News 

NST  today  reported  on  the  possibility  of  PNB  to  form the  country’s  largest  property  player  by  asset  value, through  a  merger  between  SP  Setia  and  I&P  Group Sdn Bhd.

Reasoning behind the  merger  was to revive SP Setia, which  is  losing  grounds  to  its  competitors  after  more than  300  talents,  including  top  executives,  left  the group.

Highlights 

We  are  not  surprised  by  the  mentioned  merger  as there  were   already  several  circulations  of  such  news that  PNB  intend  to  inject  its  unlisted  assets  into  SP Setia.

Should  this  is  true,  we  believe  the  merger  would benefit  both  property  developers  as  there  will  be synergistic  values  in  the  merger  exercise  through combination  of business model as well as landbank.

The  merger  would  allow  the  enlarged  entity  to  reach out  to  wider  target  market  as  it  would  then  have  a larger  offerings  of  both  premium  (SP  Setia)  and medium-to-low -end  properties  (I&P Group).

As at Aug 2014, SP Setia has 33 ongoing projects and 1,852ha  (or  4,576  acres )  of  undeveloped  landbank with  GDV  of  RM93bn.  The  group’s  effective  stake reached  a total GDV of RM32.4bn.

I&P  on  the  other  hand  have  a  total  of  2,090ha  (or 5,165  acres)  landbank  in  the  Klang  Valley  and  Johor Bahru, with potential  GDV of RM32.4bn.

Given  that  I&P  is  doing  well  and  has  a  strong  brand name,  we  believe  it  would  rebuild  the  confidence  in both investors and consumers in SP Setia, with hopes to clear the doubts on the latter’s future  developments.

Risks 

• Slowdown  in sales
• Escalation in construction and raw mat erial costs
• Delays in launches
• Uncertainty in long-term  direction of  top  management.

Forecasts 

• Unchanged.

Rating  HOLD

• Positives :  Strong  product  concepts  and  pipeline; consistent dividends.
• Negatives : No longer  the most liquid property stock in Malaysia; uncertainty in long-term  direction.

Valuation 

• Maintain  HOLD.  TP  remained  unchanged  at  RM3.45 (maintain 35% discount to RNAV), which  values SPSB at 14.8x FY15E P/E, vs. 18x for IOIPG  and UEMS.

Source: Hong Leong Investment Bank Research - 13 Oct 2014