Winner: UEM Land-Sunrise
Market size is important to attract investor interest, particularly given Malaysia's two-tier market where institutional funds are heavily drawn to larger stocks and the FBM KLCI is currently bereft of property representation.
At just under RM10 billion, the merged UEM Land Holdings Bhd-Sunrise Bhd entity will be the country's largest property developer by market capitalisation.
This will be followed by the merged entity of IJM Land Bhd and Malaysian Resources Corp Bhd (MRCB) with RM7.2 billion. SP Setia Bhd comes in third with RM5.2 billion while the merged Sunway group, comprising Sunway City Bhd and Sunway Holdings Bhd will be at fourth spot with about RM3.5 billion.
However, the market capitalisation of IJM Land-MRCB could be boosted by the conversion of IJM Land's derivatives and debt instruments. They include 222.56 million outstanding warrants (exercise price: RM1.35) and RM400 million in unlisted redeemable convertible unsecured loan stocks (RCULS, conversion price: RM1.74) issued to its parent, IJM Corp.
Full conversion of these instruments will give IJM Land an implied total market value of RM5.7 billion, and the merged MRCB-IJM Land a total value of RM8.87 billion — not too far off from UEM Land-Sunrise.
2) Free float
A high free float is essential for trading liquidity, garnering institutional interest and for inclusion into the various indices.
In all three cases, the major shareholders (or those intending to hold on to their stakes for the longer term), will hold almost similar proportions amounting to about 56% to 65% of the enlarged entities, leaving a free float of 35% to 44%.
UEM Land is currently tightly held, with Khazanah Nasional holding a 77.1% stake. This will be reduced to between 56% and 65% after the merger, depending on which of the payment options shareholders choose. Datuk Tong Kooi Ong and his associates will hold 6% to 11% of the enlarged entity.
In the IJM Land-MRCB merger, assuming full conversion of all IJM Land's warrants and RCULS, parent IJM Corp (in which the EPF has the largest stake of 19.4%) will hold an estimated 40% stake in the merged entity, with EPF owning 21%.
Over at Sunway, Tan Sri Jeffrey Cheah will own 44% of the enlarged entity. SunCity's second-largest shareholder, Government of Singapore Investment Corporation (GSIC), which currently holds a 21.28% stake in SunCity, would effectively hold a 12% stake in the enlarged entity.
Size winner: UEM Land-Sunrise
Quality winner: IJM Land-MRCB
In terms of acreage, the merged UEM Land-Sunrise will be the biggest with a total of 12,015 acres. Of this amount, 11,420 acres is from UEM Land and 595 acres from Sunrise (comprising 164 acres of development land and a 431-acre plantation).
The merged IJM Land-MRCB will have over 9,000 acres. Of this, 5,318 acres is from IJM Land and about 4,000 acres from MRCB (although mostly in the form of a township in Perak).
There is speculation the merged group will have access to the 3,300-acre Rubber Research Institute (RRI) land in Sungei Buloh, which is being allocated to MRCB's parent, the EPF. This could eventually place it neck-to-neck with UEM Land-Sunrise in terms of acreage.
Meanwhile, the enlarged Sunway group will have about 2,148 acres of land, of which 1,718 acres are from SunCity and 430 acres from Sunway Holdings.
In terms of the quality of landbank, IJM Land-MRCB stands out among the three for its geographical diversity and strength in township and residential developments. IJM Land currently has exposure to major urban growth areas in the Klang Valley and Penang, as well as land in Johor, Negri Sembilan, Sabah and Sarawak.
UEM Land-Sunrise's landbank will be heavily concentrated in Iskandar (Johor), where it has 8,917 acres. As such, its fortunes will be tied to that development, although Sunrise also owns plots of prime land in Mont'Kiara and downtown Kuala Lumpur.
Sunway still has pockets of quality land in Bandar Sunway, Kota Damansara, Mont'Kiara and Penang, but these are starting to deplete. About half of its total merged landbank, totalling some 1,121 acres are in Ipoh, with another 538 acres are in Semenyih.
4) Earnings and stock valuations
Short-term winner: Merged Sunway
Long-term winner: UEM Land-Sunrise and IJM Land-MRCB
The merged Sunway group will have lower price-to-earnings ratios (PERs) than the other two companies, as both Sunway Holdings and SunCity were undervalued to begin with, and are being taken private at PERs of about 12 times for 2011.
As such, the newly merged company will also have a PER of around 12 times for 2011, according to forecasts by a foreign research house. The merged group will not be wholly property-focused, as it will also have interests ranging from construction and quarry to building materials.
By comparison, the other two merged entities will have fairly high PERs and price-to-book ratios.
UEM Land has very lofty valuation ratios to begin with. This will be significantly pared by Sunrise's lower valuations — but overall PER will still remain high.
