THE BUZZ 
Malaysia  Building  Society  (MBSB)  announced  on  Bursa  Malaysia  that  its subsidiary, Ambang Hartamas SB (AHSB), has entered into a conditional sale and purchase  agreement  (SPA)  with  PJ  Sentral  Development  SB  in  relation  to  the proposed acquisition of strata office space on 27-30 floors in a planned 'Grade A' office building, to be known as Tower 3, for a total cash consideration of RM239m.


OUR TAKE 
Settling in a new home at PJ Sentral. Tower 3 will be a 'Grade A' building comprising 27  to  30  floors  of  office  space,  four  basement  car  park  levels  and  a  service  floor. Although the proposed acquisition will only involve the  floors comprising office space, it is estimated that these will provide a total net lettable area (NLA) of 281.5k sq ft. Tower 3  will  be  part  of  the  first  phase  of  the  PJ Sentral  Garden  City,  a  planned  new  central business district in Petaling Jaya's Section 52. As part of the Economic Transformation Programme, Tower 3 will be conferred Leadership in Energy and Environmental Design (LEED)  status,  Green  Building  Index  (GBI)  accreditation  and  be  Multimedia  Super Corridor  (MSC)-compliant,  as  well  as  comprise  a  flagship  banking  hall  for  MBSB.  The tower's development is estimated to last 33 months for expected completion by 4Q2016.

Purchase price no impact on MBSB's net gearing. The purchase, which will translate into approximately RM850 per sq ft based on the total estimated NLA, will be satisfied by bank  borrowings  (RM167.5m)  and  internally-generated  funds  (RM71.8m).  Based  on MBSB's 3Q12 financial position and taking into account the said transaction, the group's net  gearing  level  will  not  be  affected.  AHSB  will  pay  a  deposit  totaling  RM23.8m  to  PJ Sentral  within  two  weeks  from  the  SPA  date,  while  the  rest  will  be  paid  through installments  in  accordance  with  a  progress  certificate  confirming  the  completion  of  the building's stages  of  construction.  The  estimated  gross  development  value  of  Tower  3, excluding the land cost, is approximately RM180m.

A growing family coming under one roof. MBSB said the proposed acquisition is part of  its  expansion  plan  and  also  fulfils  the  group's need  to  relocate  its  headquarters  to accommodate  its  growing  staff  force  of  700  employees  and  expanding  business functions.  The  move  will  also  harmonize  MBSB's operating efficiencies,  in  tandem  with its plan to accommodate all or most of its subsidiaries  in one location. The building will also house a new signature branch, an electronic banking customer service and a large information technology data centre which will form part of MBSB's core banking system.
 
Maintain  BUY.  The  latest  transaction  is  not  expected  to  prompt  significant  changes  in our forecasts. We maintain our BUY call, with our FV unchanged at RM2.81, pegged to 2.4x PBV, assuming a 3% growth rate, COE of 11% and ROE of 23.1%.

An  EPF  initiative?  We  note  that  the  purchase  is  a  related-party  transaction  as  EPF  is  a  substantial  shareholder  in  both  PJ Sentral  (via  a  70%  shareholding  through  its  vehicle,  Nusa  Gapurna  Development  SB)  and  MBSB  (in  which  EPF  holds  a  64% stake).  Although  we  believe  that  buying  the  building is  purely  an  MBSB  initiative and not EPF's in  view  of  the  rationale  for  the move, we are not discounting the possibility that the purchase may have been transacted on terms favourable to MBSB. Given the  building's LEED  Gold  status,  GBI  and  MSC  accreditation,  the  development  cost  could  be  significant,  especially  taking  into account  the  uncertainty  in  obtaining  building  materials  that  meet  the  requirements  of  such  building  technology.  However, compared with other recent office transactions, we can conclude that the purchase consideration is fair to MBSB. Furthermore, having a building of its own will allow MBSB to extract savings from energy efficiency as well as command higher rental margins should it rent out some of the office space.

Source: OSK