SPSETIA’s 50% JCE, Retro Highland, entered into a Master Agreement with DBKL for the development of the QSPH in Cheras, KL. In return, the JCE will get the adjacent 77.8 ac leasehold land in Cheras for future development (GDV: RM16.3b) based on a total implied cost of RM809.1m. However, earnings impact will only be felt 5-6 years from now. Overall, neutral on the announcement. Upgrade to OUTPERFORM (TP: RM2.45) due to recent sell-down.

Land exchange deal with DBKL. Yesterday SPSETIA announced that its 50% JCE, Retro Highland (RH), has entered into a Master Agreement with Datuk Bandar Kuala Lumpur (DBKL) for the overall development and commissioning of the Quality Sustainable People Housing (QSPH) in Cheras, KL for a consideration of RM579.7m. There is also a minimum profit guarantee of RM229.42m. Note that upon completion of the mixed development project on the exchange land, any additional profit above the minimum profit guarantee of RM229.42m is based on 20% of the actual audited pretax profit of the project, whichever is higher. Positively, payment of the land is staggered over the development period. In exchange, RH will get 77.8 ac leasehold lands in Cheras to be developed in the future after the QSPH has been completed and delivered (refer overleaf for details and location map). Although the news was a bit of a surprise as we did not expect any land banking activities, we note that this has been in the pipeline since May 2018 (refer overleaf).

Potential project GDV of RM16.3b for the exchange land (77.8ac) over a 15-year development period. The land cost, being the development cost of the QSPH and the implied minimum profit guarantee, of RM809.1m (vs. land valuation of RM1.19b) implies a land cost-to-GDV ratio of 5%, which is very attractive considering that most transactions are done at >10% for such prime KL landbanks. Nonetheless, the price-tag also considers the time cost required to realize the value from this landbank. Based on a back-of-the envelope calculation, assuming the minimum profit guarantee RM229.42m is equal to the 20%, we derive a project pre-tax margin of 7%, which is thinner than their typical project margins. Nonetheless, the profit margin could be much higher depending on the project’s cost structure.

Given the construction time required to build the QSPH and relocating the existing residents on the exchange land, the earliest significant contribution from this project could be 5-6 years from now. As such, we are neutral on this news as earnings impact will only be 5-6 years from now while our FD SoP is increased by 0.8% to RM7.75. Additionally, there is no impact to FY19-20E net gearings as the project will only be completed in FY2021. Hence, no change to FY19-20 estimates.

Outlook. Management is targeting FY19E sales of RM5.65b, which includes land sales, backed by new launches worth RM6.8b. Besides aggressive inventory clearing effort, the group has also earmarked RM1.18b worth of non-core assets for disposal over FY19-20.

Upgrade to OUTPERFORM (from MP) with an unchanged** TP of RM2.45 based on SoP discount to 68% to a higher FD SoP of RM7.75 (from RM7.69). We had recently downgraded SPSETIA to MP on 28- Feb (last price: RM2.48) and since then, share price has corrected sharply by 9%. However, we believe an upgrade is warranted as we are comfortable with our applied discount, which is pegged closer to the -2.0SD levels given disappointments seen over FY18, including weak earnings delivery, softer than expected dividends, relatively high net gearing with FY19-20E ROEs remaining very low at 2.5-3.8%.

* Note our CNP is based on profit attributable to ordinary shareholders i.e. have deducted Perpetual Bonds and iRCPS (A & B) interest costs. Note that consensus’ estimates have defined their CNP as before iRCPS interest costs, resulting in much higher estimates. ** Although our FD SoP is slightly higher, it has no impact on our TP due to rounding practices.

Source: Kenanga Research - 08 Mar 2019