A  local  financial  weekly  repeated  an  earlier  speculation  that  Sime  Darby (SIME) may buy PNB’s 51.12% stake in SP Setia (SPSB) and added that since the potential takeover would require a MGO, SIME could likely resort to  a  rights  issue  to  fund  the  takeover  and  MGO.  The  weekly  however qualified  that  it  is  not  clear  if  PNB,  SIME  and  SPSB  are  receptive  to  the proposal. (Source: The Edge Malaysia)

Comments:  We  are  not  aware  of  a  potential  takeover  of  SPSB  by  SIME. SIME  has  just  recently completed  the acquisition  of  New  Britain Palm  Oil Ltd  NBPOL)  for  approximately  RM6b.  It  is  therefore  questionable  if  its management would mount another major acquisition, particularly of a major listed property asset. It is also relevant to ask if the potential takeover will add  value  to  Sime’s  branding  and  land  bank.  Nevertheless,  the  proposal may be something which is being considered at the shareholder level.

Based on last Friday’s closing price (SPSB RM3.35, SIME RM9.25), PNB’s stake in SPSB is worth approximately RM4,353m, accounting  for just 7.6% of SIME’s market capitalisation of RM57,453m. A partial takeover or even a full  takeover  is  therefore  not  entirely  impossible.  Still,  a  partial  or  full takeover  will  push  SIME’s  net  gearing  ratio  across  0.5x,  a  level  which management intend to cap and hence potentially requiring a rights issue. As at 31 December 2014 (and before the acquisition of NBPOL), Sime had a net debt of RM6,815m and a net gearing ratio of 0.24x.

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 of RM8.96 and HOLD rating for Sime.

Source: Affin Hwang Capital Research - 16 Mar 2015