S P Setia replenishes development sites in Australia

S P Setia Bhd (May 3, RM3.19)

Maintain neutral with a higher target price (TP) of RM3.18: S P Setia Bhd has announced its acquisition of a 1.02-acre (0.414ha) piece of freehold land for a purchase consideration of A$101 million (RM302 million). The land was secured via a competitive bidding exercise from Telstra Corp Ltd, Australia’s leading telecommunications company. The land cost makes up 16% of the project’s gross development value (GDV) of A$640 million, which seems higher compared with S P Setia’s previous transactions of Parque Melbourne in St Kilda Road and Fulton Lane in 2010 and 2011 at around 10% of GDV.

The land is located at 308 Exhibition St, which is in the upper east-end of Melbourne’s central business district (CBD), on the corner of La Trobe St and Exhibition St. Given its proximity to a few education institutions such as Melbourne University and RMIT University, we believe the project will tap into the student population.

Although the housing market in Australia is currently slowing down, we agree with S P Setia’s move to replenish its development sites in Australia. The company handed over the Fulton Lane project last year, and Parque Melbourne is now nearing completion. Given its existing platform in the Australia market and financial position, we think S P Setia would be able to ride through the slowing market over the next one to two years.

Media reports have recently highlighted that domestic banks are getting tighter in their lending to foreign house buyers, and there are also concerns of oversupply in the apartment segment, particularly in the Brisbane and Melbourne CBD areas. Therefore, given the negative news flow, we think the market would be “neutral” on this acquisition announcement.

We keep our earnings forecasts unchanged, as the project can only be launched in late 2017. Given the incremental value in our revised net asset value (RNAV) estimate after the inclusion of Exhibition St land, and two other smaller parcels in Carnegie and Prahran, our TP is raised to RM3.18 (from RM3.10).

Meanwhile, the recent confirmation of Datuk Khor Chap Jen as president and chief executive officer, Datuk Wong Tuck Wai as deputy president and chief operating officer, and Choy Kah Yew as chief financial officer effective April 1 should clear market concerns over any leadership uncertainty. The key risks affecting our call and forecasts would be if the market climate/environment takes a turn for the worse, or if better-than-expected market conditions develop. — RHB Research Institute, May 3

Do not ask the taxi driver about the value of your home. Click here at The Edge Reference Price to find out.

This article first appeared in The Edge Financial Daily, on May 4, 2016. Subscribe to The Edge Financial Daily here.