Conditional Takeover Offer From UEM Land
On 4 Nov 2010, UEM Land (Not Rated) announced a conditional takeover to acquire the entire equity interest in Sunrise at an offer price of RM2.80/share. Based on this offer price and after adding back the recently-announced net interim dividend of 20 sen, this would value Sunrise at approximately 1.3x FY11 P/NTA, but at a mere 0.58x of P/RNAV. This implies a hefty 44% discount to our CY11 target price of RM4.33.
Essentially, the shareholders of Sunrise have to decide whether to hold out and wait for a better offer; accept the share swap; accept the RCPS; or simply cash out from Sunrise. We are reducing our TP on Sunrise to the takeover offer price of RM2.80, exdividend (from RM4.33). Downgrade to Neutral.
The synergy factor. While UEM Land is known for its expertise in large-scale township developments and as the engine for long-term growth via the monetisation of its large landbank and valuable assets in Nusajaya, Sunrise lacks all these catalysts. On the other hand, Sunrise holds many parcels of prime development landbank in the high-growth areas of Klang Valley and stands out for its expertise in developing quality commercial projects and high-end condominiums while UEM Land lacks these credentials.
Therefore, as the two developers can potentially complement each other’s shortfalls, the merger does make a lot of sense.
The four “real” choices. Essentially, the shareholders of Sunrise have to decide whether to:
(i) hold out and wait for a better offer;
(ii) accept the share swap;
(iii) accept the RCPS; or
(iv) simply cash out from Sunrise. Option 1 is perhaps the most risky among the options while Option 2 is considered to be potentially the most rewarding, although it is not without its risks. Option 3 offers, at cost, a good hedge to investors, while Option 4 is to simply cash out and walk away from the bet. Skeptics and investors who are not impressed by the risk-reward ratio and the opportunity costs inherent in the other options may opt to cash out from Sunrise on or after the 18 Nov 2010 ex-date of the 20 sen net interim dividend.
As we believe that the Malaysian property sector is at the cusp of a strong positive re-rating over the next 12 months (see our sector report ‘A Brewing Real Estate Mania’, 3 Sept 2010), such investors may be more attracted to this option vis-à-vis the others.
A trading opportunity in UEM Land (Not Rated)? Based on our back-of-the-envelope calculation, the RNAV of UEM Land will be potentially enhanced to approximately RM1.93
to RM2.01/share (from RM1.76/share prior to merger). Assuming that the last trading price of UEM Land has yet to reflect the value-accretion from the merger, we could then use the last P/RNAV multiple of 1.3x as our valuation benchmark. Pegging this against the potentially enhanced RNAV of UEM Land post-merger, this may translate into an indicative price target of RM2.48 to RM2.58 for UEM Land. UEM Land is Not Rated by us.
THE MERGER OF THE YEAR
DETAILS OF THE OFFER
Conditional takeover. On 4 Nov 2010, UEM Land (Not Rated) announced a conditional takeover to acquire the entire equity interest in Sunrise at an offer price of RM2.80/share. The shareholders of Sunrise have been offered the following options:
. To accept 1.33 UEM Land shares at an issue price of RM2.10/share for every Sunrise share surrendered; or
. To accept 2.8 unlisted Redeemable Convertible Preference Share (RCPS) in UEM Land at an issue price of RM1.00 for every Sunrise share surrendered. With tenure of 2 years, there will not be any dividend attached to the RCPS. Holders of the RCPS may convert their RCPS into UEM Land shares at any time at a price of RM2.30 each. The redemption value of the RCPS at maturity will be priced at RM1.00. If the holders of RCPS do not exercise their options to covert/redeem, upon maturity, these will be automatically converted into UEM Land shares based on the non-cash conversion method.
Strong support for takeover. There is already an irrevocable undertaking by the major shareholders of Sunrise to accept the takeover offer in respect of a 40.3% equity stake in Sunrise. These major shareholders are Datuk Tong Kooi Ong, Tan Sri Dato’ Tan Chee Sing and Dato’ Allan Lim Kim Huat (herein known as “Datuk Tong and his friends”). On the part of UEM Land, with strong support from its major shareholder UEM Group, which owns 77.1% in the former, the takeover offer appears likely to succeed.
Post-merger shareholding structure. Assuming a 100% acceptance for the share swap, UEM Group’s (100%-owned by Khazanah) current equity stake of 77.1% in UEM Land will be diluted to 65%. In turn, Datuk Tong and his friends will collectively hold a 6% stake in the merged entity.
Other shareholders of Sunrise will have a collective stake of 9% in UEM Land. At the other extreme, assuming a 100% RCPS alternative with full conversion under the cash conversion method, UEM Group’s stake in UEM Land will be diluted to 56% while Datuk Tong and his friends will collectively hold an 11% equity stake in the merged entity. Other shareholders of Sunrise will have a collective stake of 17% in UEM Land (see Figure 3).
