S P Setia replenishes landbank in Iskandar Malaysia
S P Setia Bhd
(Sept 13, RM4.43)
Downgrade to hold at RM4.24 with target price of RM4.46: S P Setia announced last Thursday the acquisition of a 259.1-acre freehold development tract adjacent to its Setia Indah township in Iskandar Malaysia for RM169.3 million or RM15 psf. It is located to the immediate north of and adjacent to the Group’s matured Setia Indah Johor township. Other established projects in the vicinity include Taman Mount Austin and Taman Daya. Among others, the proposed acquisition is subject to the procurement of planning approval and revised layout approvals from Majlis Bandaraya Johor Baru and land authorities for the development of the land as a mixed development without any condition to construct low-cost housing.
On a psf basis, this acquisition is by far the most expensive by S P Setia in Johor. Land cost of its existing four projects in Johor — Setia Indah, Bukit Indah, Setia Tropika and Setia Eco Gardens — ranges from RM3.34 to RM7.05 psf as compared to RM15 psf for this acquisition. Having said that, based on management’s estimated gross development value (GDV) of RM1.5 billion, the new project yields a GDV per acre of RM5.8 million which is well above the RM2 million to RM4 million range for S P Setia’s existing projects in Johor. This implies management may be launching a combination of high-end and/or highrise properties. Looking at land cost as a proportion of GDV, the acquisition price seems reasonable as it makes up only 11% of GDV which is in line with existing projects in Johor.
The project which will replenish the company’s diminishing landbank at Setia Indah is expected to be launched by end-2011 (FY2012) and spans a development period of approximately eight years. Assuming a pretax profit of 20%, the project will accrete 11 sen to realised net asset value of RM4.32.
No changes to our earnings estimates are necessary as earnings contribution from this new project will only be meaningful from FY2013. We downgrade S P Setia from “buy” to “hold” as we believe it is currently fairly valued. Our target price of RM4.46 remains unchanged. It is based on upper-end PER valuation of 20 times on CY2011 earnings. While earnings visibility in the near term is underpinned by strong sales of RM1.8 billion achieved during the first nine months of FY2010, there is heightened risk of a slowdown in sales going forward due to potential imposition of mortgage lending restrictions by Bank Negara Malaysia. — ECM Libra Investment Research, Sept 13
This article appeared in The Edge Financial Daily, September 14 2010.
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