S P Setia - Replenishing landbank in Penang HOLD

- S P Setia has announced it has entered into an SPA to acquire about 21 acres of freehold hill-side land in Penang, near Batu Feringghi for RM185.6mil or RM200psf. 

- The land cost may appear pricey, but this is justified:- (1) It is a prime land, with a natural waterfall feature; (2) First grade title attached to the land, which does not carry a specific category of land use and thus, there is no requirement for the land to be converted for housing development.

- Not surprisingly, given the natural feature of the land, Setia is planning to develop an ecothemed project comprising superlink houses and condominiums with an estimated GDV of RM1.1bil. The development would likely be launched in 2HFY13. 

- While the impact to our NAV is small – due to the massive projects in the pipeline – we view the land acquisition positively, given that the group has only about 100 acres left in Penang. We believe there will be more deals to come towards replenishing its landbank there.

- Based on a plot ratio of 3x, an efficiency ratio of 70%, and construction cost of RM200psf, we estimate the development to have a breakeven point of RM380psf. 

- Pricing of the units would be higher than Setia Pearl Island products which are in the range of around RM300psf. 

- We estimate Setia would have to sell these units at about RM500psf-RM550psf to yield its standard margins of 25%-30% in Penang.

- We are not changing our estimates at this juncture as deal is yet to be completed. 

- Our HOLD recommendation on S P Setia is maintained with our fair value unchanged at RM3.95/share.

Source: AmeSecurities