Sime Darby Bhd
(March 16, RM9.26)
Maintain buy with an unchanged target price (TP) of RM10.20. The Edge weekly reported that a proposal has been put forward to the relevant parties for Sime Darby to buy Pemodalan Nasional Bhd’s (PNB) stake in S P Setia Bhd as a first step towards consolidating the property portfolio of PNB. PNB owns 51.1% of S P Setia. 

This news flow is not new, having surfaced several times last year. While the potential acquisition may benefit S P Setia, it may not benefit Sime Darby. We see no synergies as both companies are in the mass market property segments with largely the same geographical presence such as in the Klang Valley, and may end up cannibalising each other’s market share. 

Sime Darby is already the biggest prime landowner in west coast of Peninsular Malaysia with over 200,000ha of freehold land, including approximately 7,000ha currently under development and another approximately 37,000ha of freehold land in Selangor currently planted with oil palm trees, which has property development potential. 

If manpower is ever an issue driving this potential acquisition, it is much cheaper to hire talent, and Sime Darby’s enlarged property arm will hold up to an 80% stake in the Battersea Power Station (BPS) project, prompting a consolidation of BPS’ balance sheet with the group’s.

This will add an estimated £2 billion (RM10.95 billion) in debt to the group by 2017, when BPS’ cash flow requirement peaks, based on past guidance, to fund BPS’ phase 1 to phase 3 developments. A stretched balance sheet will impede future growth. 

With PNB holding a 51.1% stake in S P Setia, an acquisition of this stake by Sime Darby would trigger a general offer (GO) for the remaining shares in S P Setia. Pricing will be a key determinant to both Sime Darby and S P Setia shareholders in giving their go-ahead. 

Recall that a GO by PNB in 2012 for the remaining shares in S P Setia was at RM3.95 per share. A RM3.95 pricing per S P Setia share should thus be the benchmark for S P Setia shareholders, but this would narrow the valuation upside for Sime Darby. 

Our revalued net asset value (RNAV) estimate for S P Setia is RM5.58 per share while our TP is RM4.07, pegged to 0.73 times of previous RNAV. — Maybank Investment Bank Bhd, March 16

This article first appeared in The Edge Financial Daily, on March 17, 2015.