Limited downside for S P Setia in case of Brexit, says CIMB IB

KUALA LUMPUR (June 17): CIMB Investment Bank Bhd (CIMB IB) is projecting a limited downside for S P Setia Bhd if the UK votes to leave the European Union (EU).

For now, the research house has maintained its "hold" call on the property developer, with an unchanged target price of RM3.05, pending the referendum's result next Thursday (June 23).

Even though S P Setia's 40%-owned Battersea Power Station development in London makes up 22% of its remaining gross development value (GDV), CIMB IB has imputed a lower pound sterling in its earnings estimate, said its analyst Saw Xiao Jun in a note today.

"We have assumed RM5.50 to £1 in our earnings forecast and every 10% decline in pound sterling could cut our financial year ending Dec 31, 2016 (FY16) and FY17's earnings per share (EPS) by 1% and 3%, (respectively)," he explained.

Battersea Power Station's development accounts for 8% to 27% of CIMB IB's FY16 and FY17 EPS forecasts, respectively, for S P Setia.

The potential of a "Brexit", a portmanteau of a "British exit" from the EU, caused the pound sterling to weaken against many currencies recently.

At 11:06am, the ringgit traded at 5.8426 to a pound sterling. In comparison, the ringgit traded at around 6.0 to a pound at the end of last month.

Citing real estate service provider Savills Plc, Saw said a vote to leave the EU could affect the transaction volumes of the London property market, as the short-term uncertainty of the UK's economy looms.

But the medium-term prospects, said Savills, are somewhat unimportant. The real estate's appeal fundamentally hinges on the assets themselves, instead of whether it is located within the EU or not.

Saw, however, sees the potential for a weaker pound sterling as a silver lining to London's prime residential properties. According to CIMB IB's checks, the demand for this class of properties in London was mainly driven by foreign investors, so "a weak pound sterling had previously been a positive catalyst for this source of demand".

"Regardless of the outcome of the referendum, we believe London properties will continue to appeal to foreign investors in the long run, thanks to the city's status as a global financial centre, the established private property rights in the UK and the status of English as the lingua franca of the world.

"While Brexit will cast into question whether the remaining £6 billion (about RM35 billion) GDV of Battersea can be realised, the risk of weakening demand for London property is mitigated by undersupply of housing in the city," he said.

Located in the Nine Elms regeneration area in London, the Battersea Power Station is developed by a consortium consisting of S P Setia, Sime Darby and the Employees Provident Fund (EPF). The two public-listed companies have a 40% stake each, with the pension fund owning the remaining 20%.

Saw said the Battersea Power Station development is divided into seven phases, which have a combined GDV of £8.7 billion. The consortium has launched three of the seven phases and achieved a combined take-up rate of 85% as at December 2015.

"The subsequent phases will be completed by 2019 at the earliest. We think the completion risk for these phases is small, as 70% of units launched have already been sold. High take-up rates minimise the construction financing risk since the proceeds from locked-in sales should cover most, if not all, of the construction costs for these phases," he added.

As at 10:49am, S P Setia shares inched down by four sen or 1.28% to RM3.09 apiece, valuing the company at RM8.23 billion. The counter had a small trading volume of 8,100. — theedgemarkets.com

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