KUALA LUMPUR (March 9): Iskandar Waterfront City Bhd (IWC) announced a proposed merger with its major shareholder Iskandar Waterfront Holdings Bhd (IWH) through a one-for-one share swap exercise in which IWH would take over the listing status upon completion.
The merger plan also entails a proposed asset acquisition of RM4.1 billion from four parties, including Tan Sri Lim Kang Hoo and Sultan Ibrahim Sultan Iskandar of Johor, through issue of new shares and new redeemable convertible preference shares (RCPS).
In a nutshell, the merged IWH will emerge as an asset-laden entity awaiting values to be unlocked through land sales, joint ventures (JVs) or developments on its own.
This confirms the article titled “IPO shelved, IWH to merge with IWC” published in The Edge Financial Daily on Tuesday.
IWC said it had signed a heads of agreement with IWH in relation to the proposed merger plan.
IWH executive vice-chairman Lim told The Edge Financial Daily that the proposed merger will expose IWC’s shareholders to substantially bigger land banks, with enlarged revised net asset value (RNAV) per share of RM4.50 per share — nearly three times IWC’s last traded share price of RM1.64.
The property tycoon pointed out that the merged entity will have a total land bank of 7,367 acres (2,981ha) with a total RNAV of RM30 billion, excluding IWH’s equity interest in the Bandar Malaysia project. IWH holds an effective 36% stake in the Bandar Malaysia project.
Lim explained that the merged entity’s earnings would be derived from three core activities, namely land sales, JVs with strategic developers and development projects.
“This is a long-term ‘land banking’ play … shareholders have to be patient [for good returns],” said Lim, who controls both IWC and IWH. The tycoon is also the majority shareholder of Ekovest Bhd, which recently sold a 40% stake in the Duta-Ulu Klang Expressway to the Employees Provident Fund for RM1.13 billion cash.
Lim owns 63.1% in IWH through Credence Resources Sdn Bhd. IWH currently holds a 38.34% stake in IWC.
Under the proposal, IWC shareholders will swap their shares for IWH shares on a one-for-one basis. IWH shares will be valued at RM1.50 per share.
In addition, there is proposed acquisition of assets, mainly land bank that is worth up to RM4.1 billion, which will boost the merged IWH’s asset values substantially. The asset purchases would be settled through issue of new shares and RCPS by IWH.
The asset acquisition is conditional upon the proposed merger. However, the two proposals are not inter-conditional.
According to the announcement, RCPS could only be converted into IWH shares when the company has generated a cumulative profit after tax of more than RM1 billion post-restructuring exercise, a move to minimise dilution. However, IWH could redeem RCPS at any time without conditions attached.
There is a wide gap between IWC’s last traded price of RM1.64 and the potential RNAV per share of RM4.50. The gap would be the potential gains that IWC shareholders could eventually yield should things pan out accordingly.
RNAV is used by a developer to evaluate the value of its land banks and projects. However, it is common for developers to have their RNAV discounted based on when they can be unlocked.
Analysts, for example, recently discounted the RNAV of Johor-based UEM Sunrise Bhd between 50% and 71%. Similarly, KSL Holdings Bhd, who also has a sizeable land bank in Johor, had its RNAV discounted by 86% in a recent report by Kenanga Research.
Having said that, it is worth noting that the RNAV value for the merged entity after the asset acquisition is based only on the open market price of its land banks. With a 50% discount, the merged entity’s shares would be at RM2.25.
Nonetheless, Lim stressed that IWH’s land banks in Johor are closer to the city centre which is considered prime location. Indeed, the company has 2,000 acres of land in Danga Bay and 1,938 acres in Tebrau Bay to add to its Iskandar Waterfront projects, among others.
Interestingly, IWC still has some value yet to be unlocked. In April 2015, the group signed a sales purchase agreement worth RM2.4 billion with China-based Greenland Group, which would have bumped up its earnings per share substantially.
“From a financial perspective, the sales proceeds will bring a boost to our balance sheet with a gain of RM1.89 per share even before taking into account our share of the profits from the development with an estimated gross development value of RM18.4 billion,” IWC chairman Datuk Haji Ayub Mion said in IWC’s financial year 2015 annual report.
The deal has since been postponed to May 5 this year. Notwithstanding that, IWC shares will be worth more than the RM1.50 proposed in the IWH-IWC merger should the deal go through.
This article first appeared in The Edge Financial Daily, on March 9, 2017.