S P Setia - Positive indication from cash call?

News   SPSETIA intends to raise up to RM1.0b from a 15% placement of new shares (max scenario: 322.69m) based on the illustrative price of RM3.19 (10% discount to its 5-day VWAP). The group is also terminating its existing ESOS to make way for new ESOS (up to 15% of its share cap). The expected completion is by 4QCY12. 

 Cash call rationales are for the 1) funding of its new projects/land commitments including Battersea, St Kilda@Melbourne, Qinzhou Industrial Park@China, 1HIH/MoH land swap deal, etc. (refer overleaf) and 2) improve the liquidity/public shareholding spread.  

 

Comments   We expect the share base to increase by 35% to 2.47b; this is more than the placement amount due to our maximum scenario** assumption that all ESOS/Warrants will be exercised. FY12-13E EPS will be diluted by 26% each to 14.4-17.1sen. 

 Based on 2Q12 balance sheet, the net gearing will fall to 0.19x from 0.32x. However, we are estimating a higher FY12-13E net gearing of 0.35-0.41x postcash call as the aforementioned projects require heavy financing. 

 Based on the shareholdings as at 27/7/12, PNB and Tan Sri Liew’s shareholdings of 70.0% and 5.65% respectively will be reduced to 61.6% and 4.6%.

 Although the EPS dilution appears significant, we believe it is necessary for the company to become a global property developer. In the last 12 months, the group has expanded aggressively to UK, Australia, China and Singapore while still landbanking locally. 

 We view this positively as it shows PAC’s (PNB & Tan Sri Liew) intentions to maintain their stakes as major shareholders, albeit being diluted. The exercise should improve liquidity and reduce concerns of a delisting/privatisation. 

 

Outlook  We understand that the group will embark on a book building exercise to invite non-PAC/new shareholders to subscribe. 

 

Forecast  No changes to our FY12-13E estimates based on our assumed sales of RM3.8b-RM4.0b. Note that our estimates and per share estimates fully reflect the placement at maximum scenario. 

 

Rating Maintain MARKET PERFORM

 Although there are catalytic projects at hand, it appears SPSETIA is still finding it tough to command premium valuations without sufficient liquidity. Upon the successful placement, we will look to revisit our call with an upside bias on the back of its promising overseas expansion.

 

Valuation   We have lowered our TP to RM3.90 from RM4.05 on a steeper discount of 29%* (21% previously) to a higher FD SoP RNAV of RM5.46 (refer overleaf). 

 

Risks  Sector risks and liquidity issues.  

Source: Kenanga