SP Setia minimises capital commitment with tie-up


BY JAGDEV SINGH SIDHU

SP Setia Bhd's decision to team up with two solid institutions to develop part of its huge land bank in Bandar Setia Alam, Shah Alam, is a shrewd move by the company to minimise its capital commitment in the project. 

Details of SP Setia's joint venture with the Employees Provident Fund (EPF) and Great Eastern Life Assurance (M) Bhd announced yesterday gave a clearer picture on the company's game plan for the project, and indicated that it may end up with a lot of land in Bandar Setia Alam for virtually no cost of all. 

A firm believer that shareholders should not be afraid to dilute their equity and take on institutional investors in order to prosper, SP Setia's group managing director Datuk Seri Liew Kee Sin says the deal with the EPF and Great Eastern – both of which are shareholders of SP Setia – is a coup for the group and opens a new avenue for it to grow its business. 

“The traditional way is to borrow money to build a project. Now we have institutional investors coming in directly through private equity. This shows confidence in us,” he told Starbiz in an interview yesterday. 

Liew estimates that the Eco-Parks project to be developed by the SP Setia-EPF-Great Eastern joint-venture company Bandar Eco-Setia Sdn Bhd (BES) would be a highly profitable undertaking based on the gross development value of RM2.3bil for the decade-long project, but he has no regrets about parting with a substantial part of a potentially huge windfall for SP Setia. 

“Cashflow management is important to us. We now have the cash to look for further opportunities should they arise,” he said. 

The deal with the EPF and Great Eastern reduces SP Setia's risk in the massive Bandar Setia Alam project (of which Eco-Parks is a part) and, apart from getting a management fee for running the joint-venture company, SP Setia would receive about RM169mil cash in the deal. 

Liew said the money received would be used on other parcels of the Bandar Setia Alam project. He also said that SP Setia would be looking at other spinoffs with Great Eastern, like innovative packages for the SP Setia group's customers. 

The joint venture with the EPF and Great Eastern also vindicated SP Setia's decision to buy the land. SP Setia had surprised the market in April 2002 when it revealed that it was paying about RM600mil, or RM3.49 psf, to acquire 3,900 acres of land from See Hoy Chan Plantations Sdn Bhd. Indeed, the news was initially received with some horror by many investors who felt that the company had bitten off more than it could chew. 

But 18 months later, the land has been sold for RM8 psf, a slight discount to the RM8.50 the land was valued at without infrastructure works, but a massive 129%, or RM4.51 psf, higher than what it was bought for. 

And SP Setia is set to reap another bonus from the sale of 1,000 acres earmarked for disposal, half of that by the end of the year. 

“We are at an advanced stage of negotiations,” Liew said. 

The price of RM8 psf at which the land was sold to BES could be used as a reference for the price the company may fetch from the sale of the 1,000 acres, but Liew said the selling price to BES did not involve too much negotiating since SP Setia would retain 50% of the project. In other words, the selling price could be higher. 

While SP Setia has reason to smile, the EPF and Great Eastern have not been taken for a ride either. 

EPF chief executive officer Datuk Azlan Zainol had told Liew in a chance meeting that the fund was searching for ways to get better returns without risking the people's money. Liew, who had all along wanted to build the high-end component of Bandar Setia Alam on a joint venture basis, immediately got his team working on a proposal to the EPF. 

After getting a favourable response from the EPF, SP Setia also took its proposal to Great Eastern. 

In the end, Liew said, both the EPF and Great Eastern showed tremendous interest in the Eco-Parks project – and for good reason. 

Imputing a pre-tax profit margin of between 20% and 30% – the profit band SP Setia has been making over the past few years – on the gross development value of RM2.3bil, the total profit for the joint-venture partners could range from RM460mil to RM690mil. 

The annual gross yield that the EPF and Great Eastern would make on a 20% profit margin for the duration of the project would be 18%, and that yield would go up to nearly 28% if the profit margin is 30%. 

Even though the preference shares to be issued under the deal would be repaid within seven years, the join venture partners would still split whatever profit BES would earn after the redemption of the preference shares. 

The risk to the EPF and Great Eastern in getting involved in property development, in an area where there would be an enormous supply of houses, should not be discounted, but Liew said they were banking on SP Setia's track record as a seller of properties, including high-end residences.  

 Stock Watch On SPSETIA

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