Land swap deal with DBKL for 52.25 ac leasehold land in Cheras, KL with Retro Highland, a 50:50 JV between SPSETIA and Tradewinds JV. The mixed development land has a GDV of RM11.03b. The implied land cost is fair while there is minimal impact to balance sheet. We are positive in the longer-term but expect no immediate-term earnings impact. Maintain OUTPERFORM with an unchanged TP of RM3.50.

Land swap deal with DBKL. SPSETIA’s 50% JV entity, Retro Highland, has entered into a privatisation agreement with DBKL for the development and commissioning of Quality Sustainable People Housing (QSPH) project, which entails the construction of 3,971 residential units, 112 units of shop/stalls, a market and other public facilities. In return, Retro Highland will be awarded 52.25 ac leasehold land in Cheras, KL for development which has an estimated GDV of RM11.03b which will be developed over 2 phases over 11 years. Note that the other 50% JV partner of Retro Highland is Tradewinds Corporation Bhd. (Refer overleaf for location map and details.)

Positive in the longer-term. The implied land cost of RM1.19b implies a land cost-to-GDV ratio of 11%, which is fair. Given that it is a land swap deal, on balance, the impact will not be overly significant. The JV co. will need to construct 1,192 new residential units on another plot of land located nearby for the relocation of the initial batch of residents occupying the current low-cost flats (under the government’s public housing scheme) on the said land to get the Phase 1 land (13.89 ac) – construction period is set at 4 years with an estimated cost of RM344.8m. Phase 2 land (38.36 ac) will only be obtained upon completion of the remaining relocations and has an expected construction cost of RM835.1m. We note that Phase 1 will have minimal balance sheet impact on SPSETIA since cost is staggered and the project will be accounted as an associate. Similarly, there is no immediate-term impact to earnings as Phase 1 can only kick-start after the first batch of relocations.

More JVs to come? This is the second JV project for the year, following its recent Cyberjaya JV with Setia Haruman (refer overleaf). Overall, we prefer these land banking model as it does not over tax balance sheet while locking in prime land banking opportunities. Thus, we expect more of such deals. FY18E sales target is still at RM5.0b for FY18, on the back of RM7.07b worth of launches.

Reiterate OUTPERFORM with an unchanged TP of RM3.50. Our FD SoP is increased by 6.00 sen to RM7.67 post accounting for this JV project. However, our TP of RM3.50 still implies an unchanged SoP discount of 54% @ -1.5SD levels. We believe that the valuation of I&P has yet to be reflected in SPSETIA’s current price as its share price has not been 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 - 08 May 2018