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SP Setia and Sime Darby Property will have to justify need for a merger, says analyst

KUALA LUMPUR (Jan 13): Both SP Setia Bhd and Sime Darby Bhd will have to justify the need for a merger of their property businesses, as both firms have no apparent need for such a move, an analyst said today.

A local daily had reported today that the senior management of SP Setia (Fundamental score: 1.4; Valuation score: 1.2) had mooted for the property arm of Sime Darby (Fundamental score: 1.3; Valuation score: 1.6), to acquire the former. It was said this was brought up by the SP Setia’s management two months ago, to Permodalan Nasional Bhd (PNB) and Sime Darby.

PNB is the major shareholder of both SP Setia and Sime Darby.

CIMB Investment Bank’s analyst Ivy Ng said both SP Setia and Sime Darby Property Bhd — the unlisted property arm of Sime Darby, have strong assets and earnings to operate independently.

“Both are equipped with sufficient landbank for future endeavours, and both have profitability to boot, with SP Setia’s profitability slightly higher, according to our estimates,” she said.

“So, both can operate independently, on their own, without the need for a merger.

“They will have to come up with good reasons to do this, in order to win over minority shareholders. This is because as a majority shareholder, PNB will not be allowed to vote, as there would be conflict of interest,” she added.

The news report, quoting unnamed sources, had stated the idea for Sime Darby Property to acquire SP Setia was mooted to resolve a vacuum in leadership, caused by the departure of SP Setia’s former president and CEO Tan Sri Liew Kee Sin on April 30, 2014.

SP Setia’s chief financial officer Datuk Teow Leong Seng, as well as deputy president and chief operating officer Datuk Voon Tin Yow, were supposed to steer the helm of the company into 2015, but both left prematurely. Teow left on July 31, 2014, while Voon left last month.

Liew is currently a non-executive director of Bursa Malaysia-listed Eco World Development Group Bhd. It was announced yesterday that he and Voon, through a private company, has signed deals with Ireland’s Ballymore Group to jointly develop property projects in London, worth £2.2 billion.

The London projects may be eventually injected into a special purpose acquisition company (SPAC) that Liew plans to list on Bursa Malaysia.

CIMB’s Ng said it is still early days for the merger idea to be treated as a concrete move on the part of SP Setia, Sime Darby and PNB.

However, she said based on a “very rough analysis”, the potential takeover of SP Setia would be accretive for Sime Darby’s earnings.

Ng said based on analysis according to SP Setia’s last closing price of RM3.40 and interest for borrowings for the acquisition, Sime Darby can look forward to between 2% to 5% of accretion to earnings.

She said this is because the cost of borrowings that Sime Darby would have to undertake to acquire SP Setia, would be lower than the projected earnings from merging with SP Setia.

In her note today, she said if Sime Darby does acquire SP Setia, it will have to fork out RM8.5 billion for a 100% stake, based on SP Setia’s last closing price. This represents a sizable 29% of Sime Darby’s total equity.

She said the price tag is higher than Sime Darby’s offer to acquire New Britain Palm Oil Ltd (NBPOL) at around RM5.6 billion.

“Pending finer details of the proposal, our rough estimates see the acquisition as being 5% earnings accretive to Sime Darby, if it acquires SP Setia at a 10% premium to its closing price,” she said.

“We are neutral on this acquisition, which will boost Sime Darby’s property earnings and gearing ratio,” she added.

Apart from a common major shareholder in PNB, both Sime Darby and SP Setia have also jointly invested in the successful Battersea Power Station Project in London with 40% stakes each, while the Employee Provident Fund owns the remaining 20%.

The estimated gross development value (GDV) of the Battersea project is £8 billion (RM41.69 billion), which may be revised to £10 billion (RM52.11 billion) due to demand and increase in selling prices.

Liew is the chairman of the Battersea Project Holding Co Ltd, formed to implement the Battersea Power Station redevelopment project.

On whether a merger deal is possibly, Ng said, “I think people are waiting for more details or at least some sort of confirmation that this proposal is actually concrete”.

CIMB Investment Bank maintained its “Hold” rating on Sime Darby, with a target price of RM9.58.

At market close today, shares of Sime Darby rose by 25 sen or 2.73% to RM9.40, while SP Setia rose 4 sen or 1.18% to RM3.43.

(Note: The Edge Research's Fundamental Score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. A score of 0 means weak fundamentals and a score of 3 means strong fundamentals. Meanwhile, the Valuation Score determines if a stock is attractively valued or not, calculated based on historical numbers. A score of 0 means valuations are not attractive. Vice versa, a score of 3 means valuations are attractive.)

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