I&P Group buy expected to cushion S P Setia’s profit

S P Setia Bhd (March 29, RM2.99)

Maintain buy with an unchanged target price (TP) of RM4.08: S P Setia Bhd was served by the Inland Revenue Board with notices of additional assessment for an additional income tax of RM22.4 million and a penalty of RM10.1 million, totalling RM32.5 million.

The quantum of retrospective tax claims is about 5% of our financial year 2018 (FY18) earnings forecast of RM645 million. However, we do not take into account the potential negative impact as it is considered non-recurring in nature as well as on the notion that S P Setia is ready to challenge both the notices and penalty.

The above-mentioned additional income tax and penalty were imposed due to the disallowance of both interest and common expenses being treated as deductible expenses in the years of assessment from 2009 to 2015. However, S P Setia is of the view that there are reasonable grounds to challenge the basis and validity of the disputed notices. Note that this is the second retrospective tax claims within months. Recall that S P Setia was also hit by RM75 million of additional income tax and penalty pertaining to the interpretation of the Real Property Gains Tax Act 1976 back in November 2017.

We believe the completion of the realised net asset value (RNAV)-accretive acquisition of I&P Group will provide an earnings cushion in FY18 and is synergistic to S P Setia as a whole in its bid to become the largest pure property player in the market. Its consistent high dividend yield is another positive point.

We maintain our “buy” call with an unchanged TP of RM4.08 based on a 35% discount to RNAV of RM6.27. — Hong Leong Investment Bank Bhd, March 29

This article first appeared in The Edge Financial Daily, on March 30, 2018.

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