KUALA LUMPUR: CIMB Equities Research is retaining its Hold call on SP Setia as it likes the long-term prospects of its acquisition of Island & Peninsular, though they are offset by the downside risk to FY18F EPS, due mainly to the massive cash calls to finance the deal.
The research house said on Monday SP Setia remains a Hold with stronger-than-expected sales as the key upside risk while high integration cost is the key downside risk. We retain our target price of RM3.40, based on a 30% discount to realised net asset value (RNAV).
Last Friday, SP Setia announced that its unit Bandar Setia Alam Sdn Bhd (BSASB) has been served with notices by Inland Revenue Board of Malaysia (MIRB) on additional assessment for the years 2008, 2009, 2010, 2011 and 2013.
The additional income tax amount was RM52mil and the penalty was RM23.4mil, bringing the total amount to RM75.4mil.
The rationale for the additional income tax and penalty imposed by MIRB was on the basis that gains from the disposal of land and properties, held under BSASB’s investment properties, are chargeable with income tax under the Income Tax
Act 1967 instead of the Real Property Gains Tax Act 1976.
“The group believes there are reasonable grounds to challenge the basis and validity of the disputed tax claims. Upon consulting its tax solicitors, BSASB is in the view that sale of the investment properties are capital transactions
which fall under the purview of Real Property Gains Tax Act 1976.
“Assuming the worst case scenario that SP Setia needs to pay the additional tax claims and penalty totaling RM75.4m, this will likely drag its FY17F net profit down by 10%-11%, based on our and Bloomberg consensus estimates.
“However if we factor in the additional assessments and penalty into our RNAV valuation, our RNAV-based target price still holds at RM3.40. The amount of RM75.4mil is less than 1% of its estimated total RNAV of RM17.8bil,” it said.
As at end-September, SP Setia’s net gearing stood at 0.34 times, a healthy level. Given its strong balance sheet, we do not foresee any problem in it repaying the tax claims and penalty, if needed.
“We believe the tax dispute could take a long time to resolve, hence we are not factoring this into our estimates,” it said.