The SP Setia-Sime Prop-EPF JV will be disposing the commercial components of the Battersea Power Station to PNB-EPF for c.RM8.33bn. The proposed disposal is expected to be completed by 1Q19. We are positive on the news as the JV will be able to use the proceeds to accelerate development of future phases. From our estimates, SP Setia is expected to recognize a PBT of c.RM393.6m in FY20, based on its 40% stake in the JV. We maintain our BUY recommendation with an unchanged TP of RM3.03 based on unchanged discount of 50% to RNAV of RM6.06.

NEWSBREAK

The SP Setia-Sime Property-EPF JV (40:40:20) announced its proposed disposal of the commercial components of the Battersea Power Station project (via selling subsidiaries of Battersea Phase 2 Holdco) to PNB-EPF (65:35). The sale to the latter is for a base consideration of GBP1.58bn (c.RM8.33bn) which comprises 2 components: (i) cost component of GBP1.39bn (c.RM7.35bn) and (ii) adjustment component of GBP187m (c.RM984m). The transaction is expected to be completed by 1Q19.

HLIB’s VIEW

Positive on the news. We are positive on the news as the JV will be able to use the proceeds to accelerate development of future phases. Note that this is within market expectations as the JV had entered a Head of Terms (HOT) with the respective parties for the disposal back in 18 Jan 2018. From our estimates, SP Setia is expected to recognize a PBT of c.RM393.6m in FY20, based on its 40% stake in the JV.

Breakdown of base consideration. The cost component will be paid in stages as per progress billing from 1Q19 to 4Q20, while the remaining adjustment component will be paid at the end of the 5th year after completion of the project. Note that the adjustment component represents the profit derived from this sale and will be subject to fulfilling a 5-year 5% yearly rental guarantee (GBP79.2m p.a.) of the base consideration made to PNB-EPF (i.e. 5% x GBP1.58bn). The JV will be able to obtain a better margin on this sale (via a higher adjustment component) if the project derives better rental rate (i.e. more than GBP79.2m) within the 5 years, vice versa.

Forecast. We tweak our FY20 earnings upwards slightly by 1% to RM720.2m as we update the sale proceeds (note that we have already imputed most of the contribution from Battersea Phase 2).

Maintain BUY, TP: RM3.03. We maintain our BUY recommendation with an unchanged TP based on discount of 50% to RNAV of RM6.06. We believe the slump in share price (YTD: -29%) has priced in the subdued earnings in FY18. The earnings trajectory should rebound with cost expected to normalize moving forward along with better progression for newer projects. At current trough valuations (67% discount to RNAV and 0.7x PB), it is attractive for investors to collect on the backdrop of better earnings trajectory and growth expectations in FY19.

Source: Hong Leong Investment Bank Research - 18 Dec 2018