SP Setia (via its 50% JV) has entered into additional land swaps with DBKL to build the QSPH project in exchange for 25.6 acres of leasehold land in Cheras. We are neutral on the deal as the proposed mixed development (GDV 16.3bn) on the total exchanged land will only commence after FY23 (at the earliest). We leave our forecast unchanged in view of no immediate contribution. Maintain BUY with unchanged TP of RM3.03.

NEWSBREAK

Recall that in 8 May 2018, SP Setia entered into a privatisation agreement with DBKL to build the QSPH project in exchange for 52.3 acres on the agreed value of RM1.19bn comprising of construction cost and cash consideration.

SP Setia (via its 50%-owned JV with Tradewinds Corporation) has entered into a several agreements with DBKL to build an additional 1,679 residential units of the Quality Sustainable People Housing (QSPH) project which entails the construction of 5,650 (from the initial 3,971) residential units, 112 units of shops/stalls, a market and other public facilities to be developed in four phases and targeted to complete by 2028.

In return, the JV will be awarded with an additional 25.6 acres of leasehold lands in Cheras on the agreed value of RM579.7m comprising of construction costs for QSPH and cash consideration of RM36m.

All in all, total land awarded to the JV from the QSPH project amounts to 77.8 acres (from 52.3) on the agreed value of RM1.77bn (from RM1.19bn). The land is proposed for a mixed development with an estimated GDV of RM16.3bn (from RM11bn) to be developed over 15 years.

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 will likely begin after FY23, at earliest. The potential upside to our TP is circa 1.5% (or RNAV of 5 sen per share) with the project’s NPV estimated at RM376m, assuming an EBIT margin of 20%. Net gearing is expected to have minimal impact with no initial cash outlay.

Minimum profit guarantee (MGP). The proposed development will be subjected to a MGP of RM229.4m, with an additional 20% of PBT generated from development (the latter will not be charged if actual PBT is lower than the MGP).

Implied land cost. The implied land price is circa RM521.8psf or 11.3% of the estimated GDV. The price is similar to that of the previous land swap (52.3 acres) of RM522.3psf and is comparable to the surrounding asking price of RM400-RM500psf.

Forecast. We keep our forecast unchanged as we expect the proposed mixed development to only commence after FY23 (at earliest). Maintain BUY rating with an unchanged TP of RM3.03, based on a discount of 50% to RNAV of RM6.06. Earnings trajectory is expected to improve moving forward along with better progression for newer projects. At current valuations (63% discount to RNAV and 0.8x 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 - 8 Mar 2019