Analysts mostly positive on S P Setia-Mah Sing Semenyih land deal

• For S P Setia, the developer expects to free up RM278 million of cash and a gain on disposal of RM31 million.

KUALA LUMPUR (June 20): The deal announced by developer S P Setia Bhd on Monday (June 19) pertaining to the divestment of 500 acres of freehold land in Semenyih, Selangor to peer Mah Sing Group Bhd for RM392.04 million, has been viewed positively by analysts in general.

The land has an estimated gross development value (GDV) of RM3.3 billion, and will be developed as an integrated township to be named Glengowrie Estate, Mah Sing's largest township in the Klang Valley.

According to preliminary plans, Glengowrie Estate will be developed with two-storey landed homes, amenities and commercial lots. The residential homes will be priced from RM446,800 indicatively.

The proposed development is expected to commence by the third quarter of 2024 (3Q2024), and developed over eight- to 10 years. Registration of interest for the project, which is aimed at potential buyers living in Semenyih, Kajang, Seri Kembangan, Bangi and Seremban, is expected to start in 2024.

'A sweet exchange'

Research house UBS said in a note on Tuesday (June 20) that the land deal is a beneficial arrangement for both parties, as S P Setia’s plan to monetise assets is paired with Mah Sing’s balance sheet strength and affordable brand positioning that would drive earnings accretion.

For S P Setia, the developer expects to free up RM278 million of cash and a gain on disposal of RM31 million. The deal is targeted to complete in 2Q2024. This means that earnings will continue to be dragged by higher interest costs in the financial year ending Dec 31, 2023 (FY2023), with meaningful progress in FY2024. The research house thinks S P Setia’s net gearing (excluding redeemable convertible preference shares) could hit 0.4 times by FY2024 (1QFY2023: 0.56 times).

As for Mah Sing, this is its third land bank deal in 2023 that is affordability-focused and deemed to be earnings-accretive. The deal breaks down to RM18 psf, which UBS thinks is an attractive land rate. It also believes units in the project can likely be sold faster than the initial time frame of eight- to 10 years, which should ease concerns over the holding cost of the land on the developer’s balance sheet.

Mah Sing also expects its net gearing to be largely stable. With the deal expected to close in 2024, it will be receiving free cash flow of RM400 million/RM541 million across the financial year ending Dec 31, 2023 (FY2023)/FY2024. UBS does not discount the chances of more to come.

UBS has a "buy" call on Mah Sing with a target price (TP) of 80 sen, and a "sell " call on S P Setia with a TP of 55 sen.

S P Setia still an 'outperform' for PublicInvest Research

In another note on Tuesday, PublicInvest Research maintained its earnings estimates for S P Setia, pending completion of the land deal, while maintaining its "outperform" call and TP of 95 sen, which is pegged at an about 60% discount to book value.

The sale, said PublicInvest, shows S P Setia’s commitment to right-size its huge land bank of about 7,500 acres, with an estimated GDV of RM128 billion, as well as its burdensome debt load. The research house believes that the land disposal could reduce the developer’s net gearing from 0.56 times to 0.53 times. S P Setia further aims to lower it to 0.5 times by end-FY2023, which will be supported by the sale of non-core assets such as land and investment properties, with an estimated total value of RM5 billion.

Meanwhile, Hong Leong Investment Bank (HLIB) Research in note on Tuesday maintained its "hold" rating of S P Setia, with a TP of 53 sen, based on an 89% discount to its estimated revalued net asset value (RNAV) of RM4.84.

Even though the research house is neutral on the land sale, it expects the deal to lower the group’s net gearing to 76.8%, from 79.8% as of March 31, 2023. The expected gain on disposal of RM31 million is quite low, in HLIB’s view, at only 7.9% of the transacted price, compared to the developer’s gross profit margin of 23.9% in FY2022.

Land acquisition seen as positive for Mah Sing

HLIB, however, is positive on the land acquisition for Mah Sing, given: i) the attractive acquisition price, with a land cost-to-GDV of 11.9%; ii) time and cost savings as some of the infrastructure work was done, and some infrastructure costs were already paid; and iii) swift time-to-market, with the launch targeted for the second half of 2024.

The research house expects the group’s net gearing to increase to 32.4% from 20.1% as at March 31, 2023, while its remaining GDV will increase to RM24.6 billion from RM20.82 billion as at March 31, 2023.

HLIB made no changes to its forecasts, maintaining its "buy" call on Mah Sing with an unchanged TP of 86 sen, based on sum-of-parts valuation.

Higher TP for Mah Sing

MIDF Research too, in a note on Tuesday, kept its "buy" call on Mah Sing, and revised up its TP to 78 sen from 75 sen, based on an unchanged 65% discount to RNAV. It thinks the active land acquisition by Mah Sing would support its new property sales outlook and earnings visibility in the near term. In addition, the estimated dividend yield is also attractive at 5.7%.

As Mah Sing intends to fund the land acquisition through a combination of internally generated funds and bank borrowings, MIDF expects its net gearing to increase to 0.31 times, from 0.2 times in 1QFY2023. The research house sees limited earnings impact in the near term, as the project is expected to launch only in 2024. Thus, MIDF made no changes to its earnings forecasts.

At the time of writing on Tuesday, Mah Sing was 1.5 sen or 2.5% higher at 61.5 sen, giving it a market capitalisation of RM1.49 billion. S P Setia, on the other hand, was unchanged at 52 sen, with a market value of RM2.12 billion.