Battersea Phase 2 sale seen to speed up S P Setia’s new phases

S P Setia Bhd (Dec 18, RM2.34)

Maintain buy with an unchanged target price (TP) of RM3.03: The S P Setia Bhd-Sime Darby Property Bhd-Employees Provident Fund (EPF) joint venture (JV) — with a 40%, 40% and 20% stake respectively — announced its proposed disposal of the Battersea Power Station project’s commercial components.

It was done via the sale of the subsidiaries of Battersea Phase 2 Holdco to the JV of Permodalan Nasional Bhd (PNB) and the EPF, with a 65% and 35% stake respectively. 

The sale to the latter is for a base consideration of £1.58 billion (about RM8.33 billion), comprising the cost component of £1.39 billion and the adjustment component of £187 million. The transaction is expected to be completed by the first quarter of 2019 (1Q19). We are positive on the news as the JV will be able to use the proceeds to accelerate the development of S P Setia’s future phases. 

Take note that this is within market expectations as the JV had entered a head of terms with the respective parties for the disposal on Jan 18, 2018. From our estimates, S P Setia is expected to recognise a profit before tax (PBT) of about RM393.6 million for the financial year 2020 (FY20), based on its 40% stake in the JV.

The cost component will be paid in different stages as per a progress billing from 1Q19 to 4Q20, while the remaining adjustment component will be paid at the end of the fifth year after the project is completed. Take note that the adjustment component represents the profit derived from this sale, and subject to fulfilling a five-year 5% yearly rental guarantee (£79.2 million per annum) of the base consideration made to the PNB-EPF — 5% x £1.58 billion. 

The JV will be able to obtain a better margin on this sale via a higher adjustment component, if the project derives a better rental rate — more than £79.2 million within the five years, and vice versa. We tweaked our FY20 earnings upwards slightly by 1% to RM720.2 million as we update the sale proceeds; take note that we had imputed most of the contribution from Battersea Phase 2.

We maintained our “buy” recommendation with an unchanged TP based on a 50% discount to revalued net asset value (RNAV) of RM6.06. We believe the slump in share price (year to date: -29%) has priced in the subdued earnings in FY18. The earnings trajectory should rebound with cost expected to normalise moving forward along with a better progression for newer projects. 

At the current trough valuations — 67% discount to RNAV and 0.7 times price-to-book ratio — it is attractive for investors to collect amid a better earnings trajectory in and growth expectations for FY19. — Hong Leong Investment Bank Research, Dec 18

This article first appeared in The Edge Financial Daily, on Dec 19, 2018.

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