Proposed acquisition to buy the remaining 50% stake in Setia Federal Hill (GDV RM20.2b) for a total cash consideration of RM431.9m. We opine that the price tag is attractive while net gearing will only inch up to 0.28x. Earnings contributions are likelier post FY19. A surprise and we are medium-to-longer term positive on the project. Reiterate OUTPERFORM with an unchanged TP of RM4.10.

Buying the remaining 50% stake in Setia Federal Hill for a total cash consideration of RM431.9m (RM385psf), at a 10.9% premium to the adjusted NAV of the project. The proposed acquisition is expected to be concluded by 3Q18. Post this acquisition, SPSETIA will own 100% of the project. To recap, the land is located on the Ministry of Health land along Jalan Bangsar (51.57 ac) in which SPSETIA entered a land deal swap for the initial 50% stake back in 2011 (refer overleaf).

A higher GDV at an attractive price tag. Setia Federal Hill’s new estimated GDV of RM20.2b is higher than what was quoted in SPSETIA’s latest list of remaining GDV (previously RM14.3b). It has a 15-year development period. The price-tag of the remaining 50% stake in Setia Federal Hill is attractive considering that the market value of the land is RM1,050psf and the implied land cost-to-GDV ratio of 4% is rare nowadays. The project will be funded by the proceeds from the iRCPS-A which was completed back in Dec 2016; expect FY18 net gearing to increase from 0.24x to 0.28x, which is still at healthy level.

A surprise, but medium-to-longer term positive. We were surprised by the acquisition, considering that the group had only recently completed its acquisition of I&P and did not expect any sizeable acquisitions to happen so soon; but we think it does make sense for SPSETIA since they already owns 50% of the project and has the balance sheet headroom. Overall, we are medium-to-longer term positive on the acquisition given the attractive price tag to own 100% of a rare piece of prime land in Bangsar though also not expecting any near-term earnings impact. We expect the project to be launched from FY20 onwards. Thus, we maintain our earnings estimates.

Reiterate OUTPERFORM with an unchanged TP of RM4.10. Our FD SoP is increased by 4% to RM7.60 post accounting for the additional 50% stake and a higher GDV for Setia Federal Hill. However, we opt to maintain our TP of RM4.10 which implies a wider SoP discount of 46% @ -0.5SD levels (from 44%) as we do not expect near-term earnings impact. We believe that the valuation of I&P has yet to be reflected in SPSETIA’s current price as share price has not re-rated much since the announcement of the I&P acquisition. We also hope the recent placement will help alleviate the tight trading liquidity. However, in light of investors’ aversion towards property stocks, investors may need to take a longer-term view on the stock for value to be reflected in its share price.

Risks include: (i) weaker property sales, (ii) margin fluctuations, (iii) changes in real estate policies and lending environment, and (iv) timing of overseas/local billings.

Source: Kenanga Research - 09 Mar 2018