On a pre-merger basis for FY11, UEM Land is trading at 78.7 times PER and 2.7 times book. Sunrise, meanwhile, has a PER of 8.8 times and price-to-book ratio of 1.31 times. The merged UEM Land-Sunrise entity is expected to have a PER of 37 times and price-to-book ratio of 2.2 times.
In the case of IJM Land-MRCB, the proposed takeover price values IJM Land at 2.43 times book and MRCB at 2.61 times book. On a PER basis, IJM Land is priced at 37.1 times its historical March 2010 earnings and MRCB at 60.5 times its December 2009 earnings.
On a blended basis and before diluting for IJM Land's warrants and RCULS, the merged IJM Land-MRCB would be trading at a historical PER of 47.4 times, and at around 2.5 times book.
While Sunway's near-term valuations are more attractive, UEM Land-Sunrise and IJM Land-MRCB are likely to offer more potential over the longer term. This is due to their far larger landbanks, the attractive long-term proposition of Iskandar for UEM Land-Sunrise and the possibility of IJM Land-MRCB securing the RRI land.
5) Returns for shareholders
Winner: Sunway Holdings
Valuations for the corporate deals are quite subjective, as the prices and valuations offered partly depend on what levels the stocks were previously trading at. For the acquired companies, the price-to-book valuation ranges from 0.98 times book for SunCity to 2.6 times book for MRCB.
In the case of share-swap exercises, such as that of IJM Land-MRCB, the prices may represent more of an exchange ratio (at roughly similar 2.5-2.6 times price-to-book basis for both parties), rather than a perceived fair value of the companies involved.
Perhaps a better measure of returns for shareholders would be the total year-to-date share price gains, which will reflect what longer-term shareholders have made since the start of the year.
Based on last Thursday's closing prices, Sunway Holdings is the clear winner with a year-to-date gain of 84.3%, to RM2.34, while SunCity is up 41.5% to RM4.60. Cheah has proposed to privatise both companies at RM2.60 and RM5.20 respectively.
Year-to-date, UEM Land's shares are up 80% to RM2.21, while Sunrise has risen 32.5% to RM2.73. Sunrise is trading below its RM2.80 takeover offer price, while UEM Land is trading slightly above the exercise's RM2.10 price for new shares to be issued to Sunrise shareholders.
MRCB's shares are up 60.8% year-to-date to RM2.04 while IJM Land has risen 31.9% to RM3.10. Both will undergo a share-swap exercise at indicative prices of RM2.30 and RM3.65, respectively.
6) Merger synergy
Winner: IJM Land-MRCB and UEM Land-Sunrise
All three mergers offer synergy where 1+1 equals more than 2.
Even in the case of Sunway, which appears a more of an internal restructuring where two listed entities are folded into one, the enlarged company should enjoy lower funding costs and be in a better position to attract investors. Integration risks here are minimal as it is the same group.
The benefits for the other two exercises are more obvious.
UEM Land has lots of land, but lacks the branding and near-term earnings, as Iskandar is a long-term development. Sunrise has a very strong brand but a more limited landbank. Its near-term earnings are strong due to large unbilled sales and a ready pipeline of projects.
However, integration risks for this exercise are probably the highest of the three mergers, given the different corporate cultures and the wide disparity in size.
The IJM Land-MRCB merger is complementary as each party brings something different to the table. MRCB has a sizable construction and infrastructure arm, but its property forte is largely limited to KL Sentral.
IJM Land, on the other hand, brings with it strong branding and a large landbank and expertise in township development. This will come in handy for MRCB to plan the RRI township for the EPF.
Integration risks here are relatively low, as the two companies are already professionally-run with institutional shareholders and there is little overlap. Thus, it is possible the two entities may run separately as two divisions under the merged company.
7) Future wildcards?
Winner: UEM Land-Sunrise and IJM Land-MRCB
UEM Land-Sunrise's wildcard lies in the longer-term capital appreciation prospects of Iskandar Malaysia, where it owns 8,917 acres of land. The Iskandar development is still in its infancy and there is potential for higher property prices in the future if it succeeds in increasing cross-border investments and property ownership from Singapore.
Another wildcard would be the possibility of UEM Land's involvement in the development of some 670 acres of railway land in Singapore, which will be undertaken by parent Khazanah Nasional and Singapore's Temasek Holdings on a 60%-40% joint-venture basis.
The biggest wildcard for IJM Land-MRCB would be the possible injection of the 3,300-acre RRI land, which the government is allocating to the EPF, the common shareholder in MRCB, IJM Land and IJM Corp.
The prime land in Sungei Buloh, located next to Tropicana and Kota Damansara, will likely be the next growth centre of the Klang Valley given its size, strategic location and planned public transportation links.
By comparison, there will likely be fewer major surprises for Sunway as it has already reaped a lot of potential from its landbank and surfaced the value of its malls and investment assets from the listing of Sunway REIT. Moreover, the bulk of its landbank is in Ipoh and Semenyih.
This article appears in the Nov 29 edition of The Edge Financial Daily.
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