S P Setia JV with EPF to develop Battersea

News

Entered into a contract for the proposed acquisition of Battersea Power Station site in London for GBP400m (RM1.97b), post-28 days of the due diligence period.

SPSETIA, Sime Darby (SIME) and KWASA Global (Jersey) Ltd (KWASAJ) has proposed to set up a JV Co on equity stakes of 40:40:20 based on an initial authorised share cap of GBP0.5m. KWASAJ is wholly owned by EPF.

Comments

Project GDV of GBP8b (RM39.4b). Accounting for equity stake, this will increase SPSETIA’s total GDV by c.30%. The JVCo has agreed on the initial project development cost of GBP200m (RM0.99b) in addition to the land cost. Including the deposit amount, 94% of the land payment must be made within 2 months time. The remaining (GBP25m) shall be paid on the second anniversary of the completion date of the land acquisition.

EPF’s involvement is not a surprise given the various media speculations and is definitely a positive boost given the massive funding requirements the potential project duration of >10 years. However, further details are still lacking. Details of project margins, initial size of first launch, etc. are still unavailable. The debt-equity funding structure has also not been finalised yet.

SPSETIA’s portion of land payment (details overleaf) and the 2 years’ development cost amounts to GBP240m (RM1.18b). Assuming the typical 80:20 debt-equity ratio, SPSETIA’s net gearing will increase to 0.64x from 2Q12’s 0.32x, which will be a record high level since 2007 and above our comfort level of 0.50x. Although its strong billings can pare down the debt quickly, we do note that there are other capital intensive projects in the pipeline (KL Eco City, MoH land, Qinzhou Industrial Park@China, etc.).

Outlook  Target launch for Battersea (GDV: RM40b) is April 2013 while the impact to our FD SoP RNAV will see a 10% increase to RM5.61. However, we have not factored these into our earnings or RNAV pending further details.

Forecast Until further details are revealed upon the deal completion in 3QCY12, we are maintaining our earnings and balance sheet assumptions.

Rating Maintain MARKET PERFORM

Although there are catalytic projects at hand, it appears SPSETIA is finding it tougher to command premium valuations without sufficient liquidity.

Valuation Maintaining TP of RM4.05 based on a 21%* discount to our FD SoP RNAV of RM5.11 (excl. Battersea).

Risks Sector risks and liquidity issue.

Source: Kenanga