Monday, September 26, 2011

SP Setia: Overweight: A Second Act In Melbourne

September 26, 2011
Price Target: RM4.12
Share price: RM3.08


News
# SP Setia entered into an agreement with Portbridge Pty Ltd to purchase 2.23 acres of vacant freehold land located at the intersection of 557-563 St. Kilda Road and 1-23 Moubray Street, Melbourne, Victoria, for AUD25.25m, or AUD260 psf (RM807 psf).

# The said land is located in the South Yarra suburb of Melbourne, approximately 4km south-east of the Melbourne CBD, and is located close to a number of amenities as it is located in a mature neighbourhood.

# Management intends to launch an AUD250m (~RM800m) residential project within 12-18 months.

Financial Impact
# The acquisition deadline is 30 June 2012; assuming launch takes place 18 months thereafter, no major impact to earnings is expected until post FY13.

# In the mean time, management's focus will continue to be on KL Eco City, Setia Alam / Eco Park, Setia Sky Residences and Fulton Lane in Melbourne.

# No impact to net gearing, even assuming 100% loan on land cost (remains unchanged at 0.2x).

Pros / Cons
#We are positive on the deal as we believe the price is fair (AUD2,796/m2), given that SP Setia paid AUD6,912/m2 for the Fulton Lane development.

# This deal allows them to capitalise on their success of Fulton Lane, and tap the booming Australian property market, as can be seen in the 58% rise of the Melbourne HPI over the last 5 years.

Risks
# Slowdown in sales; escalation in construction and raw material costs; delays in launches.

Forecasts
# No changes, due to lack of clarity on key details such as exact product mix or project margins.

Rating - Maintain HOLD
Positives
Now trading at 34% discount to RNAV; highly liquid proxy to property sector, strong product concepts and pipeline; consistent dividends.

Negatives
High level of foreign shareholding ~20%) and liquidity means there could be more downside in the near-term before the share price stabilises. Still trades at highest P/E multiple in the sector (17x FY11E P/E).

Valuation
# Despite >20% decline in share price during the current sell-down, we see more near-term volatility on share price given its relatively high foreign shareholding
amidst flight to the safety of US$. Hence, we are maintaining our HOLD rating on the stock for now.


Source: HLIB Research

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