Analysts neutral on Sime-E&O collaboration

KUALA LUMPUR: While the market awaits specific details on the agreement between Sime Darby Bhd and Eastern & Oriental Bhd (E&O), analysts remain cautious on the deal.

Sime announced the acquisition of a 30% strategic stake in the Penang-based property developer close to two weeks ago.

The 30% stake belonged to three significant shareholders — Datuk Terry Tham who is disposing of 12.2%, Tan Sri Wan Azmi Wan Hamzah (9.1%) and GK Goh Holdings Ltd (9.5%).

The acquisition entails a three-year collaboration for which minimal details have been provided, other than that the two companies will leverage each other’s competencies and explore economic opportunities together.

“It’s too early to judge what the final outcome will be, we will have to wait and observe what kind of strategy will be bred of this partnership,” said one analyst.

He added that Sime may capitalise on E&O’s position in the luxury property market, as the latter has committed to a two-year plan to establish a stronger foothold in this segment.

Sime may decide to transfer a certain amount of landbank into E&O, or choose to market its offerings for this segment under the E&O brand, he said.

“Either way, they are likely to reserve a small portion of their overall landbank to focus on this niche development,” he said.

E&O, meanwhile, may be able to grow on Sime’s size and larger capacity.

“E&O will be able to tap into Sime’s landbank as well as their balance sheet, though E&O will also be able to lend its brand for Sime to grow and market its offerings in this very niche segment,” said another analyst.

However, the collaboration is structured, the deal is likely to be a win-win situation as both companies stand to gain from its elevated size, he said.

Moreover, the most coveted aspect of Sime’s acquisition will no doubt be E&O’s prominence in Penang, where Sime has yet to penetrate.

E&O currently has about 680ha in landbank, 80% of which is situated in Penang.

This includes Seri Tanjung Pinang, where Phase Two is currently being undertaken with a remaining concession to reclaim up to 300ha, following the completed reclamation of 97ha under the first phase.

E&O’s properties in the Klang Valley include the Dua Residency condominium in Jalan Tun Razak and Seventy Damansara and Idamansara in Damansara Heights.

Sime’s property development arm, meanwhile, may generate higher contributions with the addition of E&O, though the effect may prove to be marginal.

For FY11 Sime’s property division contributed only 8% to the group’s top line profit of RM5.75 billion, as its contribution to the group fell 8% to RM456 million from RM493 million the year before.

The company attributed the lower performance of its property division to the slower off-take of certain products, deferment of project launches, the write-off of RM19.7 million in project costs and impairment of RM77.7 million for its overseas properties.

Sime operates a total of six segments — plantation, property, industrial, motors, energy and utilities, healthcare and others.

Through Sime Darby Property it has developed townships in the Klang Valley and its business portfolio comprising property development, property investment and hospitality & leisure is active in five other countries, which are Singapore, Australia, the UK, China and Vietnam.

Another concern has been the price paid for the strategic stake in E&O.

For 30% or 273 million E&O shares, Sime offered RM2.30 per share, 59% higher than the last traded price of RM1.45 prior to the announcement and 85% higher than E&O’s book value of RM1.24.

Before the global financial crisis, the stock had been trading upwards of RM3 though it has long since moderated to a range of between 85 sen and RM1.70.

Despite this, the offer price is well below Hwang DBS Research’s revised net asset value (RNAV) of RM3.

According to a Bloomberg poll of five analysts, the stock has a median fair value of RM1.78.

Following the announcement last week, E&O’s share price has been on an uptrend and last closed X sen higher at RM1.67, merely eight sen shy of its 52-week high of RM1.75 reached in April.