What are PNB’s options with SP Setia?

By Khairul Khalid

SP Setia’s leadership crisis demands quick action from majority shareholders PNB but they have been slow to react. Is a mega merger on the cards or are there other forces at play?

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With the resignation of SP Setia’s acting CEO Voon Tin Yow throwing the company into a leadership crisis, majority shareholder of the company PNB (Permodalan Nasional Bhd) is under increasing pressure to reveal a proper succession plan that has not been forthcoming since it took over SP Setia in 2012.

Khor Chap Jen, current executive director who will take over Voon’s place in January 2015 will be the third SP Setia in just over eight months. He will only be acting CEO and it looks extremely likely that he won’t be staying for long either, judging by the wave resignations from SP Setia and exodus of staff to Eco World Development Group, the property company that was set up by former SP Setia CEO Liew Kee Sin’s associates.

PNB president and CEO Hamad Kama Piah Che Othman was on the defensive when asked about the issue after Voon’s announcement and would not shed further light on a succession plan.

“The succession plan is a board matter. We believe that the SP Setia board has already appointed someone to act on the succession plan. We believe that technically they will make a prudent decision. We also believe their board knows better on the day-to-day management,” Hama reportedly said at a media conference.

Perhaps Hama is just keeping his cards close to his chest but PNB’s continuous reticence to detail any formal succession plan and its strangely mute reaction to the en masse movement of staff to Liew’s Eco World is already causing unease among industry observers and analysts.

“It’s becoming a farce,” said an industry observer referring to the failure of PNB to appoint a permanent CEO even though they have had more than two years to plan for a transition from the Liew era.

Even more worrying is that the PNB’s indecision is eroding the SP Setia brand built up over the years and could hurt the company’s bottom line.

“Frequent changes in leadership could hamper the development of SP Setia’s strategy direction, which may in turn affect the group’s project execution and profit margin,” said TA Securities in an analyst report.

So what exactly are the options on the plate for PNB with regards SP Setia’s future management team?

Winds of a merger

One option for PNB is to merge SP Setia with one or more of the property developers in its portfolio.

A rumour that has been floating around almost since the beginning of the PNB takeover is a mega merger between SP Setia and two major companies in PNB’s portfolio — Sime Darby and Island & Peninsular Group (I&P).

Sime Darby is Malaysia’s largest conglomerate with motor, plantation, property, industrial, and energy & utilities divisions. PNB is the biggest shareholder in Sime Darby Group, with 52.8% through direct and indirect shareholding. The conglomerate’s property division Sime Darby Property has the largest land bank in Malaysia with 19,000 acres with another 18,800 acres identified for future development.

Although rumours off Sime Darby spinning off its divisions to unlock value has been proposed for some time, a merger of its property division with SP Setia although not impossible is seen by some as a difficult proposition.

“Sime Darby is a different animal altogether,” said a market observer referring to the conglomerate’s corporate culture and political connections.

The other property company under PNB that seems a more likely candidate for a merger with SP Setia is I&P. Between 2005 and 2007, PNB had privatised three listed companies — I&P, Petaling Garden and Pelangi — for RM1.34 billion and restructured them under the I&P Group in 2009.

Market talk has it that this is a strong possibility that PNB is considering at present. PNB did not respond to emailed queries by KiniBiz while SP Setia declined to provide any input.

“A M&A (merger & acquisition) involving the unlisted I&P Group and SP Setia, if it materialises, would not be a surprise to us. It is just a matter of time.  Since SP Setia has a more established customer base and operating system as well as a stronger brand name, the injection should unlock the maximum potential of PNB’s land bank,” said a Maybank Research report.

A UOB Kay Hian report also talked up the possibility of a SP Setia and I&P merger.

“Potential asset injection could be a catalyst. Media reports have been suggesting SP Setia could acquire its major shareholder’s landbank, which includes I&P’s landbank. It reportedly has about 11,889 acres of land, of which 1,931  acres are still undeveloped. Most of these landbank is in the Klang Valley and Johor Bahru,” said a UOBKH analyst report.

