CIMB Research positive on SP Setia purchase of remaining stake in Setia Federal Hill

KUALA LUMPUR: CIMB Equities Research is positive on SP Setia’s plan to purchase the remaining 50% stake in Setia Federal Hill which it does not own, for RM431.9mil.

The research house said on Friday upon completion of the proposed acquisition, Setia Federal Hill will become a unit of SP Setia. 

“With a 100% stake post deal, this could potentially lift our FY19-20F EPS by 2%-4%. Likewise, our RNAV will increase by 6% after the acquisition,” it said. 

CIMB Research maintained its EPS, Hold call and TP of RM3.40, still based on a 30% discount to RNAV, pending more details on the acquisition.

To recap, Setia Federal Hill is a joint venture company to undertake the development project on the two parcels of leasehold land (totaling c.52 acres) in Bangsar, Kuala Lumpur. The remaining 50% stake will be purchased from Mekar Gemilang.

It plans to build an integrated development project on the land, comprising residential and commercial components as well as a mall. The gross development value (GDV) is estimated to be RM20bn with a development period of 15 years.

The price tag of RM431.9m is at a premium of 10.9% vs. adjusted net asset value of Setia Federal Hill as at end-Dec 2017 at RM778.64m, given: (i) market value of the land of RM2.4bn or RM1,050 per sq ft, (ii) potential estimated GDV of c.RM20bn, and (iii) strategic location due to its close proximity to Kuala Lumpur City Centre. 

“The transaction price is fair, in our view, given that it is less than 10% of total GDV,” it said.  

The deal is expected to be funded via the cash proceeds from the issuance of Islamic Redeemable Convertible Preference Shares (RCPS-i A), which was completed in Dec 2016, and/or bank borrowings. 

“As at end-Dec 2017, SP Setia’s net gearing ratio was only 0.1x. Assuming the deal will be fully funded by debt, the group’s net gearing ratio will only increase to 0.15x vs. 0.1x previously, which is still at a manageable level,” it said.

“Given the strategic location in Bangsar (near KL Sentral), large land area of c.52 acres (planned for integrated development) and sizeable GDV of RM20bn (one of the highest among all projects), we expect the deal to contribute positively to the group’s future earnings in the medium- to longer-term. 

“We assume launches worth an average GDV of RM500m for Setia Federal Hill from 2018-2020 in our forecast, based on SP Setia’s 50% stake previously. With a 100% stake post deal, this would potentially lift our FY19-20F EPS by 2-4%. Likewise, our RNAV will increase by 6% after the acquisition. Maintain Hold. 

“While we view this acquisition positively, we believe it will take time to translate into bottomline. We expect SP Setia’s core net profit to be lower on-year in FY18F, due to the lower on-year contribution from joint ventures like Battersea and additional integration cost for I&P,” said CIMB Research.

Analyst Reports , Property