News

• On 14 April 2017, SP Setia (Setia) has entered into a non binding Memorandum of Intent with PNB and Amanahraya Trustees Berhad to commence negotiations on the proposed acquisition of I&P Group Sdn Bhd.

• On a separate announcement, Setia has proposed the acquisition of 342.5 acres of freehold land in Bangi for a cash consideration of RM448m plus conditional profit sharing from the development. The planned GDV for this land is RM2.47bn for a development of 8 years from 2019.

• Both deals are expected to be completed by 4Q17.

Highlights

• Positive view with minimal integration risk. We are positive on the proposed acquisition of I&P Group as it is RNAV accretive and would double Setia’s existing landbanks to 9.5k acres and potentially become the largest property player in the market. Besides, the likelihood of this deal falling through and integration risk are less of a concern given that PNB is the ultimate owner of both entities.

• RNAV accretive. Based on our scenario analysis laid down in page 2, the proposed acquisition is expected to raise Setia’s RNAV/per share by 14%, assuming 30% of RM3.75bn to be funded by equity via right issue and gearing would increase to 0.28x from 0.17x currently.

• Fair pricing with potential synergy. The quoted price of RM3.75bn works out to be 1.2x book value which is on par to that of Setia. On psf basis, the 4,263 acres of land are acquired at the average price of RM20, which is fair considering majority of the lands are at close proximity to existing Setia’s projects and landbanks in Klang Valley and Johor that could yield synergy and enhance value.

• Slight negative on land acquisition . On the other hand, we are slightly negative on the proposed Bangi land acquisition as our projected NPV is less than the price tag of RM492m (including the cost for profit sharing) and potentially dilute our RNAV by 1.4% although it is strategically located near to major highways and existing Setia projects.

• Potential high land cost. Besides, the effective land acquisition cost for the development is circa 20% of the GDV of RM2.47bn and may potentially increase by another 10-15% for the conversion premium on land title to commercial land.

Forecasts

• We incorporate the latest balance sheet position and fully diluted share base resulting a higher RNAV/share at RM5.67 from RM5.07 previously but keeping our forecasts unchanged pending for the funding structure.

Rating

BUY TP: RM3.97

• We believe investor’s sentiment towards SP Setia would improve as the proposed acquisition of I&P Group is expected to be RNAV accretive, synergistic in the long run and potentially become the largest pure property player in the market. Consistent dividend yield of 5% is another positive point.

Valuation

• Upgrade to BUY with TP increased from RM3.29 to RM3.97 based on a narrower 30% discount (previously 35%) to RNAV of RM5.67 given the impending accretive major corporate exercise and long-run synergy

Source: Hong Leong Investment Bank Research - 17 Apr 2017