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Monday, June 6, 2016

SP SETIA - Rights Issue To Raise Up To RM1.07bn

SP Setia surprised us with a proposed renounceable rights issue of up to 1,069,686,243 new Islamic redeemable convertible preference shares (“RCPS-i”) on the basis of two RCPS-i for every five existing ordinary shares. The cash call is expected to raise a minimum of RM536.6m to as much as RM1.07bn. We understand that the proceeds will be used for projects and working capital requirements, though some are also earmarked for future property development and expansion plans. With net gearing of 0.2x and unbilled sales of RM8.6bn, this came as a negative surprise for the Group to tap the equity market currently. All told, this cash deal will be dilutive to our RNAV, and hence adjusted our TP to RM3.70 (from RM3.85 previously) to account for the rights issue with c.20% discount to RNAV. Our Outperform call is retained.

To raise up to RM1.067bn. The rights issue via the issuance of 1,069,686,243 new ICPS-i shares in SP Setia is priced at RM1.00 each and expected to be completed by 4Q2016. Correspondingly, SP Setia has also proposed an increase in the authorised share capital from RM2.25bn comprising 3.00bn SP Setia shares to RM2.64bn comprising 3.5bn SP Setia shares and 1.1bn RCPS-i by the creation of 500m new SP Setia shares and 1.1bn RCPS-i. SP Setia’s largest shareholder, PNB which owns 51.04% currently has already undertaken to subscribe in full for its entitlement, which is the minimum subscription level basis of c.RM536.6m of the proposed rights issue. The maximum scenario whereby all ESOS and share grants are exercised and all the entitled shareholders subscribe in full, the cash raised is estimated at c.RM1.067bn. The RCPS-i has annual expected preferential dividend rate of 6.49%, with an additional stepped-up dividend rate of 1.0% but capped at total rate of 20%.

Use of proceeds. SP Setia will utilise the proceeds (c.RM300m) for projects and working capital requirements which among others include Setia Ecohill2, Setia Eco Templer, Setia Sky Seputeh, Setia Trio, Setia Sky Vista and Setia Sky Ville. We believe marketing costs and the Setia 10:90 home financing scheme will also need some capital. The remaining proceeds (up to RM768m) are earmarked for future property development and expansion plans but nothing has been identified as yet.

A negative surprise. With net gearing of 0.2x and healthy unbilled sales of RM8.6bn, we did not expect the Group to raise capital via a rights issue. Also, current debt cost for the Group is ranging from 4.34% to 8.00%, and the ICPS-i is expected to yield from 6.49% with a step-up of 1% annually till the maximum of 20% p.a. This, in our view, is a more costly way of raising capital, given the Group’s current balance sheet. That said, the RCPS-i issuance would minimise immediate dilution effect as the conversion is over a period of time

Source: PublicInvest Research, 06 June 2016

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