News

• SP Setia proposed renounceable rights issue of up to 1.07bn new Islamic redeemable convertible preference shares (RCPS-i) on the basis of 2 RCPS-i for every 5 existing shares at an issue price of RM1.00.

• This is expected to raise up to RM1.07bn (28% for existing project and working capital with the remaining 72% for potential landbanking).

• The perpetual RCPS-i carries an attractive 6.49% of dividend per annum (stepped up of 1% per annum starting on 15th anniversary ) and to be paid semiannually. It is redeemable on and after 15th anniversary.

• With conversation ratio of 2 new shares for 7 RCPS-i, the conversion price is estimated at RM3.50 per share, circa 11% premium to last price.

Financial Impact

• Net gearing is expected to reduce slightly from 0.24x to 0.21x.

• If we assume fully conversion of RCPS-i, the immediate dilution to RNAV is estimated at 3%. However, we believe this will be mitigated by the earnings contribution from potential landbanking exercise.

Pros/Cons

• We are neutral to slightly positive on the deal. The propose rights issue will ensure continuity of syariah compliance (as total debt to asset level is estimated to fall down to 30% level ) and raising war chest for potential landbanking opportunity amidst property downturn.

• In addition, this will help to strengthen the balance sheet with minimal EPS dilution in near term.

• Management remains confident in achieving full year sales target of RM4bn. New launching is expected to accelerate in subsequent quarters with target GDV of RM4.7bn.

• Unbilled sales stood at RM8.6bn, representing 2.5x FY14’s property development revenue.

Risks

• Escalation in construction and raw material costs; and

• Delays in launches.

Forecasts

• Unchanged.

Rating

HOLD

• Positives: Strong product concepts and pipeline; consistent dividends.

• Negatives: No longer the most liquid property stock in Malaysia.

Valuation

Maintain HOLD with unchanged TP of RM3.12 based on discount to RNAV of 35%.

Source: Hong Leong Investment Bank Research - 6 Jun 2016