SPSETIA will acquire I&P for RM3.65b and funding will come from rights issuance, iRCPS, borrowings and internal funds. Post the acquisition, there will be a placement to raise up to RM1.2b to fund future working capital and improve shareholding spread. Overall, we are long-term positive, as it may take 1-2 years before I&P?s landbank can be realized aggressively. Reiterate OUTPERFORM with a higher ex-rights TP of RM4.08.

3rd largest land owner in Malaysia. Post-acquisition of I&P, SPSETIA will have 9,417ac, behind SIME and UEMS in terms of land bank size. The acquisition price of I&P of RM3.65b is at a 39% discount to its market NAV of RM6.01b, funded by: (i) rights issue of up to RM1.2b, (ii) rights issue of iRCPS-B of up to RM1.2b, and (iii) bank borrowings/internally funds of up to RM1.65b (refer overleaf for details). Post the acquisition, there will be a placement to raise up to RM1.2b to improve shareholding spread and liquidity and fund future working capital requirements. The price-tag is within the expected range which we had earlier highlighted as at attractive levels*.

Not quite the RM15b market cap target. We had highlighted earlier that SPSETIA aspires to be part of the FBMKLCI and targeted RM15b market cap to ensure its inclusion*. However, post rights/placement and current adjusted price (assume no iRCPS conversions), its market cap will only be RM12.6b or a ?borderline? case for FBMKLCI inclusion unless its share price re-rates further. Overall, the funding structure balances between the earnings dilution impact arising from the cash calls and timing of earnings. Post the entire exercise, we expect FY18E net gearing of 0.25x.

Potential GDV of RM50b*. Management mentioned that it will take time to derive the true potential of I&P?s land banks which are in similar areas as SPSETIA. We also gather that management intends to maintain both the SPSETIA and I&P branding as the latter has different customer base while no staff VSS is expected. However, I&P units will eventually comply with SPSETIA?s operational SOP. Going forward, management is likely to tone down its land banking momentum and concentrate on execution. We expect completion of the exercise by year-end.

FD SoP increases by 30% to RM7.59 post the entire exercise. Overall, we are long-term positive on the deal as the synergies from both companies will take time to materialize. However, investors will need to give SPSETIA 1-2 years before I&P?s land banks can be realized more aggressively. In the meantime, we can expect FY18E core PER to expand by 31% to 21.7x (refer overleaf). We also raise FY18E CNP by 5% after accounting for I&P?s potential contributions and iRCPS costs (refer overleaf).

Maintain OUTPERFORM with a higher ex-rights TP of RM4.08 based on the enlarged FD SoP of RM7.59 but a wider property RNAV discount of 45%***. We believe the wider discount is warranted as listed developers with vast land banks (e.g. UEMS, IOIPG) are pegged at 57%-66% RNAV discount while considering SPSETIA?s significantly stronger sales base. However, we qualify that investors will need to take a long-term view on the stock as earnings will need to catch-up for share price to properly re-rate. Risks include: (i) weaker property sales, (ii) margin fluctuations, (iii) changes in real estate policies and lending environment, (iv) timing of overseas/local billings.

*Refer to 17/4/17 report for details ** Note that we have assumed that exercise will be reflected in FY18, so FY17 estimates remains unchanged. Our estimates impute for all the cash-call exercises but per share data only accounts for the rights and placement (i.e. no iRCPS-B conversions). *** Note our previous TP was RM3.86 (ex-rights TP: RM3.76) based on an 34% property RNAV discount to its FD SOP of RM5.84

Source: Kenanga Research - 23 Jun 2017