S P Setia down 7% on cash call for I&P Group acquisition

KUALA LUMPUR (June 23): Shares of S P Setia Bhd fell 6.91% in morning trade following its announcement to make a cash call to fund its acquisition of I&P Group Sdn Bhd, and mixed views from analysts on the plan.

As at 11:35am, it fell 25 sen to RM3.37 with 1.81 million shares traded.

While S P Setia's cash call decision to fund its acquisition of I&P Group from Permodalan Nasional Bhd is seen positive by research houses, analysts cautioned it may come with short-term pain to its FY18 earnings.

The acquisition, which was first announced in April, will proceed with a deal for RM3.65 billion, as the parties signed a conditional share purchase agreement yesterday.

For CIMB Research, the size of the cash call comes as a negative surprise.

"Based on S P 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%," it said in a research note today.

It added the additional earnings contribution from I&P Group may not fully offset the interest cost and dividends for preference shares relating to the acquisition, if I&P Group's core net profit for FY18 is the same as CIMB Research's estimate of RM69 million in FY16.

S P Setia will borrow RM1.5 billion 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 RM1.2 billion each.

S P Setia also plans for a private placement exercise to raise another RM1.2 billion after the rights issues to fund the development of I&P Group's land bank.

The prices and entitlement basis of the cash call 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.

It has been reported earlier that the corporate exercise would substantially increase S P Setia's landbank from 5,141 acres to 9,417 acres, making it the third largest in the country and would potentially make it the largest listed property developer in the country.

On the other hand, PublicInvest Research was more positive.

"The proceeds to partly fund the deal effectively will strengthen the capital base of the group and minimise dilution to EPS as RCPS are not expected to be converted immediately. The proposed placement could potentially expand the institutional shareholding of the group and also improve further share liquidity by way of increased free float," said PublicInvest Research.

Nonetheless, the acquisition is said to hold great promises if S P Setia manages to replicate its success stories on I&P Group's landbank.

"Compared to I&P Group, SP Setia has a much stronger brand name and better track record in developing property projects. We expect S P Setia to take up to one year to integrate the two companies and draw up new plans for I&P Group's land bank.

"S P Setia is confident that I&P Group's assets will boost its sales in FY18. However, we think the sales will only translate into meaningful earnings starting FY19," said CIMB Research.

CIMB Research maintains "hold" with an unchanged target price of RM3.65, as it factors in the downside risk of the large cash calls on S P Setia's FY18 EPS.

PublicInvest maintains "outperform" with a higher target price of RM4.50 on its sizeable landbank, consistent performance and earnings visibility. — theedgemarkets.com

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