Accept or wait for better deal?

PETALING JAYA: Apart from substantial shareholder Tan Sri Liew Kee Sin, S P Setia Bhd's minority shareholders are probably also thinking hard whether to accept Permodalan Nasional Bhd's (PNB) takeover offer of RM3.90 per share.

An offer that values the property company at 2.25 times of FY12 price-to-book (PBV) value, which is slightly above its five-year historical average of 2.22 times, is considerably appealing in view of the current bearish market sentiment. Furthermore, the unfavourable economic conditions do not augur well for the property sector.

"We advise investors to accept the offer which we view as fair and attractive since it values S P Setia at upcycle valuations when the current market condition is on a downtrend," said ECM Libra in a research note on Thursday, Sept 29.

"The offer is also attractive now given equity market risk aversion is pervasive while the property sector may potentially enter a cyclical downturn due to weakening economic outlook, deteriorating housing affordability and policy risks," it.

RHB Research and OSK Research are also recommending shareholders take up the offer.

Valuation aside, some fund managers noted that another consideration is whether there is any good reason for investors to hold onto their S P Setia shares.

PNB may use S P Setia as a vehicle to consolidate all its property development businesses, making it the biggest developer by market capitalisation, landbank and sales. But bigger does not always mean better.

This is because PNB has a less than impressive track record in property development as Island & Peninsular Bhd and Sime Property Bhd used to trade at large discounts to their respective book values.

CIMB Research, for one, said if Liew exits, PNB and S P Setia would be deprived of one of the most dynamic and aggressive CEOs in not just the property sector but in Malaysia.

"As S P Setia's employees are fiercely loyal to Liew, it is conceivable that many would want to join him in his next endeavour. In such a scenario, the price may turn out to be very high for PNB as it would end up with a company with a lot of landbank but without the senior management necessary to execute those projects," CIMB Research said.

S P Setia's premium valuations as the bellwether and best-managed property company might then start to disappear, it said.

CIMB Research said if Liew continues to run the show, S P Setia would be a stronger entity as its chances of securing land privatisation projects such as the Rubber Research Institute land would be enhanced.

It said as a PNB subsidiary, S P Setia's share price would probably scale new highs when markets rebound and the property sector regains favour. CIMB downgraded its call on S P Setia to "neutral" from "outperform" with a RM4.73 target price.

PNB had on Wednesday launched a takeover bid on S P Setia at RM3.90 per share and 91 sen per warrant. In response, S P Setia said it will invite counter bids from other parties as the offer "fundamentally undervalues" the developer.

Since the S P Setia board is inviting counter bid, some analysts are of the view that there is no hurry for investors to surrender their shares now.

OSK Research said it does not rule out the possibility of PNB revising its offer price upwards or a higher offer price from other interested parties.

"These options will be also made available to investors who take up the PNB offer," it said.

HwangDBS recommended adopting a "wait and see" approach since the S P Setia board is seeking a higher offer by PNB or other parties.

However, the research outfit said the challenge for any competing bidder will be the capital outlay as S P Setia is valued at some RM7.1billion. Furthermore, its foreign shareholding currently stands at 21%.

HwangDBS also noted that PNB's offer values S P Setia at 24% discount to real net asset value (RNAV) of RM5.11against the backdrop of current weak market sentiments.

It also said the 11% premium over S P Setia's last traded price offer is lower than the 14% to 31% range seen for previous privatisation or merger and acquisition exercises in the local property sector. HwangDBS has a "buy" call on the counter with a target price of RM3.90.

JPMorgan said there is no real hurry to accept the bid until the offer becomes unconditional, as the share price will likely be well supported by the offer price.

The foreign broker believes that the assumption other government fund would counter bid is far-fetched given PNB's already significant holdings in S P Setia.

"Watch how it will all pan out before accepting the offer. There should be no downside as your RM3.90 offer is still on the table," it added.

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