Despite the housing market slowdown, SP Setia’s acquisition of new land in Melbourne Exhibition Street indicates the company’s strategy to maintain its presence in the Australia market. In our view, SP Setia should have sufficient internal funding for the acquisition and other ongoing overseas projects, supported by its 28 % net gearing (including perpetual bond). We maintain our NEUTRAL recommendation with a revised TP of MYR3.18, based on an unchanged 35% discount to RNAV.

New development site in Melbourne. SP Setia announced its acquisition of a 1.02-acre piece of freehold land for a purchase consideration of AUD101m (or MYR300.8m). The land was secured via a competitive bidding exercise from Telstra, Australia’s leading telecommunications company. Prospects of the land. The land cost makes up 16% of the project’s GDV of AUD640m, which seems higher compared with SP Setia’s previous transactions of Parque Melbourne St Kilda and Fulton Lane in 2010/2011 at around 10% of GD V. The land is located at 308 Exhibition St, which is in the upper east-end of Melbourne CBD, on the corner of La Trobe St and Exhibition St.. Gi ven its proximity to a few education institutions such as Melbourne University and RMIT, we believe the project will be able to capture the demand from student populations.

Replenishing overseas sites. Although the housing market in Australia is currently slowing down, we agree with SP 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 SP Setia would be able to ride through the slowing market over the next 1-2 years. Australia’s housing market is cooling, in line with the regional housing market slowdown. Media reports have recently highlighted that doestic 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. Maintain NEUTRAL. We keep our earnings forecasts unchanged, as the project can only be launched in late 2017. Given the incremental value in our RNAV estimate after the inclusion of Exhibition St land, and two other smaller parcels in Carnegie and Prahran, our TP is raised to MYR3.18 (from MYR3.10). Meanwhile, the recent confirmation of Dato’ Khor Chap Jen as President/CEO, Datuk Wong Tuck Wai as Deputy President/COO and Mr Choy Kah Yew as CFO effecti ve 1 Apr 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.

Source: RHB Research - 3 May 2016