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Property mergers to the fore

KUALA LUMPUR: Size matters. This is the message that property developers have been sending out recently, as seen from the slew of tie-ups among the big names.

In the span of a month, three significant proposed mergers among property developers have emerged in the market, and all with the objective of building up size.

Early this month, UEM Land Holdings Bhd, a unit of government investment arm Khazanah Nasional Bhd, proposed to take over Sunrise Bhd, to create the country's largest property entity, that will have a market capitalisation of slightly under RM10 billion.

Hot on the heels of that proposed merger, IJM Land Bhd and Malaysian Resources Corp Bhd (MRCB) announced they would also embark on a merger exercise that would effectively make them the second largest property player, in terms of market cap, in the country.

The latest is a merger involving Sunway Group, where Sunway Holdings Bhd — primarily a construction company — and Sunway City Bhd (SunCity), will be merged into an enlarged entity helmed by Tan Sri Jeffrey Cheah and his daughter Sarena, SunCity's strategic and corporate development director.

Apart from seeing the landbanks of all three enlarged entities balloon sizeably, one of the key attractions for the mergers is to drive share liquidity.

"Prior to these proposed corporate exercises, S P Setia Bhd was the only property player that commanded more than one time price-to-book. The lack of liquidity in property stocks has somewhat dampened the interest of foreign investors, especially institutional funds, in property companies here.

"But, all that is about to change. Based on the sheer size of the soon-to-be merged property companies, investors will find it hard to ignore property stocks," a banker said.

Which is the better bet?

Indeed, investors will be spoilt for choice once all three enlarged property entities are listed on the market.

But, should an investor ride on all three? Or is there one particular company that will stand out?

Analysts say that, if an investor were looking for size, the enlarged UEM Land group would be the bet. Following the completion of the merger between UEM Land and Sunrise, the property company will have close to 12,000 acres in its landbank — most of it situated in the Iskandar region.

"If you buy the growth story of the Iskandar region and the Sunrise brand, which also has development projects in Canada, then you may want to take a look at the enlarged UEM Land," a property analyst said.

He said the key advantage to being the largest property entity with an established brand is the access to financing from the debt market it brings.

According to a recent report by Nomura Securities, developers such as SP Setia and IJM Land tend to have access to cheaper funds — between 3% and 4% a year — compared with smaller property developers like Hunza Properties Bhd, which borrows at about 7%.

Another sweetener in the UEM Land deal is the option to accept 2.8 unlisted redeemable convertible preference share (RCPS) in UEM Land at an issue price of RM1 for every Sunrise share.

However, some industry observers suggest that the enlarged UEM Group may not be that attractive, since the Iskandar Development Region is a long-term project, which means any further upside to the stock may take a longer period to unlock.

"Sunrise's build-and-sell strategy will provide the enlarged UEM Land near-term upside, but bear in mind that Sunrise does not have much land left, and so, most of the development projects will come under the Nusajaya development, which is in UEM Land's landbank in the Iskandar Region," an industry observer said.

Additionally, there are still questions on how these two companies will integrate, since the corporate cultures in Sunrise and UEM Land are also different.

On the other hand, the IJM-MRCB merger appears to be "a merger of equals", a banker said. "IJM Land has a diversified landbank around the country, while MRCB's jewel is the KL Sentral area with a gross development value of over RM12 billion. The merger then creates an enlarged entity with high-quality landbank," he said.

Furthermore, MRCB, being 41.6% owned by the Employees Provident Fund, is believed to be a front runner to develop the 3,300 acres of Rubber Research Institute (RRI) land in Sungei Buloh. The land would be developed via an EPF-government partnership.

IJM Land and MRCB share more similarities as partners, in terms of management style. "Both IJM Land and MRCB are run by professional managers, with institutions as shareholders. Hence, there are more similarities in terms of culture between the two companies," the banker commented.

As for the proposed merger between Sunway Holdings and SunCity, analysts laud the 20% cash and free warrants sweetener for shareholders and say the proposed merger will have the least integration risk among the announced tie-ups.

"The merger will ensure better utilisation of resources within the group and create a larger vehicle with a stronger balance sheet to undertake bigger projects," HwangDBS Vickers Research wrote in a report last week.

However, some are of the view that Sunway's proposed merger may not create as much excitement and drive liquidity in its shares.

"The purpose of Sunway's proposed merger exercise is to streamline its operations to create a bigger, more efficient property company. But, it is not creating a new player in the market, unlike the proposed merger between IJM Land and MRCB," a banker said.

Game changing

As UEM Land, MRCB, IJM Land, Sunway Group and Sunrise have taken the opportunity to become bigger players, industry observers say other property developers such as SP Setia and Sime Darby Property are seeing a change in the game as well.

"The proposed mergers are making other property players sit up, as investors, especially institutional funds now have more choices for which property player to invest in," an industry observer said.

Prior to the slew of proposed tie-ups, UEM Land and S P Setia Bhd were the two largest property players in terms of market capitalisation, and among the few that could command more than one-time price-to-book.

UEM Land's market capitalisation this year was boosted by a rights issue and a rally in its share price, but S P Setia has always been the top favourite of institutional investors.

However, S P Setia is set to be knocked off its No 2 spot in terms of market cap, as the bigger players enter into the market.

In terms of market cap, the merged entity of UEM Land and Sunrise will be the largest, with just under RM10 billion, while the proposed merger between IJM Land and MRCB would rank it second with just over RM7 billion.

"SP Setia is not likely to sit down and watch. It would not be surprising if S P Setia were also looking at opportunities to grow inorganically, given the increased competition in the property market," a banker said.

Permodalan Nasional Bhd is a major shareholder in S P Setia, owning close to a 30% stake in the company.

Another big name that will have to up its game is Sime Darby Property. Sime Darby's key advantage is that it has the largest landbank among all property players in the country, but it has not been moving as fast as other property companies in terms of launches and development projects, an industry observer said.

"It will take a while before Sime Darby rationalises its property assets, since it is still licking its wounds from the massive losses at other subsidiaries within the group," he said.

Smaller players such as Mah Sing Group Bhd could also be looking at merger opportunities, a market source said. "However, it may take more time for Mah Sing to get partners, since it is a niche player that builds high-rise condominiums, which appears to be less attractive than township developers," he said. Nevertheless, the question "Who is next?" will continue to asked around the market, as the property developers gear up for further shakeups.

This article appears in the Nov 29 edition of The Edge Financial Daily.
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