SP Setia Berhad TP: RM4.10 (+15.5%) Acquiring I&P Group

A Member of the TA Group MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048 C O M P A N Y U P D A T E Monday 17 April 2017 FBMKLCI: 1,730.99 Sector: Property SP Setia Berhad TP: RM4.10 (+15.5%) Acquiring I&P Group THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Last Traded: RM3.55 Thiam Chiann Wen +603-21679615 cwthiam@ta.com.my www.taonline.com.my Buy Last Friday, SP Setia entered into two deals, which will enable the group to become one of the largest land owner in Malaysia. Deal 1: Proposed Acquisition of I&P SP Setia, Permodalan National Berhad (PNB), and Amanahraya Trustees Berhad (as trustee for Amanah Saham Bumiputera) had entered into a non-binding Memorandum of Intent to initiate negotiations on the proposed acquisition of I&P Group Sdn Bhd (I&P) by SP Setia. The indicative price for the proposed acquisition of the entire interest in I&P is estimated to be within the range of RM3.5bn to RM3.75bn. However, the final purchase price will be determined after a due diligence process, which will involve SP Setia engaging independent valuers to value all the land, on-going projects and investment properties owned by I&P. According to the announcement, the proposed acquisition will be funded by a combination of equity, internally generated funds and borrowings. The proposed acquisition is expected to be completed within 9 to 12 months. Deal 2: Proposed Acquisition of Bangi Land Separately, SP Setia had also entered into a conditional sale and purchase agreement with Seriemas Development Sdn. Berhad (a 60% owned subsidiary of PNB Development Sdn. Berhad) to acquire from the latter, a parcel of land measuring approximately 342.5 acres located in Bangi, Selangor known as Bangi Estate for a purchase price of approximately RM447.58mn (or RM30 psf). In addition, Seriemas development will entitle a share of the future audited profit before taxation from the development of the land, up to a maximum of RM3.00 per square foot. The proposed acquisition is expected to be completed by 4Q2017. i n Share Information Bloomberg Code SPSB MK Stock Name SP Setia Stock Code 8664 Listing Main Market Share Cap (mn) 2853.8 Market Cap (RMmn) 10130.9 Par Value 0.75 52-wk Hi/Lo (RM) 3.63/2.80 12-mth Avg Daily Vol ('000 shrs) 2179.70 Estimated Free Float (%) 22.7 Beta 0.67 Major Shareholders (%) PNB (68.0) KWAP (10.4) EPF (6.2) Forecast Revision FY17 FY18 Forecast Revision (%) 0.5 0.8 Net profit (RMm) 730.5 650.1 Consensus 766.7 813.3 TA's / Consensus (%) 95.3 79.9 Previous Rating Buy (Maintained) Financial Indicators FY17 FY18 Net Debt / Equity (%) 16.6 14.4 FCFPS (sen) 18.1 20.1 Price / FCF (x) 19.7 17.7 ROA (%) 3.8 3.2 NTA/Share (RM) 3.3 3.4 Price/NTA (x) 1.1 1.0 More about the land in Bangi Bangi Land is located near Bandar Baru Bangi, Kajang and Semenyih, which is accessible via several major highways namely Kajang-Seremban Highway (LEKAS), North-South Expressway (PLUS) and South Klang Valley Expressway (SKVE). It is approximately 30 km south-east of the city centre of Kuala Lumpur and approximately 25 km from Kuala Lumpur International Airport (KLIA). In addition, the land is also located within a 5-km radius from SP Setia s existing two sister mixed development townships, namely Setia Ecohill and Setia Ecohill 2 see Figure 1. We gather that the company has plans to develop the land into a mixed development township with a potential GDV of approximately RM2.7bn. The township is expected to have a development period of 8 years, with first launch targeted in 2019. Share Performance (%) Price Change SP Setia FBM KLCI 1 mth 4.4 (0.8) 3 mth 10.6 4.1 6 mth 1.4 4.7 12 mth 10.2 0.2 (12-Mth) Share Price relative to the FBM KLCI Reasonable Price Tag for Bangi Land We believe the acquisition cost of RM33psf (including the RM3 psf profit sharing) is fair vis-à-vis the average asking price of RM30-40 psf for freehold agriculture land within the Bangi area. Although Mah Sing paid RM18.56 psf for 408 acres land in Bangi back in May 2012, we note that land price in the vicinity has appreciated rapidly in recent years due to scarcity of suitable land for township development. Based on estimated GDV of RM2.7bn, the acquisition Page 1 of 5 Source: Bloomberg

