SPSETIA has announced its acquisition of Bangi land (342.5 acres) and MOI to acquire I&P Group for RM3.5bRM3.75b. Since they also have an aspiration to achieve RM15b market capitalisation and inclusion in the FBMKLCI, we reckon an equity cash call will be the main funding avenue. Overall, we are positive on its aggressive growth path and raise TP to RM3.85 (from RM3.60). Reiterate OUTPERFORM.

Acquiring 342.50 acres Bangi land from Seriemas Developent S/B (60% PNB Development Bhd, 40% SIME) for RM447.6m which excludes a profit sharing of 20% of the project’s PBT (up to maximum of RM44.8m) - this collectively implies RM33psf. The project has a GDV of RM2.74b (RM8m/ac). Hence, land cost to GDV is 18% which is considered slightly steep considering most townships’ land bank cost are at less than 15% of GDV. However, we note that the GDV could be a bit conservative for now considering Setia Ecohill’s remaining GDV/ac implies RM11.8m/ac. Given the iRCPS issuance, the group has sufficient funds to finance the acquisition and FY17E net gearing will increase from 0.25x to 0.30x. Expected completion of the acquisition is by 4Q17 with an expected launch in 2019 over an 8-year development period; hence, no changes to earnings estimates. The project increases our FD RNAV by 2.0 sen to RM5.72.

MOI to acquire entire equity interest in I&P Group from the PNB and ASB for RM3.50b and RM3.75b, which implies 1.11x and 1.19x PBV to I&B’s NAV of RM3.16b (Dec 2016), respectively. We think it is attractive considering the low historical valuations of I&P’s land bank resulting in high pre-tax margins of 31% and 37%, while it is also a net cash company with low debt levels. I&P has a total remaining land bank of 4,263 acres in similar areas where SPSETIA has landbank and we estimate a total GDV of RMRM45-50b. This will increase SPSETIA’s (i) effective land bank size by 82% to 9,481 acres making it the 3rd largest developer by landbank behind SIME Properties and UEMS, (ii) effective remaining GDV by 59%-65% to RM121b-RM126b. We also estimate that I&P could increase SPSETIA’s earnings and sales by 20%-30% as most of their landbanks are in areas with strong demand.

While the MOI to acquire I&P does not come with funding details (expect detailed announcement in 3 months’ time), the group did express aspiration to be part of the FBMKLCI and is targeting RM15b market cap. Currently, the group has a market capitalisation of RM10.1b. We also believe the group will have to raise additional funds beyond the acquisition price of I&P as reported by The Star that SPSETIA is the highest bidders for the Toh Tuck Road, Singapore land (SGD265m). Additionally, PNB Development Bhd has over 9,000 acres of land, which was mentioned to be a source of land bank for SPSETIA. Hence, we think an equity cash call, possibly a minimum of a 1-for-2 rights issuance scenario, could be the quickest way to achieving the RM15b market capitalisation target; but until then, we await details as SPSETIA also has a relatively light balance sheet.

Reiterate OUTPERFORM. Overall, we are positive on its aggressive growth path and expect the stock to react positively. We also hope that this is a window to improve the liquidity of the company. For now, we only impute for the Bangi land. Our TP is upgraded to RM3.85 (from RM3.60) based on a narrower discount of 35% (from 37%) or at +1.0SD to an increased FD RNAV of RM5.72.

Source: Kenanga Research - 17 Apr 2017