Wednesday, September 23

SP Setia adds to strong earnings visibility with KL Eco City land purchase agreement

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KUCHING: Property developer SP Setia Bhd (SP Setia) is adding to its existing strong revenue figures with a land acquisition deal to implement a milestone development project.

LANDMARK PROJECT: An artist impression of the KL Eco City project with a GDV of RM6 billion. The project will allow SP Setia to convert existing strong pre-sales registrations into firmed sales with earnings contribution commencing from FY12, says Ching.

The group announced that it had finalised the privatisation agreement with the Mayor of Kuala Lumpur for the development of 25 acres of land in Kampung Haji Abdullah Hukum, which is the site area for its Kuala Lumpur Eco City (KLEC) development.

The project, which was expected to be completed over a period of 12 years, had an estimated gross development value (GDV) of RM6 billion and gross development cost (GDC) of RM5 billion.

Consisting of four parcels consisting of residential towers, corporate office towers, a retail podium and other amenities, it would be the first integrated mixed development to be certified under the Green Building Index standard. Under the agreement, SP Setia would be paying RM105.9 million, less the premium it had already settled for the land. The company had already acquired 4.4 acres of the said land, thus the land cost worked out to RM118.6 per sq ft for the remaining 20.5 acres.

There was also a minimum guaranteed profit of RM191.2 million, on top of the previously agreed 80:20 net profit share ratio between SP Setia and Dewan Bandaraya Kuala Lumpur (DBKL).

ECM Libra Capital Sdn Bhd (ECM Libra) analyst Bernard Ching opined, “This is positive as SP Setia will be able to bring a closure to more than a decade effort in securing this large parcel of prime land adjacent to the successful Mid Valley City development.

“The effective land cost works work to be under RM400 per sq ft which is attractive since it only makes up about seven per cent of total GDV. The KLEC project involves the development of an integrated commercial and residential development with net saleable area of approximately 5.7 million sq ft.”

With the signing of the privatisation agreement, SP Setia would also be able to convert strong pre-sales registrations for its office blocks to firmed sales of about RM1.1 billion.

“In addition, we also expect all non-Bumiputera units for its first residential tower with GDV of RM700 million to be converted into firmed sales in the coming months,” Ching stated.

Meanwhile, AmResearch Sdn Bhd (AmResearch) commented in a research note, “The group will be able to recognise the robust sales of circa RM1.5 billion to RM2 billion from this development which will lift its new sales to more than its bullish target of RM3 billion.

“This deal would be further enhanced by its proposed acquisition of a 40 per cent stake (RM75 million) in its joint venture partner of this development. Although the profit-sharing agreement with DBKL stands at 80:20, having full control would mean more earnings to filter through to the group.

“We estimate earnings to jump by 10 per cent and would also boost our net asset value (NAV) by six per cent,” AmResearch opined.

SP Setia had registered new sales of RM2.7 billion up to September, having seen superb month-on-month (m-o-m) growth of 80 per cent to RM337 million, mostly due to the sales recognition from its maiden venture in Melbourne.

AmResearch left the group’s fair value pegging unchanged at RM5.40 per share, at parity to its NAV estimate.

Ching reckoned that the project would allow the company to convert existing strong pre-sales registrations into firmed sales with earnings contribution commencing from financial year 2012 (FY12). ECM Libra’s calculation of the fair value remained unchanged at RM3.90 per share based on the takeover price recently offered by PNB.