cost makes up about 18% of total project GDV, which is still below the land cost to GDV ratio s general rule of thumb of 20%. In terms of funding, the recently completed rights issue of redeemable convertible preference shares, which raised RM1.13bn, should come in handy for this land purchase. Our View on the Proposed Acquisition of I&P We are not surprised by the acquisition as there were already market talks of PNB s intent to inject its unlisted property assets into SP Setia. We believe the merger would benefit both property developers as there will be synergistic values arising from combination of landbank and staff strength. Together with I&P s remaining landbank of 4,263 acres and the 342.5 acres of land in Bangi, this will collectively boost SP Setia s remaining landbank by 88% to 9,823 acres. If the acquisition materialises, SP Setia is set to become the third largest property developer by landbank in Malaysia, just behind Sime Darby Property (28,000 acres) and UEM Sunrise Bhd (13,000 acres) see Figure 3. In addition, the press also reported that the combined GDV of both companies is expected to hit a whopping RM122bn. In terms of valuation, the indicative price of RM3.5bn-3.75bn translates to 1.1x 1.2x I&P s 2016 audited net asset value of RM3.16bn, which is comparable to SP Setia s 1.1x. Meanwhile, the indicative acquisition price and I&P s estimated GDV of RM45.5bn would imply a market price/gdv ratio of 0.08x. This suggests that I&P s valuation is attractive if we compare it with SP Setia s current market cap/gdv ratio of 0.13x. Additionally, we also note I&P has a light balance sheet with very low debt level. Although SP Setia is sitting on a strong balance sheet with net gearing of 17% as at end 2016, we believe a cash call may be necessary to avoid overstretching its balance sheet. All in, we are positive on the proposed merger, as it will enable SP Setia to fast track its landbank expansion plans. The proposed acquisition of I&P will likely expedite SP Setia s aspiration of growing its market cap to RM18bn by 2021, from about RM10bn currently. With regards to the management team and future direction, we opine that the current SP Setia management team will continue steering the enlarged entity. This is in view of the fact the SP Setia is taking the lead to acquire I&P, instead of PNB creating a new entity to buy over both SP Setia and I&P. Forecast We fine-tune our FY17 and 18 earnings forecasts by +0.5% and +0.8% respectively after performing some house-keeping. Note that we have not factored in earnings contribution from I&P and the Bangi land acquisition pending the completion of the deals. Recommendation Target price is adjusted higher to RM4.10/share after rolling forward our valuation base year to CY18 and ascribing a higher target P/E of 18x (from 15x previously). Our target P/E of 18x is in line with the group s 5-year average P/E multiple. We expect valuation rerating following the acquisition of I&P, which will further solidify SP Setia as a dominant township player in the central Klang Valley and Johor. We maintain our Buy recommendation on SP Setia. Page 2 of 5

TA Securities 17-Apr-17 A Member of the TA Group Figure 1: Location of I&P Group and SP Setia s Project Klang Valley Figure 2: Location of I&P Group and SP Setia s Project Johor Page 3 of 5

Figure 3: Township developers and their respective remaining landbank (in acreage) Page 4 of 5