Conditions of the takeover offer. UEM Land has no intention of maintaining the listing status of Sunrise if the public shareholding spread of Sunrise is not met pursuant to the takeover offer. Should the acceptance level be <50%, the takeover bid will be aborted (see Figure 4).
RATIONALE OF THE MERGER
Background of UEM Land. UEM Land was incorporated on 20 Aug 2008 pursuant to a restructuring exercise undertaken by the UEM Group and UEM World. Subsequent to the exercise, UEM Land was listed on the Main Board (now called the Main Market of Bursa Securities) on 18 Nov 2008. UEM Land is primarily known for its developments in Nusajaya, a 24,000-acre development within the broader Iskandar Malaysia in South Johor.
UEM Land in Nusajaya. The Nusajaya embodies 8 signature developments, namely, the Kota Iskandar (Johor state new administrative center), Southern Industrial and Logistics Clusters (SILC), Afiat Healthpark, EduCity, Puteri Harbour at the Waterfront Precinct, the International Destination Resort and Nusajaya Residences (comprising of Horizon Hills, Ledang Heights, and East Ledang townships) and the Medini. UEM Land’s primary developments are Kota Iskandar, SILC, Puteri Harbour, the Afiat Healthpark as well as Nusajaya Residences.
The developer still has an undeveloped landbank of about 5,800 acres in Nusajaya. Some catalytic developments are due for full completion in and around 2012/13, such as Newcastle University's medical faculty and Marlboro College Malaysia, the coastal highway link to Johor Baru, the Bio Xcell theme park, the Columbia Asia Hospital, theme parks (Family Indoor Theme Park and LegoLand), hotels as well as Kota Iskandar.
The completion of these developments will give Nusajaya great leverage to attract the necessary critical mass population to draw the entire region to life and attract a torrent of capital into the properties there. Therefore, we believe that the tipping point for Nusajaya is likely to be around year 2012/13.
The key challenges pre-merger. The key challenges currently faced by UEM Land are aplenty,ranging from the protracted developments in Nusajaya, earnings and cash flow constraints, limited exposure in commercial, retail & high rises, limitation in its current workforce to current conditions in the industry which are impediments to attracting the necessary tenants and investors. For Sunrise, Datuk Tong has expressed his desire to move the company to its next growth stage and expand into multiple locations with multiple products, apart from Mont’ Kiara, with which the company is synonymous. However, Sunrise too faces its own challenges in realising this objective given its current size.
The synergy factor post-merger. While UEM Land is well-known for its expertise in large-scale township developments and for long-term growth prospects via the monetisation of its large landbank and valuable assets in Nusajaya, Sunrise lacks these strengths. Conversely, Sunrise holds many parcels of prime development landbank in the high-growth areas of the Klang Valley and has built a reputation for developing quality commercial projects and high-end condominiums, but these are what UEM Land is short on. Therefore, as these two developers can potentially complement each other’s shortfalls, the merger does indeed make sense.
Pacifying the potential “culture clash”. While the proposed merger makes sense on paper, investors must also be ready to recognise the risk of potential clashes in the business culture of the two entities, which may potentially delay, if not derail, any value-creation from the synergy. However, it is heartening to note that the managements of both companies recognise this risk. Instead of forcing a merger on their employees, the two companies will work parallel to each other and over time, with more interaction, this may potentially minimise or diffuse the risk. Post-merger, UEM Land will retain the brand name and employees of Sunrise.
Datuk Tong to stay. Another key concern is Datuk Tong’s role in the merged entity going forward. Most shareholders of Sunrise have mostly attributed the company’s recent commendable growth to Datuk Tong. Should he no longer play a proactive role in driving Sunrise post-merger, there is little doubt that the company’s current shareholders may get jittery. However, the investment community has been assured that Datuk Tong has agreed to be Chairman of the development committee in UEM Land and Sunrise. He will also continue to be proactive in not only driving Sunrise but also elevate the merged entity to the next level.
VALUATIONS & RECOMMENDATIONS
OFFER COULD HAVE BEEN BETTER
Is the deal fair? Based on the offer price of RM2.80 and after adding back the recently-announced net interim dividend of 20 sen, Sunrise is valued at approximately 1.3x FY11 P/NTA, but at a mere 0.58x on P/RNAV (RNAV of RM5.15). This also represents a hefty 44% discount to our CY11 target price of RM4.33. We believe that the offer price could indeed have been better, especially when we are of the view that the Malaysian property sector is at the cusp of a strong positive re-rating (see our sector report ‘A Brewing Real Estate Mania’, 3 Sept 2010). Therefore, for Sunrise shareholders to accept the offer, they must be convinced that, among others, the merger would not only fast-track the value realisation in Sunrise but also that the value created by the merger could potentially be more than what Sunrise alone can achieve.
