News

• Bandar Setia Alam Sdn Bhd (BSASB), a wholly-owned subsidiary of SP Setia was served by Inland Revenue Board of Malaysia (MIRB) with Notices of Additional Assessment for an additional income tax of RM52m and a penalty of RM23m, totalling RM75m.

Financial Impact

• The retrospective tax claim of RM75m is expected to negatively impact our FY18 bottom line by 12%.

• However, we do not take into account the potential negative impact as it is considered non-recurring in nature as well as on the notion that SP Setia is ready to challenge both the Notices and penalty.

Highlights

• The abovementioned additional income tax and penalty were imposed in the view that the gains from the disposal of land and properties held under investment properties are chargeable under the Income Tax Act 1967 instead of the Real Property Gains Tax Act 1976 (RPGTA).

• However, SP Setia is of the view that there are reasonable grounds to challenge the basis and validity of as the sales of the investment properties are capital transactions which fall under the purview of RPGTA.

• Apart from tax issue, we also clarified on the outlook for SP Setia following the completion of Phase 1 of Battersea in Oct 17. We understand that subsequent phases are expected to contribute only in FY20, which lead us to revise downward our earnings forecasts for FY18 and 19.

• Moving forward, the focus is to ramp up local sales with launches in the group flagship townships where underlying demand is still favourable such as Setia Alam, Setia EcoHill, Setia Eco Templer and KL Eco City.

• The overall earnings prospects remain intact underpinned by total unbilled sales of RM7.1bn (cover ratio of 1.7x) which will sustain its earnings visibility for coming years.

• We remain positive on the proposed synergistic acquisition of I&P Group, which is expected to complete by Dec 17. However, more guidance is warranted before we impute the full impact of the enlarged entity with 9.4k acres of landbank and GDV of more than RM100bn post merger exercise.

Forecasts

• We adjust our FY18/19 bottom lines downwards taking the completion of Battersea Phase 1 into consideration and impute the contribution of Sapphire by the Gardens into our RNAV.

Rating

BUY ↔

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

Valuation

• Maintain BUY with unchanged TP of RM4.00 based on unchanged 30% discount to RNAV of RM5.71 given the accretive major corporate exercise which has long-run synergy.

Source: Hong Leong Investment Bank Research - 20 Nov 2017