SP Setia (via its 50% JV) has entered into a land swaps with DBKL to build the QSPH project in exchange for 52.3 acres of leasehold lands alongside Jalan Loke Yew, Cheras. We are neutral on the deal as the proposed mixed development (GDV of RM11bn) on the exchanged land will only commence after FY22. The project’s NPV is estimated at RM316m or 1.2% of RNAV while the implied land price is fair. We leave our forecast unchanged in view of no immediate contribution. Maintain our BUY rating with unchanged RNAV-based TP (35% discount) of RM4.08.

NEWSBREAK

SP Setia (via its 50%-owned JV Retro Highland with Tradewinds Corporation) has entered into a privatisation agreement with DBKL to build the Quality Sustainable People Housing (QSPH) project which entails the construction of 3,971 residential units, 112 units of shops/stalls, a market and other public facilities to be developed in two phases and complete by 2028.

In return, the JV will be awarded with 52.3 acres of leasehold lands in Cheras on the agreed value of RM1.19bn comprising of construction costs for QSPH and cash consideration of RM15m. The land is proposed for a mixed development with an estimated GDV of RM11bn to be developed over 11 years.

Both QSPH and the proposed developments are expected to be funded via bank borrowings and/or internally generated funds.

HLIB’s VIEW

Neutral on the proposal. We are neutral on the proposal as it is not expected to have any near-term impact to Setia given the proposed mixed development is estimated to contribute after FY22. The potential upside to our TP is circa 1.2% (or RNAV of 5 sen per share) with the project’s NPV estimated at RM315.6m, assuming an EBIT margin of 20%. Net gearing is expected to have minimal impact with no initial cash outlay.

Implied land cost. The implied land price is circa RM522.3psf or 10.8% of the estimated GDV. It is comparable to the surrounding asking price of RM400-RM500psf. However, the effective land cost will be lower given the no initial cash outlay as the majority of land cost will only be incurred during the construction cost of QSPH.

Sizeable land in desirable location. The exchange lands are approximately 8km to Kuala Lumpur City Centre, 3km to Viva Mall and are located alongside Jalan Loke Yew, east of the Cheras LRT Station. Besides, the location is readily available with amenities, facilities and infrastructure such as linkages, schools, commercial centres, utilities supply and etc.

Forecast. We keep our forecast as we expect the first phase of the proposed mixed development to only start after FY22 (at the earliest) upon the completion of Phase 1 of QSPH, as part of the conditions to take possession of the exchange land.

Maintain BUY, TP: RM4.08. Our TP is based on 35% discount to RNAV of RM6.27. We believe the completion of RNAV accretive acquisition of I&P Group will provide the earnings cushion in FY18 and the synergistic to Setia as a whole in its bid to become the largest pure property player in the market. Consistent high dividend yield is another positive point.

Source: Hong Leong Investment Bank Research - 8 May 2018