S P Setia - MoH-BSA land deal swap agreement

News   SP Setia’s 50% associate company, Sentosa Jitra Sdn Bhd (SJ), has entered into a privatisation agreement with the Government of Malaysia and Syarikat Tanah dan Harta S/B to develop and construct a new 1NIH complex on 41.12ac land in Bandar Setia Alam (BSA) based on a contract sum of RM845m in exchange for the prized 52.37ac government land along Jln Bangsar (MoH land). Recall that the government will also be entitled to 20% of the MoH development profits (minimum profit guarantee of RM217.1m). 

Comments   No surprises as it follows from Jan-11 announcement when SJ entered into negotiation with the government for the MoH-BSA land swap deal, while more details were revealed. Deal expected to be concluded in 9 months upon meeting CPs. 

 However, management guides MoH Land GDV of RM8.0b, or less than our initial estimates of RM11b. So our FD SoP RNAV will be lowered by 4sen to RM5.42. Details of plot ratio and indicative ASP are not available currently. 

 Positively, the land deal enables ‘progressive’ payments for the MoH land and two layers of profits (land sale gains and development profits). We estimate that the entire deal can reap RM501m net profit for SPSETIA over the lifetime of the project (including 50% entitlement of BSA land sale gain to SJ), which is 1.2x more than developing BSA normally (refer overleaf for details). 

Outlook  MoH project launch will unlikely happen in the next 18 months. Furthermore, MoH project can only be developed gradually until those workings on the MoH land are relocated to the completed 1NIH complex, BSA. 

 The group has up till Apr-13 to complete their 15% placement. 

Forecast  No changes to FY12-13E earnings as we maintain our sales targets of RM3.8b-RM4.0b. We will only impute for BSA land sale gains once the deal is final. Note that our RNAV and per share estimates have fully reflected the maximum 15% placement scenario.

 

Rating   Maintain MARKET PERFORM

 Although there are catalytic projects at hand, it appears SPSETIA liquidity issues are affecting its share price negatively. However, downside risk is limited at the 6-year trough of 1.4x FY13E PBV (-1.5SD).

Valuation   Lower TP to RM3.30 (from RM3.80 previously) based on wider discount of 39% (30% previously) on our FD SoP RNAV of RM3.42. The wider discount reflects the potential difficulty of completing its 15% placement; share price has corrected sharply recently making it tough to get investors to participate, particularly with an immediate term EPS dilutions from the placement. The placement is required to kick-start catalytic projects like Battersea, so delays in the placement will affect project timelines.

 

Risks  Sector risks and liquidity issues

Source: Kenanga