SIME DARBY BHD may buy Permodalan Nasional Bhd’s (PNB) stake in S P Setia Bhd as a first step towards consolidating the property portfolio of PNB.

Sources say a proposal has been put forward to the relevant parties but it is not clear if PNB, Sime and S P Setia are receptive to it as it would be a massive undertaking.

PNB has a 51.12% stake in S P Setia (fundamental: 1.4; valuation: 1.2) and a direct 10.06% shareholding in Sime (fundamental: 1.0; valuation: 0.90) with another 36.73% held via Skim Amanah Saham Bumiputera.

If the proposal comes to fruition, Sime would have to make a mandatory general offer (MGO) for S P Setia as the 51.12% stake exceeds the MGO trigger point of 33%.

It would be a hefty acquisition. Given S P Setia’s market capitalisation of RM8.54 billion as at last Friday, PNB’s 51.12% stake is worth RM4.37 billion. Nevertheless, Sime’s market cap is much larger, at RM57.52 billion.

Sources say such a deal is unlikely to be facilitated by a share swap as S P Setia’s minority shareholders may not like exchanging their shares in a property company for those in a conglomerate with diversified businesses such as plantations, automotive and so forth, apart from property.

For Sime to fund a cash deal, it could likely resort to a rights issue where PNB could subscribe for its entitlement by utilising the proceeds from S P Setia.

While consolidation of PNB’s property portfolio remains the key reason, the motivation for such a deal could be because both Sime and S P Setia are entering into a slow growth phase due to a challenging environment in the plantation and property sectors.

In the financial year ended Oct 31, 2014 (FY2014), S P Setia saw its net profit fall 3% to RM405.7 million from RM418.3 million the previous year despite revenue rising 16.8% to RM3.8 billion.

Sime, meanwhile, saw its net profit decline to RM938.1 million in the six months ended Dec 31, 2014, from RM1.31 billion previously due mainly to weak commodity prices.

Market observers say it makes sense for Sime and S P Setia to merge. They each have a 40% stake in Battersea Power Station Development Co Ltd while the Employees Provident Fund holds the remaining 20%. The Battersea project in London has an estimated gross development value (GDV) of RM50 billion.

Datuk Seri Abd Wahab Maskan, managing director of Sime’s unlisted property arm Sime Darby Property Bhd (Sime Property), told The Edge Financial Daily last September that the GDV of Sime Property’s projects could exceed RM100 billion. This excludes its share of the Battersea project’s GDV as well as the development potential of some of Sime’s plantation estates in emerging areas, which could further increase the potential GDV.

In terms of property assets, Sime could be one of the largest property players in the country, alongside IOI Properties Group Bhd (GDV: over RM100 billion) and S P Setia Bhd (GDV: RM71 billion).

Sime also holds a 21.95% stake worth about RM570.7 million in Penang-based developer Eastern & Oriental Bhd.

Rumours about a consolidation or merger of property assets of sorts between Sime and S P Setia are not new.

In S P Setia’s case, questions about its direction and leadership have swirled around since the departure of former president and chief executive Tan Sri Liew Kee Sin last April.

Liew was synonymous with the S P Setia brand and has set the bar very high for his successor. Lined up to take over his duties were the then chief financial officer Datuk Teow Leong Seng and deputy president and chief operating officer Datuk Voon Tin Yow. They were supposed to stay on until this year but Teow left in mid-2014, followed by Voon in December. Deputy president Datuk Khor Chap Jen has now taken the helm of the company.

Sime, meanwhile, needs huge management resources to spur the development of its massive landbank. With plantations being its core business all these years, the group has traditionally focused its management resources on this sector instead of property development.

As for PNB, a merger between Sime and S P Setia would enable it to restructure the assets and strengthen the property division’s management, thus paving the way for an even larger property entity to be listed on Bursa Malaysia.

It is worth noting that PNB wholly owns I&P Group Sdn Bhd, which was formed in 2009 out of the merger of Island & Peninsular Bhd, Petaling Garden Bhd and Pelangi Bhd.

When contacted, Sime Darby says it “cannot comment on speculation” while PNB could not be reached.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on March 16 - 22, 2015.

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