SPSETIA has won a tender bid for 1,675 acres in Seberang Perai Utara, Pulau Pinang for RM620m. The eco-themed township GDV is RM9.6b which increases our FD RNAV by 2.6%. The implied land cost to GDV ratio of 6.5% is fair, if not attractive. Launch is likely in 2020 and is a long-term positive for the group. Until we have confirmation of 9M16 sales, we opt to maintain MARKET PERFORM and an unchanged TP of RM3.40.

Won tender bid for 1,675 acres freehold land in Seberang Prai Utara, Penang for RM620m (RM8.50psf). The land is located within the Butterworth-Sungai Petani Growth Corridor with access to the North-South Highway via the Bertam interchange and is 18km away from Butterworth and 32km from the Penang Bridge. We gather that the surrounding area is fairly established with existing townships, malls, a university campus, medical institute and a golf course. Due to the size of the land which requires comprehensive planning, expected launch is likely by 2020 onwards with a 15-20 years development period. Thus, no changes to FY16-17E earnings.

GDV of RM9.6b for the new eco-themed township, and this replenishment is a plus for the group as township products are still in demand and we view it as a long-term positive for the group. Land payment details are pending although we believe it would be favourable to the group if payment is staggered given the long development period. Nonetheless, we have factored in a lump-sum payment by FY17 which would increase FY17E net gearing from 0.08x to 0.15x, which is still very comfortable for the group; we will adjust our net gearing assumptions if payment is staggered over a longer period. The land cost to GDV ratio of 6.5% which is fair, if not attractive, as a lot of landbanks are transacted above 10% nowadays. Their GDV/acre ratio is reasonable, if not conservative, at RM5.7m/acre vs. other mainland developments which are going for RM5-8m/acre, and there is still room for long-term GDV appreciation given the size of the project.

Targeting RM3.50b sales for FY16E (lowered from RM4.0b during the recent result season) given uncertainties caused by Brexit and weak local property scene. We gather that 40%-50% of sales will be driven by to ’10-90’ scheme which has been well received in terms of take-up rates. Note that SPSETIA can recognize its local ’10-90’ sales on the typical stages of progress billings instead of ‘on completion’ basis. The iRCPS issuance of RM1.1b is expected to be completed by 4Q16 and given the bullet deliveries from Parque and Battersea, we expect net gearing of 0.27x by year-end.

Maintain MARKET PERFORM with TP of RM3.40. The project increases our FD RNAV by 2.6% to RM5.70. However, as the group has only achieved 7M16 sales of RM1.35b or 39% of its revised FY16E target of RM3.5b (ours: RM3.1b), there are still risks to sales targets and our assumptions. Nonetheless, given the recent sell-down on overall market weakness, current FY16-17E yields of 5.3%-4.5% will offer downside buffers. Thus, we opt to maintain our TP at RM3.40 with a wider FD RNAV discount of 40% (39% previously) which is in-line with mean levels. We may consider narrowing our RNAV discount if 9M16 sales achieves at least 75% of its FY16E sales target during the upcoming reporting season.

Risks include: (i) weaker/stronger than expected property sales, (ii) margin issues, (iii) changes in real estate policies, and (iv) changes in lending environment.

Source: Kenanga Research - 10 Nov 2016