By NST Property - March 24, 2021
The RM16 billion urban renewal mixed-use development in Cheras, Kuala Lumpur by Retro Highland Sdn Bhd could potentially do well at least over the long term given the huge population catchment in the surrounding areas, says AmInvestment Bank.
Retro Highland is a 50:50 joint venture between S P Setia Bhd and Tradewinds Corp Bhd, controlled by tycoon Tan Sri Syed Mokhtar Albukhary.
The company has been appointed by Kuala Lumpur City Hall (DBKL) to redevelop four of the council's housing projects - Sri Johor, Sri Pulau Pinang, Sri Melaka, and Taman Ikan Emas - in Bandar Tun Razak under the Quality Sustainable People Housing (QSPH) scheme.
The low-cost flats, constructed in the 1970s for low-income earners, were only intended as temporary homes but many continued to live there up to now.
It is among the largest public housing schemes in the city and it comprises a few thousand units.
It was announced in 2011 that the low-cost housing development would undergo a massive transformation costing RM2.8 billion.
Work for the project, to be carried out in stages, was scheduled to commence in the second half of 2011.
Retro Highland inked the privatisation agreement with DBKL in May 2018.
In the same year S P Setia said the project will have a GDV of RM11.03 billion and it would take 11 years to complete, or fully developed by 2028.
S P Setia had said that Retro Highland will acquire 20.9 hectares of leasehold land in Cheras worth RM1.19 billion and that the project involved the redevelopment of a total of 5,650 residential units.
The developer said Phase 1 will begin after meeting the requirements of the privatisation agreement and is expected to be completed within four years. Phase 2 will begin after the first phase is handed over to DBKL, and is expected to also take four years to complete.
Retro Highland inked the master agreement and the settlement agreements only in March 2019.
In consideration, the company will be awarded some 31ha of leasehold land owned by DBKL in Cheras, where it will undertake a mixed-use development featuring residential and commercial units over 24 years.
MMC Corporation Bhd, in which Syed Mokhtar also owns a controlling stake will have a hand in the project as it is proposing to acquire Tradewinds' 50 per cent stake in Retro Highland for RM250 million cash.
In a filing with Bursa Malaysia yesterday, MMC said that its wholly-owned unit, MMC Land Sdn Bhd, had on March 22, 2021, entered into a conditional share sale agreement with Tradewinds for the proposed acquisition.
MMC said that the acquisition price is inclusive of RM55 million in shareholder's loans advanced by Tradewinds to Retro Highland, including interest.
It said the project will be carried out via land swap and compulsory land acquisition methods — the latter involving units belonging to DBKL and individuals who own units in Sri Melaka and Sri Pulau Pinang flats under the project.
The deal, which is a related-party transaction does not require shareholders' approval, it said.
AmInvestment said in a note that it is mildly positive on this development as MMC, which is involved in transportation and logistics is effectively gaining entry into a developer who has locked in a decent deal with Kuala Lumpur City Hall (DBKL).
The firm said it is unfazed by Retro Highland's net losses of RM300,000 million, RM5 million, and RM600,000 in the financial years 2017 to 2019 as it expects earnings momentum to pick up once it starts to launch products in the development.
"We take the comfort of the fact that at RM250 million, the valuations of the 50 per cent stake and shareholder's loan fall within the RM233 million to RM260 million valuations by independent valuers," it said.
AmInvestment said the acquisition will increase MMC's already high net debt and gearing of RM9.3 billion and 0.9 times respectively as of December 31, 2020, to RM9.5 billion and 0.93 times.
It also does not expect material earnings contribution from the project during the firm's forecast period.
According to the filing by MMC, Deloitte Corporate Advisory Services Sdn Bhd has valued Retro Highland at between RM356 million and RM410 million.
Excluding the shareholder's loan from the valuation, the value of the 50 per cent stake in Retro Highland ranges between RM178 million and RM205 million, it said.
On the rationale for the proposed 50 per cent Retro Highland acquisition, MMC said that S P Setia has a proven track record in the property development business in Malaysia and overseas.
"With the combined strong branding and reputation, the potential synergy between the MMC Group and S P Setia is expected to be in the form of revenue, financial, market and cost synergy," it said.
MMC said that Retro Highland will face competition from other property development players with regards to the RM16 billion development.
"Other competitors in the industry may have a proven track record, greater resources, and market presence as compared to Retro Highland and therefore, may in some instances, be better positioned to compete and win general consumer's demand.
"However, Retro Highland is also a 50 per cent-owned company of S P Setia. As such, Retro Highland will be able to benefit from the joint venture arrangement by leveraging on S P Setia's expertise, experience, and brand name," it said.
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