SP Setia (Non-rated) has received a notice of takeover from its largest shareholder, PNB following the latter has triggered the 33% threshold of Mandatory General Offer (MGO). The offer price is at RM3.90/share, whilst warrant is at 91sen. The general offer to the Group will be satisfied by cash.

We are not surprised with the PNB's takeover of SP Setia as it has been talk in the market for quite sometimes. The recent talk has resurfaced with recent GLC, Sime Darby bought a 30% stake in E&O and pursuant to the earlier UEM Land takeover of Sunrise and the aborted merger between MRCB and IJM Land.

At RM3.90 offer price, it represents 11.4% upside to the last closing (or even higher with 25.8 upside compared with Monday's closing); whilst, the offer price for warrant represents 97.8% upside to the last traded price.

However, the Board of SP Setia is in view that the offer price has fundamentally undervalued the Group and decided to seek a competing offer from other interested parties. The Board of the Group will also be writing to PNB to seek its consideration to revise upwards its offer price.

We view that PNB offer is fair given that SP Setia is being valued at 13% discount to our indicative RNAV/share of RM4.50 as compared with Sime Darby bought over 30% stake in E&O which valued the latter at 20% discount to its RNAV; and UEM Land takeover of Sunrise which valued the latter at over 20-25% RNAV discount. We believe that the lower RNAV discount is due to the premium given to the Group as being the sector bellwether in respect of its market cap (just after UEM Land), strong brand name, highest property sales among all the developers, sizeable landbank and projects' GDV. Also, the offer price values 20x FY12F PE and 2.1x P/B, which implies the Group at its upcycle valuation. Given that current bearish sentiment on property counters and possible of policy risks faced by the sector, such as reintroduction of 30% RPGT in upcoming budget, we would advise investors to take this opportunity to cash out by accepting the offer.

Possible success of the offer? Government-linked funds, namely EPF (13.4%) and KWAP (5%), together with PNB (33.2%), collectively own about 51.6% in SP Setia. The offer requires the acceptance of more than 50% of SP Setia's shares. Upon successful completion of the deal, PNB intend to maintain the listing status of the Group.

Strategic move for PNB to inject its property assets. We believe that the takeover of SP Setia is in line with PNB's strategy to consolidate or inject all its property companies, namely I&P, Pelangi and Petaling Garden (which were privatised by PNB in 2005-07) into SP Setia. We believe that the deal will further strengthen PNB's brand name in township development. Besides, there will be more synergies created especially the merger between I&P and SP Setia whereby I&P could tap on SP Setia's expertise in high-rise residential and commercial development (as evidenced by the encouraging take-up rate for SP Setia's KL Ecocity in Mid Valley City) and diversifying PNB's landbank to overseas such as Vietnam, Singapore and Australia.

Strong upcoming bidder for the federal land development. Furthermore, PNB move to takeover SP Setia also leverage its chances to develop 1MDB's Sg Besi airforce base, co-develop of Sg Buloh land with MRCB, and River-of-Life project in Klang valley. We see that other major peers such as UEM Land (Khazanah being the major shareholder) and MRCB (EPF being the major shareholder) are aggressively lobbying for the federal land development.

Other potential corporate restructuring candidates in the property sector include E&O (where SC is still examining whether Sime Darby is required to make a GO following the company acquired 30% stake from E&O's major shareholders for a 60% premium), Country Heights (pursuant to the earlier report that founder Tan Sri Lee Kim Yew intend to privatise the company), and other deep-value property counters such as KSL (trading at 43% below its NTA), Wing Tai Malaysia (trading at 37% below its NTA) and MK Land (trading at 69% below its NTA).