The report also adds that in comparison, SP Setia has currently over 4,782 acres of undeveloped land bank with a potential GDV (gross development value) of above RM71 billion.

“The bulk of its landbank is within the Klang Valley. We estimate the acquisition of these assets could enhance SP Setia’s RNAV (revalued net asset valuation) by over 15%,” said Maybank.

I&P CEO Jamaludin Osman has long been tipped to be the permanent successor for Liew but both SP Setia and I&P have so far kept silent about the rumours.

On the other hand, there also some quarters who doubt that SP Setia and I&P would be a good fit.

“Jamaluddin is not likely to take over,” opined a market watcher to KiniBiz, asking not to be named. “Likely no merger with I&P (involving SP Setia) too because they are two separate companies with different branding.”

Jamaluddin had previously denied knowledge of any plans to name him the CEO of a potential new entity from such a merge to KiniBiz, saying that he is “just an employee”.

Can PNB keep the current team?

Another option is for PNB to retain the existing SP Setia managerial team by offering them permanent positions, although judging by recent events it is the least likely scenario.

If PNB was considering that option, logically they would have offered Voon and his team permanent positions to assure them of their long-term future in SP Setia. However following Liew’s departure Voon was only made an acting CEO instead of being named to the position permanently.

It is estimated that between 300 and 500 staff have migrated from SP Setia to Eco World since the PNB take over, from board members to top managers down to frontline sales and administration staff. Even Voon’s daughter reportedly joined Eco World as a staff from its inception.

This seemingly endless wave of departures cannot be good for staff morale of SP Setia. Far from the continuity cited in the succession plan approved by the company board in March 2013, it appears that uncertainty has enveloped the company instead.

As an alternative to trying to maintain as much continuity as possible — which does not seem to be working at present — another option for PNB is to find a completely new person for the CEO post and allow the new CEO to realign SP Setia to his or her personal leadership and style.

In the second part of this series, KiniBiz looked at how the personal touches of a CEO can be unique to the individual, which translates into a unique company culture and environment.

“Different CEOs have different styles,” said a market observer to KiniBiz, asking anonymity. “Liew was people-oriented, while IOI Group’s Lee Shin Cheng had tremendous respect for costs, for example.”

The observer added that any new CEO coming in would have likely changed SP Setia’s internal environment and driving values.

This meant that the SP Setia brand would be transformed into a different entity than what PNB spent RM6 billion to acquire.

However the other side of the coin is the argument that with the departure of Liew — whose vision and leadership that brand was built upon — and his long-time associates, it would not have been possible for PNB to keep the brand as it was, in which case they might as well have let a qualified new CEO to reshape the brand quickly and march forward post-Liew without wasting too much time in transition.

Lacking urgency

In any case, it is strange that PNB has not pulled the trigger on any firm plans for SP Setia since the 2012 take over, leaving the company in a leadership limbo. None of the above options have meaning if not translated into action.

Although Liew has officially left the company, it is still chairman of the Battersea project at least until September 2015 and that could be a reason why PNB is still reluctant to reveal its succession plan.  There could be other forces at play behind the scenes and PNB’s silence only invites more speculation.

Either way, it is imperative for PNB to immediately draw the line on the massive departures to Eco World. Apart from its land bank, SP Setia’s staff members are also a considerable asset.

A Malay proverb goes that time is gold, and it cannot be more poignant in the case of the uncertainty surrounding SP Setia’s leadership crisis. If PNB dithers on the much talked about succession plan, by the time it finally imposes its blueprint it could be left with just a shadow of the property giant it spent RM6 billion to acquire.

As long as the crisis isn’t resolved urgently then SP Setia would continue to be in limbo and PNB’s massive investment in acquiring it would look a waste that shouldn’t have been.

Yesterday: Is Eco World rising at SP Setia’s expense?