Funds raising

• Proposed placement and bonus
SP Setia announced proposal to undertake a private placement of up to 15% of its paid-up share capital as well as a 1-for-2 bonus issue. The issue price for private placement will be determined by way of a book-building process with a discount of up to 10% to the 5-day VWAP. These corporate exercises, which are subject to approval of the shareholders, are expected to be completed by 1H2011.

• RM1.1bn funds will be raised
Based on the 5-day VWAP as of 7 Jan 2011, the proposed placement will raise about RM1,142m of cash proceeds which will be used part-finance the development of KL Eco City, Setia City, Fulton Lane project in Australia and other projects.

• 40-acre Bangsar land deal confirmed
SP Setia also confirmed that it has procured approval-in-principle from the government to develop the 40-acre prime land in Bangsar as reported by The Edge over the weekend. Details are scant at this point in time as the formal agreement has yet to be signed. Nonetheless, SP Setia has indicated that it will be developing luxury residential and integrated commercial products on the site. Management expect to take 3 months to firm up the development agreement. Note that SP Setia has a 50% stake in this project after a 20% profit share with the Ministry of Health. We estimate the GDV to be around RM8bn and that will add 24 sen to RNAV.

• Earnings dilution
We revise our earnings estimate to take into account earnings dilution which will be partly mitigated by potentially higher than expected sales from KL Eco City as we understand management has secured bookings for 10 out of 12 office blocks.

• Downgrade to SELL
Despite the land deal being positive, share price has appreciated significantly. Current valuation at FY11 P/E of 24.7x is already above 2x standard deviation and 22% above RNAV of RM5.50. Even rolling over target price to FY12 and maintaining 20x P/E to derive revised target price of RM6.00, valuation still look expensive. As such, we believe all positives have been priced-in and advise investors to take profit. Downgrade from hold to SELL.