News

• 1. Proposed acquisition of I&P Group Sdn Bhd for RM3.65bn.

• 2. Proposed renounceable rights issue of ordinary shares to raise gross proceeds of up to RM1.2bn.

• 3. Proposed renounceable rights issue of new class B Islamic redeemable convertible preference shares (RCPS i B) to raise gross proceeds of up to RM1.2bn.

• 4. Proposed placement of new shares to raise gross proceeds of up to RM1.2bn after the completion of both rights issue exercises.

• All the exercises are expected to be completed by 4Q17.

Highlights

• The I&P acquisition will be funded by 55% of the combination of rights issue of shares (RM1bn) and RCPS i B (RM1bn), 44% (RM1.5bn) debt and 4% (RM500m) internally generated fund.

• The proposed rights issue of ordinary shares shall be at a discount of approximately 20% to the theoretical ex-rights price based on 5-day VWAMP preceding the price-fixing date and PNB has committed to fully subscribe.

• The proposed RCPS-i B is similar to the structure of RCPS-i A issued in FY16 with a premium conversion ratio to be determined later where up to RM340m will be undertaken by PNB. RCPS-i B carries a dividend rate of 5.93% p.a. with a step up rate of 1% per p.a. commencing on the 5th anniversary of the issue date.

• The proposed private placement is expected to take place in 4Q17 after the rights issues with the proceeds allocated to fund the property development of new and on-going projects of the enlarged SP Setia Group.

• We remain positive on the proposed acquisition of I&P Group given the attractive acquisition price which is RNAV accretive. It will also double Setia’s existing landbanks to 9.5k acres to become the 3rd largest land owner in Malaysia.

• While the equity raising exercises look to be earnings dilutive to existing shareholders, the proposed I&P acquisition is expected to be synergistic and contribute positively to the future earnings. Shareholders are given a chance to participate in the growth via rights issue.

• Based on our estimated RNAV and the illustrative assumptions of funding structure as depicted in page 2, the RNAV/per share of Setia is raised by 7.6%; while gearing would improve to 0.13x from 0.16x currently, leaving ample rooms for further acquisitions.

Forecasts

• Unchanged pending for the finalization of price fixing.

Rating

BUY ↔ TP: RM4.00

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

Valuation

• Maintain BUY with unchanged TP of RM4.00 based on a 30% discount to RNAV of RM5.67 given the accretive major corporate exercise and long-run synergy.

Source: Hong Leong Investment Bank Research - 23 Jun 2017