Reported in NST was an analysis by Kenanga. S P Setia will be acquiring a piece of land in Bangsar for RM431.9 million. The piece of land is only 51.57 acre. The land belongs to a joint-venture (Setia Federal Hill) which is 50 percent owned by S P Setia. With this purchase of the remaining 50 percent stake in Setia Federal Hill, it will own the RM20.2 billion gross development value potential. Total development period is estimated to be 15 years. According to the report, the price tag of the remaining 50% stake in Setia Federal Hill is attractive because the implied cost-to-GDV ratio is only 4 percent. (Usually land cost may range closer to 10 percent or in some hotspots, even higher) The purchase will be funded by the proceeds from the Islamic redeemable convertible preference shares completed in December 2016. Kenanga says that with this purchase, the net gearing for financial year 2018 (FY18) will increase from 0.24 times to 0.28 times, which is still at a healthy level.
What is net gearing ratio? In brief, according to Investopedia: The net gearing ratio is calculated by dividing the total debt, including long- and short-term liabilities and bank overdrafts, by the total shareholder equity. Expressed as a percentage, this ratio reflects the amount of existing equity that would be required to pay off all outstanding debts. (Generally, the lower would indicate a healthier and stronger company even if not all debts are bad and sometimes, in order to grow faster, the company would take up additional debts to fund its growth. If we look at some of the listed property developers, 0.28 net gearing is definitely on the healthy side too.)
In the same analysis, Kenanga said that while they were surprised, they think it made good sense and that they are maintaining their TP of RM4.10. It believes that the valuation of I&P has yet to be reflected in S P Setia’s current price as its share price has not been rerated much since the announcement of the I&P acquisition. It said that many investors are also wary of property stocks which meant that any potential investor should take a longer-term view of the stock before its value is reflected in its stock price. S P Setia closed at RM3.20 today, implying a potential upside of 28 percent. Here’s that Kenanga analysis in NST for reference again. (I think this upside Pretty significant actually, especially for those who like S P Setia but is not yet loaded enough to buy one of their properties.) Happy reading.
written on 12Mar 2018
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