S P Setia Bhd
(March 30, RM4.16)
Maintain hold at RM4.18 with target price of RM4.46: S P Setia announced on Monday its acquisition of a 1.07acre (0.43ha) land in Melbourne for a cash consideration of A$30 million (RM92.4 million) via a tender process. The said land is strategically located on the central spine of the Melbourne's Central Business District within the northern precinct, between A'Beckett Street and Franklin Street, and between Elizabeth and Queen Streets.

The site is a short walk to Melbourne Central Shopping Centre and Railway Station, and is close to the Queen Victoria Market with its vibrant atmosphere and multitude of high-quality fresh food providers. The acquisition is conditional upon the approval of Australia's Foreign Investment Review Board being obtained by S P Setia by May 3.

While no development details were revealed in the announcement, we understand that the said land is currently used as a car park and does not have any building plan approval yet. However, the land is situated in an area zoned for high density development. A residential development with limited commercial space may be launched within 18-24 months from the date of acquisition.

The proposed development has the potential to match the gross development value of S P Setia's existing projects in Penang, which currently stand at RM1.2 billion.

Assuming a gross margin of 20%, the project could potentially contribute RM168 million in net profit over a three-year development period or add 10 sen to existing revised net asset value (RNAV) of RM4.32.

While we are positive of the acquisition which expands S P Setia global reach to yet another vibrant property market, we are also wary of the risks involved. Median house price in Melbourne has rose by a staggering 19.7% in 2009 on the back of strong employment and migration.

However, Australian authorities are reportedly growing uneasy with the pace of price increase which may lead to asset bubble, thereby raising prospect of further interest rate hike by the Reserve Bank of Australia. Building regulations which are strict but transparent means that there will be less risk in procuring building plan approval though it will take awhile to meet these stringent requirements.

As such, we are not surprised by management's guidance of 18-24 months before the project can be launched. We leave our estimates unchanged for now until more development details are revealed by the management in due course. We also maintain our hold call and target price of RM4.46 based on upper-end price/earnings (P/E) valuation of 20 times on calendar year 2011 earnings. - ECM Libra Investment Research, March 30