Penang land tender win a ‘long-term positive’ for S P Setia

S P Setia Bhd (Nov 10, RM3.22)

Maintain market perform call with an unchanged target price of RM3.40: S P Setia Bhd has won a tender bid for 1,675 acres (677.85ha) in Seberang Prai Utara, Penang, for RM620 million. The eco-themed township’s gross development value (GDV) is RM9.6 billion which increases our fully diluted revalued net asset value by 2.6%. The implied land cost to GDV ratio is 6.5%. The launch is likely to take place in 2020 and is a long-term positive for the group.

The land is located within the Butterworth-Sungai Petani Growth Corridor with access to the North-South Espressway via the Bertam interchange, and is 18km away from Butterworth and 32km from the Penang Bridge. We gather that the surrounding area is fairly established with existing townships, malls, a university campus, a medical institute and a golf course. Due to the size of the land which requires comprehensive planning, the expected launch is likely in 2020 or onwards with a 15- to 20-year development period.

Land payment details are pending, although we believe it would be favourable to the group if payment is staggered given the long development period. Nonetheless, we have factored in a lump sum payment by financial year 2017 (FY17) which would increase FY17 estimate net gearing from 0.08 times to 0.15 times, which is still very comfortable for the group. We will adjust our net gearing assumptions if payment is staggered over a longer period.

The land cost to GDV ratio of 6.5% is fair, if not attractive, as a lot of land banks are transacted above 10% nowadays. The GDV per acre ratio is reasonable, if not conservative, at RM5.7 million per acre versus other mainland developments which are going for RM5 million to RM8 million per acre, and there is still room for long-term GDV appreciation given the size of the project.

We gather that 40% to 50% of sales will be driven by the “10:90” scheme which has been well received in terms of take-up rates. Note that the group can recognise its local “10:90” sales in the typical stages of progress billings instead of “on completion” bases. The Islamic Redeemable Convertible Preference Share issuance of RM1.1 billion is expected to be completed by the fourth quarter of 2016 and given the bullet deliveries from Parque and Battersea, we expect net gearing of 0.27 times by year end. — Kenanga Research, Nov 10

This article first appeared in The Edge Financial Daily, on Nov 11, 2016. Subscribe to The Edge Financial Daily here.