Equity Issuances to Fund Acquisition

SP Setia has proposed a rights issue of new shares to raise up to RM1.2bn, rights issue of new Class B Islamic Redeemable Convertible Preference Shares (RCPS-i B) to raise up to RM1.2bn and private placement of new shares to raise up to RM1.2bn post-rights issue. It has also fixed the purchase price for I&P Group at RM3.65bn.

Acquiring I&P at a Discount to Market Value

Based on I&P’s book value of RM3.23bn, SP Setia’s proposed purchase consideration of RM3.65bn is at Price/book of 1.1x. Based on the RNAV estimate of RM6.01bn by independent valuers, the purchase consideration represents a 39% discount to RNAV. Based on I&P’s net profit of RM168m in FY 2016, the purchase consideration translates to historical PER of 21.7x. I&P’s net profit has declined from RM329.1m in FY14 to RM281.5m (-14% yoy) in FY15 and RM168.0m (-40% yoy) in FY16 due to lower property sales. I&P has net cash of RM509.1m at end-FY16, which effectively will reduce the cost of acquisition.

Equity Issuance

The proposed issuance of new shares and RCPS-i B will raise up to RM3.6bn in total, which is sufficient to finance the acquisition of I&P. Considering I&P’s net cash position, SP Setia’s group net gearing will only increase marginally from 0.16x at end-FY16 to 0.19x post-exercises (minimum scenario). The issue prices of the rights issue of new shares and RCPS-i B, and private placement have not been determined.

Expansion of Land Bank

SP Setia’s land bank in Malaysia will increase from 5,141 acres to 9,417 acres post-acquisition of I&P, and raise its ranking of major developers from 5th to 3rd in terms of land bank. SP Setia plans to reap merger synergies from I&P’s land bank to scale up its operations.

Fair and Reasonable Proposals

Affin Hwang Investment Bank Bhd is the independent adviser for the proposed Bangi land and I&P acquisitions, rights issue of shares and RCPS-i B to advice the non-interested shareholders and directors of SP Setia.

Source: Affin Hwang Research - 23 Jun 2017