Financial Statement Profit and Loss (RM'mn) Balance Sheet RM'mn) FYE Dec 2015** 2016 2017F 2018F 2019F FYE Dec 2015** 2016 2017F 2018F 2019F Revenue 6,746.3 4,957.2 4,240.5 5,101.6 5,581.6 PPE 260.1 271.5 307.1 271.0 236.6 COGS (4,683.1) (3,515.8) (2,798.7) (3,367.1) (3,683.8) Land held for dev 5304.3 5579.6 6179.6 6279.6 6379.6 Gross profit 2,063.3 1,441.4 1,441.8 1,734.6 1,897.7 Concession assets 7.2 11.6 11.6 11.6 11.6 EBITDA 2,010.1 1,270.8 1,005.0 1,188.7 1,272.0 Investment Properties 726.4 1016.0 1016.0 1016.0 1016.0 Depreciation & Amortisation (33.0) (39.5) (64.4) (66.2) (64.3) Associates 1086.8 1677.7 1916.7 1916.7 1972.2 EBIT 1,977.1 1,231.4 940.6 1,122.5 1,207.6 Others 1333.6 1965.1 2204.1 2204.1 2259.5 JV and Associates (440.3) 73.6 239.0 0.0 55.4 LT Assets 7631.6 8843.8 9718.4 9782.3 9903.4 Finance cost (110.3) (120.3) (69.5) (87.8) (96.5) PBT 1,426.4 1,184.7 1,096.9 1,034.8 1,166.6 Property dev. Cost 2111.8 2105.7 2205.7 2305.7 2405.7 EI 0.0 0.0 0.0 0.0 0.0 Inventories 878.9 877.9 698.9 840.8 919.9 PBT Adj 1,426.4 1,184.7 1,096.9 1,034.8 1,166.6 Trade & other receivables 1450.5 1925.3 1045.6 1257.9 1376.3 Cash & Cash equivalent 3752.1 4170.1 4688.7 5484.1 6328.0 Tax (415.4) (285.4) (268.7) (258.7) (291.6) Others 597.8 767.1 767.1 767.1 767.1 MI (50.5) (55.0) (62.5) (90.8) (145.3) ST Assets 8791.2 9846.1 9406.0 10655.6 11796.9 Net profit 918.3 808.0 730.5 650.1 694.4 Core net profit 918.3 808.0 730.5 650.1 694.4 Total Assets 16422.7 18689.9 19124.4 20437.9 21700.3 Core EPS (sen) 35.7 28.3 25.6 22.8 24.3 Trade and other payables 2,592.7 2,455.7 2,058.9 2,373.5 2,548.8 DPS (sen) 23.0 20.0 14.0 14.0 15.0 ST Borrowings 1,782.9 1,973.8 1,776.4 1,598.8 1,438.9 Others 146.5 112.2 112.2 112.2 112.2 ST Liabilities 4,522.1 4,541.7 3,947.5 4,084.4 4,099.8 Cash Flow (RM'mn) PBT 1,426.4 1,184.7 1,096.9 1,034.8 1,166.6 LT Borrowings 3,467.8 3,892.1 4,492.1 5,292.1 6,092.1 Depr & Amort 33.0 39.5 64.4 66.2 64.3 Others 40.5 13.1 13.1 13.1 13.1 Tax (301.6) (285.4) (268.7) (258.7) (291.6) LT Liabilities 3,508.2 3,905.2 4,505.2 5,305.2 6,105.2 Others 527.1 (835.6) 322.9 (139.7) (177.6) CFO 1,685.0 103.2 1,215.5 702.5 761.7 Share Cap 1,971.3 2,140.1 2,140.1 2,140.1 2,140.1 Share Cap - i 0.0 11.3 11.3 11.3 11.3 Capex (1,131.9) (900.0) (700.0) (130.0) (130.0) Reserves 5,423.4 7,049.1 7,380.2 7,630.8 7,897.1 Others (29.7) 0.0 0.0 0.0 0.0 Shareholder's Funds 7,394.6 9,200.6 9,531.6 9,782.2 10,048.6 CFI (1,161.6) (900.0) (700.0) (130.0) (130.0) Perpetual Bond 610.8 610.8 646.0 681.2 716.4 MI 387.0 431.7 494.2 585.0 730.3 Net Addition/Rpmt 819.0 1,617.7 600.0 800.0 800.0 Dividend Paid (31.4) (570.7) (399.5) (399.5) (428.0) Liabilities + Equities 16,422.7 18,689.9 19,124.4 20,437.9 21,700.3 Others (61.6) 255.3 (197.4) (177.6) (159.9) CFF 726.0 1,302.3 3.1 222.9 212.1 Ratios EPS Growth (%) 118.8 (20.6) (9.6) (11.0) 6.8 Net Cash Flow 1,249.4 505.4 518.6 795.4 843.8 PER (x) 10.0 12.5 13.9 15.6 14.6 GDPS (sen) 23.0 20.0 14.0 14.0 15.0 FCF 523.4 (796.8) 515.5 572.5 631.7 Div Yield (%) 6.5 5.6 3.9 3.9 4.2 FCF/share (sen) 19.9 (27.9) 18.1 20.1 22.1 Net Debt (RMm) 1,498.5 1,695.7 1,579.7 1,406.7 1,203.0 Net gearing (x) 0.2 0.2 0.2 0.1 0.1 ROE (%) 12.4 8.8 7.7 6.6 6.9 Asssumptions (RM'mn) ROA (%) 5.6 4.3 3.8 3.2 3.2 New Property Sales 4,320.0 3,823.0 4,008.0 4,944.0 6,650.0 NTA (RM) 2.8 3.2 3.3 3.4 3.5 Property margins (%) 23.7 23.4 22.4 22.7 22.3 P/NTA (x) 1.3 1.1 1.1 1.0 1.0 ** comprising 14-month earnings from Nov-14 to Dec-15 Stock Recommendation Guideline BUY : Total return within the next 12 months exceeds required rate of return by 5%-point. HOLD : Total return within the next 12 months exceeds required rate of return by between 0-5%-point. SELL : Total return is lower than the required rate of return. Not Rated: The company is not under coverage. The report is for information only. Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months. Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium. Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. for TA SECURITIES HOLDINGS BERHAD(14948-M) (A Participating Organisation of Bursa Malaysia Securities Berhad) Kaladher Govindan Head of Research Page 5 of 5