comprises residential and commercial components along with a mall with an expected GDV of RM20.2bn over 15 years.

• The acquisition will be funded via the cash proceeds from RCPS-i A and/or bank borrowings and is expected to be completed by 3Q18.

Financial Impact

• The land price works out to be about RM863.8m or RM384 psf. Assuming a plot ratio of 8x, the acquisition price translates into RM48 psf of GFA.

• The land cost constitutes only about 4.3% of the revised estimated effective GDV of RM20.2bn. Previously, the estimated GDV for this land was RM14.4bn.

• The estimated incremental effective GDV of RM13.0bn (RM20.2bn – RM 7.2bn) is expected to increase Setia’s remaining GDV by 10.1% to RM141.2bn.

• Assuming an EBIT margin of 22%, the NPV is estimated at RM925.9m or 8 sen per share (2.0% of our TP).

Highlights

• We are positive on the acquisition as the proposed development is RNAV accretive and the implied land cost relative to the revised GDV is competitive only at 4.3%.

• The purchase price at a premium of 10.9% to the book value of Setia Federal Hill is justified given the market value of the land could fetch as high as RM1k psf.

• Besides, the proximity to KL Sentral with readily available amenities, facilities and infrastructure is expected to support and enhance the properties’s value on the land.

• Notably, the RM631m unutilised balance from the proceeds via rights issue of RCPS-i A as at 4Q17 will be more than sufficient in funding the acquisition.

Forecasts

• We factor in the GDV for this acquisition and take the opportunity to include our revised forecast for the enlarged group (inclusive of I&P contribution), resulting higher FY18/FY19 earnings by 7.1% and 6.7%, respectively.

Rating

BUY ↔

• We believe the completion of RNAV accretive acquisition of I&P Group will provide the earnings cushion in FY18 and the synergies to Setia as a whole in its bid to become the largest pure property player in the market. Consistent dividend yield of circa 4% is another positive point.

Valuation

• Maintain BUY with higher TP of RM4.08 (from RM4.00) based on 35% discount to RNAV of RM6.27 after factoring the acquisition and the inclusion of I&P group.

Source: Hong Leong Investment Bank Research - 9 Mar 2018