PNB may become largest property player via S P Setia-I&P merger

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S P Setia Bhd
(Oct 13, RM3.30)
Maintain “hold” with target price (TP) of RM3.45:
The New Straits Times yesterday reported on the possibility of Permodalan Nasional Bhd (PNB) becoming the country’s largest property player by asset value, through a merger between S P Setia and I&P Group Sdn Bhd.

The reasoning behind the merger is to revive S P Setia, which is losing ground to its competitors after more than 300 talents, including top executives, left the group.

We are not surprised by the possible merger as news has been circulating that PNB intends to inject its unlisted assets into S P Setia.

Should this be true, we believe the merger would benefit both property developers as there will be synergistic values in the merger exercise through a combination of business model as well as land bank.

The merger would allow the enlarged entity to reach out to wider target markets as it would then have a larger offering of both premium (S P Setia) and medium-to-low-end properties (I&P Group).

As at Aug 2014, S P Setia has 33 ongoing projects and 1,852ha of undeveloped land bank with a gross development value (GDV) of RM93 billion. The group’s effective stake reached a total GDV of RM32.4 billion.

On the otherhand, I&P has a land bank of 2,090ha in the Klang Valley and also in Johor Baru, with a potential GDV of RM32.4 billion.

Given that I&P is doing well and has a strong brand name, we believe it will rebuild the confidence of S P Setia’s investors and consumers, with hopes to clear the doubts on the latter’s future developments.

Maintain “hold”. Its TP remains unchanged at RM3.45, (maintain 35% discount to revised net asset value, which values S P Setia at 14.8 times financial year 2015 estimate price-to-earnings ratio, vs 18 times for IOI Property Group Bhd and UEM Sunrise Bhd. — HLIB Research, Oct 13

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This article first appeared in The Edge Financial Daily, on October 14, 2014.