SPSETIA is acquiring its 5th landbank in Melbourne, Australia (Telstra land) for AUD101m with a project GDV of AUD640m and the land cost appears fair. Post acquisitions, FY16E net gearing will remain healthy (0.28x). We are positive on the acquisition and expect more landbanking in Australia. We raise our TP to RM3.13 on unchanged 45% discount but higher FD RNAV of RM5.70. Maintain MARKET PERFORM as share's liquidity remains an issue.

5th acquisition in Australia. The group is acquiring a 4,140 square metres (1.0 ac) land at the upper east-end of Melbourne’s CBD (at the corner of La Trobe Street and Exhibition Street) for AUD101m (AUD2,266psf). The purchase was through a highly competitive bidding exercise from Australia’s telco, Telstra, and is said to be the largest east-end CBD site in Melbourne to be sold over the last 10 years (refer overleaf). Acquisitions should be completed by 2Q17.

Project GDV of AUD640m (c. RM1.9b). Finalized detailed planning is in the works and the group plans for a prime Grade A office space, luxury apartment towers (up to 800 units) and a multi-level retail podium. Target launch is in 2H2017 and we expect rapid take-up rates as seen in recent launches in Australia by other developers. Land cost also appears fair at 16% of GDV, which implies close to 20% pre-tax margins. This project increases the group’s effective remaining GDV by 2.7% to RM72.6b.

Net gearing remains healthy. Over the last 6 months, the group has acquired three parcels of land in Melbourne, including this one. Total land cost amounted to AUD118m (c. RM350m) while combined GDV is at AUD712m (RM2.12b) (refer overleaf). However, their FY16E net gearing only increases to 0.28x from 0.23x due to their sizeable balance sheet which is still at very healthy levels. Also, recall that the group has collected its billings from Fulton Lane, which will go to fund these acquisitions and working capital requirements.

Not surprised, and we like the strategy. The group has always intended to expand their footprint in Australia. Now, the group is deploying a twoprong strategy in Australia where they are looking for: (i) more sizeable projects (e.g. Fulton Lane size) of >RM1b GDV in value, and (ii) quick turnaround projects of between GDV RM100-200m size, like the Carnegie and Chapel Street projects. The sizeable ones are for growth but also require longer gestation, while such project size is tougher to source and requires more planning efforts, in addition to being cash-flow intensive as bulk of billings is on completion. So the smaller ones are quick turnaround ones, i.e. delivery in less than two years, as these projects are acquired with Planning Approvals and are immediately ready for sale shortly after acquisitions. We gather that the quick-turnaround ones will like make up half the value of the more sizeable projects. Thus, we can expect more Australian land banking news.

Raise TP to RM3.13 but maintain MARKET PERFORM. There are no changes to earnings as these projects will be part of our overseas launch targets estimate for FY16-17E. Factoring in for these three acquisitions, our FD RNAV is increased by 2% to RM5.70. However, pending their upcoming 1Q16 sales disclosure, we opt to maintain our FD RNAV discount at 45% (peers: 53%), which implies a higher TP of RM3.13 (from RM3.08) or a total return of 3%. While we are glad that the current management team is permanent and addressing concerns of leadership and company direction, the issue of share's liquidity still needs to be resolved while we also believe the current challenging sector dynamics may keep investors at bay from such illiquid counters. 

Source: Kenanga Research - 3 May 2016