Monday, September 20, 2010

IJM Land To Be Privatised?

This was from a local broker:

Market talk indicates IJM Land may be privatized by IJM Corp, its parent company. Further details are not available at this point. We spoke to management and they were unable to comment.

We are quite surprise by the rumor given injection of IJM Properties (previously 100% owned by IJM Corp) into RB Land and subsequent rebranding into IJM Land in mid 2008. IJM Land has suffered low liquidity as it is tightly held by its parent, IJM Corp, which has 62.5% stake. Inclusive of EPF (8.7%) and GSIC (7.3%) stake, free float is 21.5%. The stock has been a laggard with only +0.9% Ytd returns vs. KLPRP +11.3%.

Catch-22 situation. Although it is unorthodox to take private a subsidiary that has been listed not too long ago, we will not be surprised if it happens. IJM Corp is unlikely to dilute its interest as more than 50% of its pretax profit is derived from property division in the future. Given the difficulties in replenishing its large orderbook of more than RM5b, the group will be more reliant on IJML earnings.

However, the low liquidity of the stock meant that IJM Corp will never be able to fully realize the value of IJML. In fact, many foreign funds are interested in IJML given that it is an alternative proxy to SP Setia and the Malaysian property sector, but are unable to invest due to lack of liquidity.

(Privatisation is possible as none of the substantial shareholders are wanting to sell at current levels. No liquidity means no other institutions are likely to buy in as they may find it hard to buy big blocks or sell them when they want to. This will make it less attractive as a listed vehicle).

IJM Land valuations. At current price of RM2.38, IJML is trading at 1.4x FY11E PBV while FY11-12E PER is 14x-13x. Our RM2.80 fair value (SoP RNAV) implies 1.7x FY11E PBV, which is a discount to SP Setai’s current FY11E PBV of 2.2x or a premium to average property development companies’ average P/BV of 0.9x. Assuming privatization price at our TP, which is 18% premium to current price or 1.7x FY11E PBV, The value of the shares not owned by IJM now is worth RM1.16b.

FY11E BV/sh (RM)
1.64




PBV (x)

RM
2.2
0%
discount to SP PBV
3.61
2.1
-5%
discount to SP PBV
3.45
2.0
-9%
discount to SP PBV
3.29
1.9
-14%
discount to SP PBV
3.12
1.8
-18%
discount to SP PBV
2.96
1.7
-23%
discount to SP PBV
2.79
1.6
-27%
discount to SP PBV
2.63

(Yes, you can compare with SP Setia, but its a different animal. SP Setia is like a charged up counter with very important GLCs as shareholders. SP Setia is likely to be a critical beneficiary of some of the upcoming big government land spin offs).

RCULS conversion. There is RM400.0m nominal value RCULS (maturity in 2013), owned by IJM Corp, which is unconverted in IJML’s books. IJM Corp can convert these into shares at any time at a conversion rate of RM1.74, which is ‘in the money’. If IJM Corp converts all RCULS, share base will be enlarged by 21% to 1.34b whilst IJM Corp’s shareholding increases to 68.9% from current 62.5%, giving them a higher shareholding to start the privatization exercise with high chances of success. Alternatively, the other two substantial shareholders EPF and GSIC could also be persuaded to act in concert with IJM for the privatization exercise.

Privatization of listed property arm of construction and conglomerate companies is not unusual. Sime Darby privatized Sime Properties in its mega merger. WCT and IOI privatized WCT Land and IOI Properties respectively. Both WCT Land and IOI Properties were privatized at 1.5x – 1.7x P/BV and at 4%-17% premium over the market price on the date of announcement.

The incentive to privatize becomes more apparent. Listed property developers are under pressure to maintain a pipeline of launches to maintain an increasing profit track record. By privatizing the property company, it has no pressure to do so especially in light of a slowdown in the growth rate of property launches, prices and take-up rates as BNM is mulling on capping LVR and pulling the plug on interest absorption schemes.

We think the privatization is possible. At IJM Corp’s Company level, net gearing is 0.22x, which is ample room to gear up further. On IJM Land’s level and assuming all RCULS converted, its net gearing will be very low at 0.03x. Assuming if IJM undertake an LBO structure to privatize IJML and subsequently “push” the debt down to IJML operating levels, IJM Land’s net gearing will be 0.69x. Given a strong FCF of RM200m-RM240m p.a. in the next 3 years, it can easily service a 5-year RM1.16b debt in addition to the current operational debt outstanding. We continue to maintain BUY on IJM Land with fair value of RM2.80.


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