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A merger to leverage the strengths of both UEM Sunrise and EcoWorld, says UEM Group chairman

KUALA LUMPUR (Oct 6): News of the proposed merger between UEM Sunrise Bhd and Eco World Development Group Bhd (EcoWorld), which will form one of Malaysia's largest real estate companies by market value, set the market abuzz yesterday.

Below is what Tengku Datuk Seri Azmil Zahruddin, chairman of UEM Sunrise's parent UEM Group Bhd, said via an email interview with The Edge on the matter:

The Edge: How did UEM Group come to the conclusion that UEM Sunrise should merge with EcoWorld, instead of other local developers, especially other government-linked companies (GLCs)? 
UEM Group chairman Tengku Datuk Seri Azmil Zahruddin: We have seen a wave of consolidation amongst property developers in some of the other markets in the region — notably China, Thailand and India — generally driven by the fact that larger players tend to be stronger, generating higher returns and margins. The Malaysian property market has been challenging, with a significant overhang in most segments in recent years. The situation has been made even more challenging by Covid-19. The environment seems ripe for consolidation.

Against this backdrop, we have been looking for a suitable partner for UEM Sunrise. UEM Sunrise has a particular set of challenges — geographically, it is concentrated primarily in the southern region whereas in terms of skills and experience, it is relatively strong in high-rise and in the central region. We therefore wanted to look for a partner which could help address some of these challenges.

We looked at a number of potential opportunities but based on facts, data and our assessment, it appeared to us that EcoWorld was the most suitable candidate. EcoWorld is one of the stronger brands in the market, with a sizeable following and a presence throughout Peninsular Malaysia.

We view the proposed merger as an opportunity for an existing government-linked company to be in partnership with the private sector to create one of the largest property developers in Malaysia with a total landbank of more than 17,000 acres locally.

The Edge: Who first came out with this idea  UEM Group or EcoWorld? Has UEM Group received the green light from Khazanah Nasional Bhd on the proposed merger?
Azmil: The letter sent to both companies to consider and deliberate on a potential merger was issued by UEM Group. Khazanah is aware and supportive of this.

The Edge: Who will be leading the management of the merged entity? Why?
Azmil: The composition of the board and the management team will be decided by the Integration Committee. We are proposing for the chairman of the merged entity to come from UEM Sunrise.

The Edge: Is EcoWorld's chairman Tan Sri Liew Kee Sin committed to remaining as a shareholder of the merged entity, and in its management team?
Azmil: We can't speak on his behalf. You may want to pose the question to him.

The Edge: Investment analysts comment that there are hardly any synergies from the proposed merger. What do you say to this?
Azmil: Aside from allowing UEM Sunrise to reduce its over-reliance on Johor exposure from 75% to 63%, the proposed merger will improve its central landbank from 5% to 20%. As mentioned, EcoWorld has particularly strong branding and a robust base of customers. It is one of the most highly regarded property developers in the country with a strong reputation as a township developer and a credible track record across the full suite of property products — ranging from residential to industrial parks.

Importantly, notwithstanding its balanced landbank, it also has a proven track record in Johor. On the other hand, from the perspective of EcoWorld shareholders, the proposed merger will provide them with access to UEM Sunrise's sizeable landbank and strong track record in high-rise residential [development].

Leveraging on the strengths of both parties, we believe the merged entity will be well positioned to serve its customers better.

The Edge: Will you embark on any rationalisation exercise, for instance the downsizing of workforce and streamlining of operations, to achieve better efficiency?
Azmil: I think it is important to stress here that in our view, the merger is predicated on expected yield and revenue enhancement perspective — we are hoping for better landbank utilisation through optimising the products. We have not assumed any cost efficiency in our merger case.

The Edge: Simply put, the proposed merger has met with criticisms. Some quarters see it as a bailout of EcoWorld with taxpayers' money.
Azmil: This is not a bailout. The main premise for this proposed merger is for UEM Sunrise and EcoWorld to leverage off each other's strengths. These include UEM Sunrise's sizeable landbank and EcoWorld's excellent execution capabilities and track record, to create a best in class property developer with strong capabilities in every segment of the industry for the benefit of all shareholders and property buyers.

EcoWorld had healthy unbilled sales of up to RM3.4 billion as at Aug 31, 2020; its net gearing was reduced from 0.7x in October 2019 to 0.6x in July 2020. In addition, EcoWorld's April to mid-June sales of RM642 million were higher than the second quarter 2020 peer average of RM257 million. EcoWorld's current net debt to unbilled sales of 0.9x is lower compared to UEM Sunrise's 1.6x and peer average of 1.3x.

The Edge: How confident are you that the proposed merger will materialise despite the criticisms against it?
Azmil: This is a proposal for the respective boards of directors of UEM Sunrise and EcoWorld to consider, and we hope they will see the commercial benefits of this merger, just as we do.

The Edge: Do you expect more consolidations ahead in the property industry?
Azmil: We wouldn't be surprised if we do end up seeing more consolidations in the industry. Such consolidations will make more sense for players with complementary capabilities and strengths that can deliver synergies and create more value for shareholders.

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