A  local  daily  reported  today  that  a  high  level  initiative  has  started  for  a proposal for the property arm of Sime Darby (RM9.18, HOLD, TP RM8.50) to take over SP Setia (RM3.35, SELL TP RM2.78). The report added that the  takeover  is  to  resolve the  management  vacuum  in  SP  Setia following the departure of key managers. A source was also quoted saying that SP Setia  is  not  part  of  the  plan  by  PNB  to  merge  and  list  all  the  property companies under its stable.  (Source: The Star)

Comment:  We are not aware of a potential takeover of SP Setia by Sime. Sime  has  a  market  capitalisation  of  RM55.6b  and  if  it  decides  it  is  in  the best interests of shareholders (including PNB), should be able to mount a takeover of SP Setia, which has a market capitalisation of RM8.5b. Sime’s debt-equity  ratio  will  increase  further  unless  the  reported  takeover  of  SP Setia is implemented through a share swap. As things are, its  gross debtequity ratio will increase from 0.4x as at 30 Sept 2014 when the takeover of NBPOL is completed but will be reduced from the proceeds of the IPO of its Motors business.

It is also pertinent to ask if the potential takeover will add value to Sime’s branding  and  land  bank.  In  the  event  of  a  takeover,  the  final  terms  will dictate the earnings and value enhancement to Sime.

Pending more disclosures, we maintain our target price and HOLD rating for Sime.

Source: Affin Hwang Capital Research - 12 Jan 2015