This article first appeared in The Edge Malaysia Weekly on April 17, 2017 - April 23, 2017
S P Setia Bhd has begun exclusive talks to acquire sister company and fellow developer I&P Group Sdn Bhd. Should the discussions lead to a deal in three months’ time, Permodalan Nasional Bhd (PNB) is set to be the biggest winner.
In a nutshell, a successful deal will enable PNB to unlock value in privately held I&P. PNB will also be having its cake and eating it, as it will retain control over I&P via its indirect majority ownership of S P Setia.
What is less clear is whether such a marriage will prove fruitful for S P Setia.
The clock began ticking last Friday when PNB and S P Setia signed a non-binding memorandum of intent to kick-start talks. Any deal would be a related-party transaction as PNB, which wholly owns I&P, also has 55.93% equity interest in S P Setia.
S P Setia says it is eyeing the entire stake in I&P, valued at an estimated RM3.5 billion to RM3.75 billion, subject to a due diligence process.
In comparison, I&P’s audited net asset value stood at RM3.16 billion as at Dec 31 last year, while its profit after tax was RM281.5 million, based on its latest filing with the Companies Commission of Malaysia (CCM) for FY2015.
By taking the lower base of RM3.5 billion as the indicative price of the proposed acquisition, I&P would have been valued at 12.5 times its earnings in FY2015.
For perspective, the trailing price-earnings ratio of S P Setia was 12.1 times, indicating a slight premium on I&P. The indicative price of RM3.5 billion also represents 22.9% of PNB’s net income and a quarter of its total dividend payout last year.
S P Setia says an acquisition will be synergistic in the long term as I&P has 4,263 acres of land in the Klang Valley and Johor Baru — areas where its own Setia brand is strong — which will accelerate the former’s land bank expansion. S P Setia owns about 5,218 acres.
The move fits into PNB’s strategic plans, “that is to rationalise and enhance PNB’s property investment”, says its chairman Tan Sri Abdul Wahid Omar. “This will create a much stronger entity together.”
An analyst, who covers the property sector, agrees that the deal is a good one for PNB.
“It will be able to unlock the value of these assets and still be able to participate in the development of the land. If it is good, it will get to enjoy the profits,” he says.
However, it is too early to tell if it is a good deal from S P Setia’s perspective, given that the developer’s pre-acquisition land bank is “already more than enough”, he adds. He questions whether there is any urgency to buy more land given the current soft property market.
“I honestly think that unless they (S P Setia and I&P) can pull a rabbit out of the hat, there may not be synergy between the two given the difference in their cultures.
“Having said that, it is still too early to say. We still have to look at the valuation of the deal and wait for more information, but it is safe to say that it is a good deal for PNB,” the analyst reiterates.
It is worth noting that I&P’s valuation, which S P Setia estimates at up to RM3.75 billion, may have been depressed by virtue of its unlisted status.
To recap, I&P was the result of a PNB-driven merger between three developers in May 2009. They are Island & Peninsular Sdn Bhd, Petaling Garden Sdn Bhd and Pelangi Sdn Bhd.
Since then, however, the book value of its total assets has only grown from RM3.79 billion to RM4.69 billion as at Dec 31, 2015, based on CCM’s records.
S P Setia’s total assets had risen from RM3.95 billion in the financial year ended Oct 31, 2009 (FY2009), to RM15.5 billion in FY2015. Its market value had also increased more than 191% over the same period, reaching RM10.13 billion as at last Friday — an annualised growth rate of about 14%, according to Bloomberg data.
It is noteworthy that despite the huge gap in the value of the two developers, they share similarities in terms of the size and location of their land bank, based on S P Setia’s statement.
Given PNB’s existing majority stake, the I&P acquisition will likely be mainly a cash deal. It is worth noting that S P Setia is separately buying 342.5 acres in Bangi from another sister company, PNB Development Sdn Bhd, for RM447.58 million cash.
The sale includes a profit-sharing arrangement of 20% of the audited pre-tax profit from the land development, capped at RM44.75 million.
Meanwhile, a look at I&P’s historical financial performance reveals a cash cow that had sustained a net profit margin of between 21% and 24% between 2012 and 2015. In comparison, S P Setia’s net profit margin for the same period was between 10% and 15%.
If the acquisition goes through, integration would be a key challenge given the aforementioned difference in corporate culture.
That said, a local fund manager, who is positive on the deal, believes the S P Setia team will likely take charge. “This is good given its track record in marketing and branding. If it does it right, the next phase of growth for the company would be interesting to watch.”
The retirement of long-serving I&P group managing director Datuk Jamaludin Osman — who, industry officials say, runs a tight ship with a more conservative approach — may also smooth the integration process with the more aggressive S P Setia.
Jamaludin will retire on April 30 after 12 years at the helm. Taking over from May 1 is Yuslina Mohd Yunus, the current general manager of group finance and information technology, who has been with I&P since 1991.
Overall, the fund manager believes the proposed deal appears to result in a win-win situation, with the creation of value from the corporate exercise being the critical factor. “Datuk Khor Chap Jen, S P Setia’s CEO, has also mentioned the group’s ambition to reach about RM18 billion in market capitalisation.
“As a bigger group and with the Wahid effect, this certainly looks like a good deal for the group.”
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