It was reported that SPSETIA is expecting delays, to 2021, for Phase 2 and 3a of the Battersea Power Station due to project complexities and Brexit. Management are still hopeful for part of Phase 2 completion by end FY20, with the bulk of Phase 2 and 3a to be completed in FY21, as expected. BUY with TP of RM2.45 based on SoP discount of 68% to FD SoP of RM7.75. Since most of the delays impact FY21E earnings, note that post adjustment, our TP implies a 14x FY21E FD PER

SPSETIA is expecting a more than a year’s delay for Battersea Power Station (BPS) Phase 2 and Phase 3a, targeting completion by 2021 instead of end-2020 due to project complexities and uncertainty surrounding Brexit. It was also reported that the Group expects marginal changes to take-up rate at Phase 3a which has declined to about 67% (from 70% previously), while maintaining Phase 2’s take-up rate of 90%. Recall that BPS is owned by EPF/SPSETIA/SIMEPROP on a 20%/40%/40% basis.

For Phase 2, risk of delays is less likely as there is just a ‘small portion’ left with a completion deadline of 1.5 years (by end FY20). As for Phase 3a, management did not provide the exact progress of completion but is estimated that it could be c.30%. For now, we take the view that the projects will be delivered based on our current assumptions and original deadlines.

Should there be delays, we caution a potential fall-through in take-up rates as buyers have the option to pull out. This is because in the UK, the buyer is obligated to go through with the purchase if the property is completed on time while failing to do so causes the buyer to forfeit their deposit. However, if the property completion is delayed beyond the contractual period, then upon completion, the buyer can opt to pull out and get their deposit back.

Although we keep our recognition time-line unchanged, we have lowered our take up rates assumptions for Phase 2 to 85% (from our initial expectation of 100% by end-FY19 vs. 90% currently), and lower Phase 3a to 45% (from our initial expectation of 75% by end-FY20 vs. 67% currently). All in, we expect a lower sales target of RM5.40-5.41b in FY19-20 (from RM5.65-5.71b previously). At current levels, FY19-20E dividend yields are decent at 3.5-5.0%.

Source: Rakuten Research - 24 May 2019