KUALA LUMPUR: CIMB Equities Research sees SP Setia is poised to be a property giant with acquisition of I&P from Permodalan Nasional Bhd (PNB) for RM3.65bil.
It said on Friday the acquisition holds great promises if SP Setia manages to replicate its success stories on I&P’s landbank.
“Compared to I&P, SP Setia has a much stronger brand name and better track record in developing property projects.
“We expect SP Setia to take up to one year to integrate the two companies and draw up new plans for I&P’s land bank. SP Setia is confident that I&P’s assets will boost its sales in FY18. However, we think the sales will only translate into meaningful earnings starting FY19.
“While we like the long-term prospects of the acquisition, it is offset by the downside risk to FY18F EPS, due mainly to the massive cash calls,” it said.
This saw CIMB Research retaining its Hold call for SP Setia with stronger-than-expected sales as the key upside risk while high integration cost would be the key downside risk.
On the pricing for I&P, it said this was in line with the earlier indicated price of RM3.5bil to RM3.75bil which was about 39% lower than the fair value of I&P’s net assets of RM6bil.
“We think the acquisition price is fair as many listed developers under our coverage trade at 30%-50% discount to their realised net asset values (RNAVs). However, the size of cash calls is a negative surprise as it is larger than expected," it said.
Based on independent property valuers’ reports, the market value of I&P’s properties is RM7.4bil while its fair value is RM6bil, after adjusting for the deferred tax liabilities arising from land revaluations.
SP Setia will borrow RM1.5bil to partly fund the acquisition. The balance will be mainly funded by two rights issues, one each for ordinary and preference shares, that may raise up to RM1.2bil each.
SP Setia also plans for a private placement exercise to raise another RM1.2bil after the rights issues to fund the development of I&P’s land bank.
“The prices and entitlement basis of the cash calls will be determined at a later date but the rights issue of ordinary shares will be priced at 20% discount to the theoretical ex-rights price.
“We are not surprised by the plan to raise equity but the size of the cash calls is a negative surprise,” it said.
Based on SP Setia’s latest closing price and shares outstanding, a 20% discount to the theoretical ex-rights price for the rights shares, and a hypothetical 10% discount to the price of placement shares would increase its shares outstanding by 26%.
“Our calculation excludes the dilution impact from the right issue of preference shares as their conversion price will be higher than SP Setia’s share price at the price-fixing date,” it said.
Assuming that I&P’s core net profit in FY18 is the same as our estimate of a core net profit of just RM69mil in FY16, CIMB Research believes the additional earnings contribution from I&P will not fully offset the interest cost and dividends for preference shares related to the financing of its acquisition, let alone the dilutive impact on EPS due to the enlarged share base.
“If I&P delivers only RM69mil of core net profit in FY18, there is a 33% downside to our FY18 EPS forecast,” it said.
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