PNB to merge S P Setia and I&P Group to form one of Malaysia's largest property developer

S P Setia's Grade A corporate headquarters is centrally located in the 240-acre Setia City commercial centre of Bandar Setia Alam in Shah Alam. The 2,525-acre Setia Alam township was launched in 2004 with a gross development value (GDV) of RM16 billion. S P Setia's Grade A corporate headquarters is centrally located in the 240-acre Setia City commercial centre of Bandar Setia Alam in Shah Alam. The 2,525-acre Setia Alam township was launched in 2004 with a gross development value (GDV) of RM16 billion.

Prominent property developer S P Setia Bhd, government-linked asset manager Permodalan Nasional Bhd (PNB) and Amanahraya Trustees Bhd (as trustee for Amanah Saham Bumiputera) have entered into a non-binding Memorandum of Intent to commence negotiations on the proposed acquisition of I&P Group Sdn Bhd by S P Setia.

If the acquisition is realised, S P Setia will 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), S P Setia president and CEO Datuk Khor Chap Jen told reporters after the signing ceremony yesterday.

The indicative price for the acquisition of the entire equity interest in I&P Group from its substantial shareholder PNB is estimated to be between RM3.5 billion to RM3.75 billion. This price represents between 35% and 38% of S P Setia’s current market capitalisation of about RM10 billion.

Both companies belong to PNB’s stable of property companies.

However, the final purchase price will only be determined and agreed upon taking into consideration the necessary due diligence results, the audited net asset value of I&P Group which as at end-2016 was RM3.16 billion, and the market value of all the landbank, on-going projects and investment properties of I&P Group as appraised by the independent property valuers to be appointed by S P Setia.

The signing ceremony was witnessed by PNB group chairman Tan Sri Abdul Wahid Omar and president and group chief executive Datuk Abdul Rahman Ahmad. Abdul Rahman said the merger of the two companies will create one of the largest property companies in Malaysia. I&P has an undeveloped landbank of 4,263 acres.

The combined landbank of S P Setia and I&P Group will be around 9,481 acres with an estimated combined gross development value (GDV) of about RM122 billion.

The enlarged group will also be poised to have a revenue of about RM5 billion, with S P Setia and I&P Group currently generating RM4 billion and RM1 billion in revenue, respectively.

Tan Sri Abdul Wahid Omar said: “This will require finance and funding. We are evaluating how best to finance it. It is still early (days) but PNB will stand by to support this to make sure the transaction is successful.” He says the acquisition process will be transparently done, and that PNB will not vote on it and will be careful and mindful of minority shareholders of S P Setia.

Khor said S P Setia has been on the lookout for land for some time now as it has used up most of its landbank. For township development, S P Setia has around 700 acres in the Klang Valley and a similar sized landbank in Johor. Hence the acquisition of I&P will help solve S P Setia’s search.

Khor said the consolidation period for S P Setia is over and the property developer has set a five-year strategic plan to boost its current market capitalization of about RM10 billion to RM18 billion by 2021 and become one of the component stocks in the FTSE Bursa Malaysia KLCI Index.

“Acquiring I&P Group is more than just landbanking. We see a lot more synergistic opportunities with the company as it owns more than 4,200 of prime lands in the Klang Valley and Johor,” he said.

Some of the lands under I&P Group are located in places where S P Setia currently has no presence in so it could give the latter an opportunity to venture into new markets, such as Kinrara and the Southern parts of Klang, Khor explained.

In addition, I&P Group has a light balance sheet with very low debt level, so it will be an excellent platform to support S P Setia’s future financing for growth, he said.

“We have 1,800 staff now but it is not enough for us to carry out our plans and advance into a higher level, so I&P Group will also provide immediate access to a ready talent pool for our expansion plan.” Khor noted.

Yesterday’s signing ceremony also included a deal in which S P Setia will buy 342.5 acres in Bangi from Seriemas Development Sdn Bhd for RM447.6 million, or about RM30 per sq ft, plus a share of the future audited profit before tax from its development, up to a maximum of RM3 per sq ft. Seriemas is a subsidiary of PNB Development Sdn Bhd.

According to KAF Research, this conditional profit sharing component of 20% effectively raises the acquisition cost from RM30 per sq ft (psf) to RM33 psf.

For comparison, Mah Sing Group Bhd’s successful Southville City, a 408-acre mixed township development in Bangi, was acquired for RM18.56 psf back in May 2012. Nonetheless, “we note that land prices has been rising since then due to the scarcity of choice development land suitable for township development in the vicinity,” says KAF.

The land is located within the 5km radius from SP Setia’s existing township developments – Setia EcoHill and Setia EcoHill 2 in the southern corridor of the Klang Valley.

While analysts and bankers work out the numbers the days ahead, the two events created much excitement for S P Setia staff. Said an S P Setia source: “This is good news. When something like this comes along, we have to work even harder. It also shows that PNB believes we can cope with this. There is an underlying reason why SP Setia staff are bullish about the deal.”

In 2011/2012, PNB, then under Tun Ahmad Sarji Abdul Hamid, triggered a hostile takeover of S P Setia. The encounter created a fair bit of uncertainty. On 1 August 2016, Tan Sri Abdul Wahid Omar was appointed chairman, replacing Ahmad Sarji who had 19 years with PNB.

As one S P Setia source stressed, the new guy is “easy to connect with. Hopefully, today will be the beginning of a new chapter in the PNB-S P Setia relationship,” he says. I&P Group, a wholly-owned subsidiary of PNB, was formed in 2009 after the mergers of three property companies, namely Island & Peninsular Sdn Bhd, Petaling Garden Sdn Bhd and Pelangi Sdn Bhd.

Tan Sri Abdul Wahid Omar said: “We believe in leveraging on the strengths of the two organisations, the position of S P Setia and with that of I&P." It is believed that they will compliment each other in terms of landbank, skills and other resources.

S P Setia’s financial year 2017 sales target of RM4 billion already makes the property giant one of Malaysia’s top developer in terms of sales. Even without the acquisition, S P Setia had already lined up RM5.4 billion worth of new launches for 2017.

For Q4 2016, S P Setia reported more than three times quarter-on-quarter jump of net profit to RM424.8 million, due to handover of London's Battersea Power Station Phase 1 units and from its Parque project in Melbourne, Australia. The developer locked in new sales of RM1.8 billion in the last quarter of 2016, bringing full year sales to RM3.8 billion, which exceeded management’s sales projection of RM3.5 billion.

For the financial year 2016, S P Setia’s revenue totalled RM4.96 billion, compared to RM6.75 billion a year ago which accounted for 14 months financial results.

A key question will be management and drivers of the new entity. A source says the current S P Setia management team will continue to manage the enlarged entity. Yuslina Mohd Yunus, who has been with I&P for 26 years, has also been designated group managing director effective 1 May 2017, replacing Datuk Jamaludin Osman who retires on 30 April.


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