Opinion  |  FEBRUARY 15, 2013 9:17AM

PNB’s puzzling moves at SP Setia

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lawrence-reasonable-doubtThe strange move by SP Setia’s majority shareholder Permodalan Nasional Berhad (PNB) to allow its stake to be diluted by a placement of 15 percent of SP Setia’s share capital to obtain funds of RM943 million should raise some red flags.

SP Setia, Malaysia’s largest listed property developer, has a 40 percent stake in London’s Battersea development and is its leading developer. Its other partners are Sime Darby (40 percent), itself majority-owned (56 percent) by PNB, and 20 percent by the Employees Provident Fund (EPF). The fund raising through the share placement is for the London Battersea project amongst others.

While companies issue new shares periodically and it is increasingly common for them to use private placements, it seems odd that PNB would not object to SP Setia placing out shares at RM2.94, especially after it bought up much of the company just under a year ago at RM 3.95 via a general offer which took its stake, together with related companies, to 71 percent from under 33 percent previously.

The issue price is a quarter less than the general offer price and dilutes the value of its existing shares because it was issued at a 7 percent discount to the market price at the time.

The sale of 320.7 million new shares, privately carried out through Maybank Investment bank last Friday, would bring PNB’s stake down to as little as 54 percent from 71 percent.

The other major SP Setia shareholder, president and CEO Liew Kee Sin could see his stake dilute to four percent, from 5.3 percent. Both parties didn’t take up any of the new shares.

PNB which manages over RM200 billion of Malaysian assets cannot be careless like this, especially at a time when the ruling Barisan Nasional government is under scrutiny for all its actions. The government has been on defensive on its management of Malaysia’s economy. PNB should not be allowed to shed losses for no good reason.

But investment analysts mostly didn’t seem to mind. Most maintained a “buy” or “hold” call on SP Setia stock and were probably happy to see that SP Setia’s share bounced to a three-month high this week, after the exercise.

Hong Leong Investment Bank said in a research note on Wednesday that it was “not surprised by this development” even as they note that the final share placement was done at 17 percent below the price that it had expected when the plan was first floated in August last year.

The fact that the low priced share sale raised only RM943 million instead of originally expected RM1 billion or more was also shrugged off.

SP Setia declined to reveal who are the buyers who have benefited from this share sale at near historical lows. The share price rarely dipped below RM3 in the last four years.

To be fair, SP Setia has been waiting for over 6 months to do this share sale since the plan was first mooted, largely to “boost liquidity.” But couldn’t the company have waited just a while longer, at least past the current doldrums in Bursa Malaysia which most everyone is aware of, due to pending national elections?

Instead, industry sources said that perhaps it is PNB’s intention to pass on some of its shares at a discount to other government linked funds including EPF and government pension fund KWAP. PNB and SP Setia both declined to reply to KiniBiz queries about this.

SP Setia’s CEO Liew however said in a statement issued last Friday that its share placement attracted “demand from a good mix of Malaysia, Asian, UK and US funds and was subscribed to by more than 70 local and foreign investors, nearly all of whom are very well known and highly reputable institutional funds.”

“This provides SP Setia with significant firepower to execute the many projects we have both in Malaysia and overseas,” Liew added.

The more likely motive for SP Setia is that it needs to immediately raise working capital to go the extra mile. Entrepreneur Liew and his team have impressively raised SP Setia’s market capitalisation from RM700 million to RM6 billion, since taking over reins in 1996.

The supersizing of SP Setia seems never ending if predictions are to be believed. For FY 2012, it reported a 28 percent increase in sales to RM 4.23 billion and for FY2013, sales could rise another 30 percent to RM 5.5 billion. Sales may even double from 2016 onwards analysts say when Battersea and other projects go full steam.

Only the first phase comprising about 10 percent of Battersea’s total gross development value of some RM40 billion has been launched. SP Setia has been euphoric over the brisk sales of the first 800 units of mixed property development last month in London and elsewhere. But the risk of a Malaysian company running a RM40 billion, 15-year development project so far away from home cannot be overstated. Many companies have tried to develop Battersea since 1983 but floundered before it recently became Malaysia’s biggest overseas property project.

Perhaps PNB, Battersea’s biggest stakeholder, is feeling jittery and they rightly should. In this case, selling off a bit of SP Setia just to hedge its books makes some sense. SP Setia has said that it does not expect to book profits on Battersea at least until 2016, under UK’s accounting rules.

Analysts said that the latest share placement helped cut the net gearing for the company down to 34 percent from 55 percent. This means SP Setia could add RM1.5 billion to its war chest and is just what the company needs to cover development costs for Battersea over the next 2 years.

But the oddest fact about Battersea is probably this one: CEO Liew, has boasted in the past that SP Setia’s biggest advantage is its huge land bank in Malaysia and elsewhere at over 5,000 acres at last count. But the Battersea development, which books in nearly two fifths of its total project gross development value of RM100 billion, is only 39 acres land. Although iconic and centrally located in London, the Battersea power station came under receivership before the Malaysian consortium bought it last year for RM2 billion.

I would sweat a little bit too if I was PNB, holding onto this tiny piece of expensive pie in a country that used to rule Malaysia, and in recent times has not been 100 percent diplomatically friendly.

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