‘S P Setia-I&P viability hangs on execution’

KUALA LUMPUR (April 17): The viability of Permodalan Nasional Bhd’s (PNB) move to merge two of its biggest property companies, S P Setia Bhd and I&P Group Sdn Bhd, depends on the way the synergy is executed, says a fund manager.

Areka Capital Sdn Bhd chief executive officer Danny Wong said bringing the two major property developers under one roof is seen as streamlining operations.

“Together it creates one of the largest property companies in the country, but we hope there is synergy on the exercise … we need to see the execution entity.

“There should be value in unlocking the land bank as I&P has large lands though it is difficult to put a value until we see the execution,” Wong told The Edge Financial Daily.

He said the merger comes at a right time as the economy recovers. Although the property segment is often the last sector to see improvement, it should produce better transactions in two to three years.

Last Friday, S P Setia, PNB and Amanahraya Trustees Bhd or ATB (as trustee for Amanah Saham Bumiputera) signed a non-binding memorandum of intent to start negotiations on the planned acquisition of I&P by S P Setia, for an indicative price within the range of RM3.5 billion to RM3.75 billion.

S P Setia’s major shareholders are PNB (28%), ATB (27%), Employees Provident Fund or EPF (6.2% direct stake as at April 12) and Kumpulan Wang Persaraan (Diperbadankan) or KWAP (9.69% interest as at April 11).

I&P is 55% owned by PNB and 45% owned by ATB.

A research house noted that the large holdings of shares by PNB, ATB and EPF in S P Setia meant that any rights issue to fund the acquisition of I&P can be easily taken by the three institutional funds. At this juncture, however, it is a bit premature to determine the exact funding mix.

The research house, which reaffirmed its “buy” rating for S P Setia, said the group’s unbilled sales pipeline stood at RM8.3 billion with the Battersea project in the UK alone accounting for about 47% of the sales.

“Buoyed by a stronger-than-expected sales performance in 2016, S P Setia sets a sales target of RM4 billion for the financial year ending Dec 31, 2017. It expects about 77% of its sales to come from local projects,” it added.

Noting that S P Setia also offers a decent dividend yield of 5% to 6%, the research house said: “Given its strong balance sheet and dividend orientation of its major shareholders — PNB, KWAP and EPF, we do not think that its dividend payout would narrow even with the proposed huge land deals.”

The only drawback, it said, is that S P Setia lacks trading liquidity, as the local institutional funds already own more than 80% of its paid-up capital.

It added, however, that there might be room for trading liquidity to improve if PNB decides to place out some of the S P Setia shares issued as purchase consideration for I&P.

“Improved trading liquidity should accelerate the share price discovery to fair value, we believe,” it said.

S P Setia has 5,218 acres (2,112ha) of development land, including 2,316 acres in the Klang Valley and 739 acres in Johor, and the merger could double the group’s land bank to 10,000 acres.

I&P, which was formed after the rationalisation exercise of three property companies under PNB — Island & Peninsular Bhd, Petaling Garden Bhd and Pelangi Bhd — in 2008, has a landbank of over 4,200 acres.

S P Setia president and chief executive officer Datuk Khor Chap Jen said last Friday that the group’s acquisition of I&P will enhance its landbank and fast-track its expansion plan.

“We believe that the acquisition of I&P Group will allow us to tap the synergistic opportunities that I&P Group could offer given that its land banks are located within the growth areas in the central part of Klang Valley and Johor Bahru, where our company has charted successes,” he said.

Axis Real Estate Investment Trust Managers Bhd head of investment Siva Shanker said the deal could be a sign for the next wave of consolidation in the property sector in order to unlock the value in land.

He said there could be more mergers or strategic alliances among developers, and with financial groups to develop landbank.

It could lead to fewer but stronger players in the market that meant it could sustain in difficult times, the former president of the Malaysian Institute of Estate Agents told The Edge Financial Daily.

“I think it is a good method of sharing resources since land has become scarce. It is also putting the infrastructure in place. The property market has become very demanding. So size does matter and a merger would be able to offer more to buyers,” he said.

Siva said while the property sector may not be strong now it would not always be like this.

“The general feel is that the market is close to bottoming out. Buyers are starting to look for properties. At the end of 2017, we expect the market to be either flat or slightly down but better than 2016, with positive moves in 2018 and 2019,” he said.

S P Setia shares, which were suspended last Friday pending the announcement of the deal, were last traded at RM3.55, with a gain of 13.4% year to date. The group’s market capitalisation is RM10.13 billion.

This article first appeared in The Edge Financial Daily, on April 17, 2017.

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