THE FOUR “REAL” CHOICES
At the crossroads. The shareholders of Sunrise are at a crossroad as they are now faced with four options. Making the so-called “correct” decision is not so straight forward at this juncture as the optimum decision can vary from one investor to the other, depending on his/her conviction of the synergy story, his/her investment horizon, as well respective risk appetites, for example (see Figure 6). Option 1 in Figure 6 is perhaps the most risky of all options while Option 2 is considered to be potentially the most rewarding, although it is not without its risks. Option 3 offers, at cost, a good hedge to investors. Option 4 is to simply cash out from Sunrise and walk away, regardless of whether the synergy will work.
OPTION 1: Hold out and hope for a better offer. This would be the most risky option. Already with an irrevocable undertaking to accept the takeover offer in respect of the 40.3% equity stake in Sunrise from the major shareholders including Datuk Tong, the takeover offer is likely to be successful. Should the acceptance level exceed 75%, Sunrise’s listing status will be withdrawn and investors who do not accept the takeover offer will risk holding the unlisted shares of Sunrise. In addition, there is no guarantee that UEM Land would make a better offer in the subsequent round, if any.
OPTION 2: Share swap. This option perhaps seems to offer the most reward potential. The proponents of this option will argue that Datuk Tong would not only continue to be proactive as Chairman of the development committee and drive Sunrise but would also, together with the management of UEM Land, elevate the merged entity to its next level. Another argument is that these catalysts are likely to materialise within the next 12-24 months. However, the option is not without risks. For starters, the business culture of the two entities is very different, and hence merging their operations could prove to be a herculean task. This may potentially delay, if not derail, the value-creation from the synergy. In addition, regardless of the merger, the tipping point for Nusajaya is only likely to occur around 2012/13, or at least 1-2 years on, when most of the catalytic developments come onstream. Datuk Tong, as an investor, must have already calculated the risks involved. Although his ambitions in helping to drive the merged entity are unambiguous, the fact that he may likely opt for the RCPS instead of a direct share swap may imply that he may prefer to hedge his investment position as an investor for now.
OPTION 3: Accept the RCPS. Shareholders who are concerned with the risks in Option 2 but are still eager to give the investment proposition a shot may opt for the zero-coupon RCPS instead. The RCPS is perhaps an investor’s best hedge as it not only offers the opportunity for him/her to subsequently convert them into UEM Land shares and ride on the upside should the synergies of the merger surface in less than 24 months. It also has very limited downside risk as it would be redeemed at face value by UEM Land 2 years later. Nonetheless, this option comes at a cost, as the exercise price for the RCPS will be RM2.30 for each share of UEM Land instead of RM2.10. Having said that, the cost may likely be
insignificant compared to the benefits the RCPS can offer. However, as the RCPS will not be listed, there will be no early exit for the investor and he/she must therefore take into account of the potential opportunity cost involved. Those who believe that it would pay to redeploy their investment capital elsewhere should opt for Option 4 instead.
OPTION 4: Cash out. Skeptics and investors who are unimpressed with the risk-reward ratio and the opportunity costs involved in other options may opt to cash out from Sunrise on or after the 18 Nov 2010 ex-date of the recently-announced interim dividend. They may then redeploy their investment capital elsewhere, such as in other Malaysian property stocks in the likes of SP Setia (Buy; TP: RM6.38), for example. As we believe that the Malaysian property sector is on the verge of a strong positive re-rating over the next 12 months, such investors will find this option more attractive vis-à-vis other options.
A TRADING OPPORTUNITY IN UEM LAND?
A value-accretive acquisition. Based on the mechanics of the takeover offer, the merger is likely to benefit UEM Land as it is viewed as value-accretive. However, whether there will be an immediate rerating to the share price of UEM Land depends on how much of the merger news is already priced into the share price prior to the stock’s trading suspension since last Wednesday. Based on our back-of-theenvelope calculation, the RNAV of UEM Land will be potentially enhanced to RM1.93 to RM2.01/share (from RM1.76/share prior to merger). Assuming that the last trading price of UEM Land has yet to reflect the value-accretion from the merger, we could then use the last P/RNAV multiple of 1.3x as our valuation benchmark. Pegging this to the potentially enhanced RNAV of UEM Land post-merger, this may translate into an indicative price target of RM2.48 to RM2.58. The risk to this indicative price target is that the anticipated value-accretion to UEM Land may have already been priced into the stock price prior to its trading suspension.
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