We recently met up with the management of Selangor Properties Bhd (SPB). Below are the key takeaways.

Aira Residence is Currently Slow-Moving

We toned down our FY17 sales assumptions for Aira Residences to 35% (previous 40%). We understand that the sales performance of Aira Residence (GDV: RM850mn) is slow. Booking/sales rates are largely unchanged at 50-60% level since our last meeting with management 6 month ago. Nevertheless, management is not overly concerned with the current performance given that sales of niche luxury developments typically accelerates once the building near completion. In terms of construction progress, the building superstructure works commenced in August 2017. The project is on track for completion and hand over to purchasers in 2020.

Bukit Permata Gombak is Scheduled for Launch Next Year

Subject to market conditions, management plans to launch the Bukit Permata project in Gombak in the first half of 2018. Featuring 36 units of semi D and 24 units of bungalow, the latest phase of Bukit Permata project is expected to yield a potential GDV of RM120mn. Targeting the mid-to-upper segment, indicative selling prices for the Semi D and Bungalow start from RM1.8mn and RM2.0mn respectively. Nevertheless, we do not rule out the possibility of further delays as market sentiments remain cautious. As such, we lower Bukit Permata’s FY18 sales assumptions to RM50mn from RM70mn previously.

Potential Upside to Wisma Damansara GDV

We are surprised to learn that the redevelopment of the 7.9 acres Wisma Damansara in Damansara Heights, would only take place in 2020 instead of 2019 guided previously. According to management, the emergence of a new land owner within the vicinity is changing the landscape of the area. It was reported a 19.1-acre of government land located at the corner of Jalan Duta and Jalan Semantan near Istana Negara has been sold for RM646mn (or RM774.90psf) in September 2017. The buyer is said to be Jakel Land. Slated for a mixed-use development, the land is expected to yield a potential GDV of RM5-6bn.

For comparison, Wisma Damansara is recognised in its balance sheet at a book value of RM215.6mn or around RM583.30 psf. This represents a steep 25% discount to the recent transacted price. Assuming a plot ratio of 6x and a potential GDV of RM6.0bn, the average selling price of the 19.1 acres land works out to around RM1,200psf. Meanwhile, SPB’s RM2.0bn GDV guidance for Wisma Damansara would only imply an average selling price of RM970psf, based on a same plot ratio of 6x. Given the potential GDV enhancement for Wisma Damansara but also the risk of fresh competition in the area, management noted that it will closely monitor Jakel’s plan for the 19.1 acres land. Management will make necessary amendments to Wisma Damansara’s development plan to better cater to market needs, considering the influx of high-end residential, office and retail supply from various high profile developments in the vicinity. These include Guocoland’s Damansara City (8.5 acres, RM2.5bn GDV), Pavilion Damansara Heights (15.8 acres, RM9.0bn GDV) and the latest Jakel Land (19.1 acres, RM5-6bn GDV).

Undervalued with Solid Balance Sheet

SPB is one of the few developers with net cash position. Out of its total assets as at 3QFY17, more than 30% of this value is made up of liquid assets such as cash and marketable securities. Combining the group’s investment properties which carry a market value of RM1.3bn and its liquid assets of about RM1.0bn, the current valuation prices the group’s undeveloped landbank for free. Note that SPB’s 15– acres freehold, vacant commercial land within the Damansara Town Centre could easily worth RM1.1bn if we benchmark it to Tan Sri Desmond Lim’s acquisition price of RM1,629 psf for the 6.34 acres land in Damansara Town Centre back in 2014. Besides, SPB also owns 57 acres and 151 acres of undeveloped land in Selayang and Ulu Langat respectively, which can be developed in the future.

Forecasts

In view of the changes in its launch schedule, we lower our sales and progress billings assumptions accordingly. Our FY17-19 sales forecasts are RM298mn/350mn/290mn (previous: RM340mn/370mn/430mn). Correspondingly, our FY17/18/19 normalised net profit forecasts are revised lower by 1%/7%/8% respectively.

Valuation

We arrive at a new target price of RM5.97, which is based on a 20% discount to our revised FY18 BPS. Our target 0.8x P/B multiple is consistent with our implied target P/B (0.6-1.2x P/BPS) for small and mid-cap developers under our coverage. We believe that the company is entering a brand new phase, drawing with it, greater investor recognition over time. We maintain our Buy recommendation on SPB.

Source: TA Research - 24 Oct 2017