S P Setia - MARKET PERFORM - 08 June 2012

News  SP Setia and Sime Darby (OP; TP: RM10.80) have issued a joint press release to announce that their joint bid had been identified as the preferred bidder for Battersea Power Station (regeneration project) in London, UK by the Joint Adminstrators and Receivers (JAR), Alan Bloom and Alan Hudson of Ernst & Young LLP, which are acting on behalf of the owners of the asset. Both SP Setia and Sime Darby have entered into an Exclusivity Agreement with JAR to acquire the site for GBP400m (RM2.0b) and have up to 28 days to conduct further due diligence and investigations. The Advisors of SP Setia and Sime Darby is RREEF, Deutsche Bank’s real estate arm. 

 

Comments  We view this as a momentous victory for SP Setia as its joint bid managed to outbid the other two shortlisted bidders, Russian billionaire/Chelsea Football Club owner, Roman Abramovich, and veteran British developer, Godfrey Bradman. We are medium to long term positive on the bid as SP Setia needs to venture into the global space for its next phase of earnings growth. Further, the London property market is looking extremely attractive as capital values are at trough levels.

Further details (e.g. the JV structure between SP Setia and Sime Darby, development details, etc.) will only be provided after the 28 days.  Management declined to comment on details, but Business Times reported it as RM7.0b while Starbiz reported GBP8.0b (RM40b) in their interview with Tan Sri Liew. Also, Starbiz revealed other information (see below). It will be futile to speculate on the financing requirements until these details unfold. As for EPF’s involvement, there is no clarity as yet (refer overleaf). 

 

Outlook The group is still in the midst of complying with its public shareholding spread post GO. We understand that the combined shareholdings of PNB and Tan Sri Liew are still c. 79%. As such, in the immediate term, liquidity and free float issues may prevent the share price from maintaining a sustainable uptrend (note the lack of share price movements after announcement of G2G park venture in China.)

 

Forecast There is no change to our FY12-13E earnings of RM359m-RM424m based on our assumed sales of RM3.8b-RM4.0b. Unbilled sales of RM4.5b provide 1.5 years of visibility.

Rating   Maintain MARKET PERFORM

In line with our Neutral sector call. Although there are catalytic projects at hand, it appears that SP Setia is finding it tougher to command premium valuations without sufficient liquidity.

Valuation  The TP of RM3.90 is based on 24%* discount to our FD SoP RNAV of RM5.11.

Risks  Sector risks and liquidity issues.

Source: Kenanga