Analysts positive on SP Setia’s Cheras land swap deal

KOTA KINABALU: Analysts are generally positive on S P Setia Bhd’s (SP Setia) privatisation agreement with Datuk Bandar Kuala Lumpur (DBKL) involving a land swap deal in Cheras.

In a filing on Bursa Malaysia, SP Setia announced that 50 per cent jointly controlled entity Retro Highland had on May 7, 2018 entered into a privatisation agreement with DBKL for the planning, design, construction, completion and commissioning of Quality Sustainable People Housing (QSPH) project, which entails the construction of 3,971 residential units, 112 units of shops or stalls, a market and other public facilities.

“In return, Retro Highland will be awarded with 52.25 acres of leasehold land in Cheras, Kuala Lumpur to be used for mixed development,” the group said.

“The exchange land is planned for a mixed development project which comprises residential and commercial components.

“The proposed development is expected to have an estimated GDV of approximately RM11.03 billion with a development period of 11 years.”

The group revealed that Retro Highland is a special purpose vehicle for S P Setia and Tradewinds Corporation Bhd to undertake the privatisation project which involved the QSPH development and the proposed development.

The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) viewed the agreement positively as the exchanged land is strategically located alongside Jalan Loke Yew, at eight kilometres (km) to KLCC.

According to MIDF Research, the exchanged land is planned for a mixed development project which comprises residential and commercial components with total estimated gross development value (GDV) of R M11.0 3 bi l l ion a nd development period of 11 years.

“The proposed development will allow SP Setia to continue to strengthen its presence in Klang Valley,” the research arm said.

“The QSPH development is expected to be funded via a combination of bank borrowings and internally generated funds.”

It added that net gearing of S P Setia is expected to climb to 0.16-fold from 0.11-fold as of end financial year 2017 (FY17).

Meanwhile, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) was also positive on this latest development, but only in the longer-term.

“The implied land cost of RM1.19 billion implies a land cost-to-GDV ratio of 11 per cent, which is fair.

“Given that it is a land swap deal, on balance, the impact will not be overly significant,” it said.

Kenanga Research highlighted that Retro Highland will need to construct 1,192 new residential units on another plot of land located nearby for the relocation of the initial batch of residents occupying the current low-cost flats -under the government’s public housing scheme -- on the said land to get the Phase 1 land (13.89 acres).

Construction period is set at four years with an estimated cost of RM344.8 million.

“Phase 2 land (38.36 acres) will only be obtained upon completion of the remaining relocations and has an expected construction cost of RM835.1 million.

“We note that Phase 1 will have minimal balance sheet impact on SP Setia since cost is staggered and the project will be accounted as an associate.

“Similarly, there is no immediate-term impact to earnings as Phase 1 can only kick-start after the first batch of relocations.”

The research arm further highlighted that this is SP Setia’s second joint venture (JV) project for the year, following the group’s recent Cyberjaya JV with Setia Haruman.

Overall, Kenanga Research preferred these land banking models as these do not over tax the balance sheet while locking in prime land banking opportunities.

Thus, the research arm expected more of such deals.

“FY18E sales target is still at RM5 billion for FY18, on the back of RM7.07 billion worth of launches.”