Wednesday, November 17, 2010

Does A MRCB-IJM Land Merger Makes Sense?

Apparently the word has switched from an IJM Land privatisation to a merger with MRCB. Something along the lines of a UEM Land-Sunrise deal it seems.

1.37bn shares
P/BV 2.4x
Net Gearing 62%

Major shareholders: EPF 42%, Public Mutual 9.6%

IJM Land
1.1bn shares
P/BV 1.7x
Net Gearing 21%

Major shareholders: IJM Corp 62.5%, GIC 7.3%

The value in MRCB due to its expected involvement/major role in the redevelopment of the federal government’s land in Sg Buloh, and a possible strong uplift to the construction order book from the 10MP rollout. MRCB has been assisting the Employees’ Provident Fund (EPF) in drawing up the masterplan for the Sg Buloh land. Thus, the group should be among the favourites to get one of the first pockets of land there. Details are sketchy at this juncture but the government is expected to announce the award and details by 1Q11.

MRCB group usually prefers to go at it alone. But EPF could be smarter to suggests that MRCB do it with the strong IJM Land proven brand power. MRCB currently has two low-key township developments in Perak and Kajang, with a combined GDV of RM4bil. Its track record in residential development is not significant, which means a link up with IJM Land would make a lot of sense.

MRCB has guided analysts that its involvement in the redevelopment of federal land would most likely be limited to Sg Buloh given that the Cochrane land is now to be auctioned off, rather than given outright to MRCB as previously speculated by the market. The government and the Employees’ Provident Fund (EPF) will form a joint venture to promote the development of the 3,300 acre-land in Sg. Buloh into a new hub for the Klang Valley. This land is believed to have a gross development value of RM10bil. This is a very positive move by the government given the scarcity of land in the Klang Valley where high land costs have resulted in very pricey residential properties. Homebuyers are now looking at prices of RM0.7mil-RM1mil for double-storey link houses in prime areas such as Bandar Utama, TTDI, etc.

Looking at the neighbouring areas of the MRB land such as Subang, Kota Damansara, Shah Alam and Sungai Buloh, land scarcity is prevalent even in recently developed Kota Damansara where only 30-40 acres of land are left available for development – most if not all are meant for high-rise developments. At 3,300 acres, the MRB land is about 3x the size of Petaling Jaya. Given it is bounded by the matured townships in Subang and Damansara and partly Sg Buloh, this parcel of land most certainly has a significant development potential.

The recent tender by the Penang state government for 93 acres at Bayan Mutiara for RM200psf may establish a new benchmark price for seafront land. This may lead to a repricing of implied land values at Phase II (103 acres) of The Light, which should cost less than RM50psf to reclaim. Newsflow momentum is re-accelerating. The imminent debut of Light Collections II (GDV: RM260m) in November 2010 is highly anticipated. IJM Land is actively negotiating with anchor investors to pre-commit on its highly sought after waterfront retail mall (GFA: 1.0msf) at Phase II.

IJM Land is acquiring some 2,000 acres of converted development land at Canal City, adjacent to the mature Kota Kemuning township. The said land will be acquired for about RM5.00psf or RM436m, with the payment to be staggered over four years. IJM Land will acquire a 50% stake in the project, with KEURO holding the balance 50%. The entire township development is expected to generate a significant GDV of RM6.5bil over 10-15 years. Canal City is accessible via the existing Kota Kemuning township as well as via the Saujana Putra Interchange along the ELITE Highway.

IJM Land will spearhead the entire development of Canal City. It will be positioned as a medium-to-high end development, with maiden launches of the bread-and-butter terrace houses expected by 4Q11. The indicative pricing range is between RM300,000 and RM350,000/unit. The land is at the edge of Kota Kemuning and neighbours Putra Heights, Bandar Saujana Putra and Puchong. These are growth zones given affordable home prices in the area. The significance of this deal is its attractive pricing, sheer size and immediate development potential given a large residential catchment in the locality.

The key here is pricing. IJM Land suffers from low liquidity and hence its unable to realise a proper valuation for the counter. As the size of both companies are almost similar, IJM Corp could end up with the controlling stake with EPF coming in second. EPF being EPF will not mind not being the largest shareholder.

By doing the deal, IJM Corp will have an absolutely mega sized property counter with immense reach. Going on its own IJM Land will not be able to realise the deep value in its counter. But just like the UEM Land-Sunrise deal, how the new company will be run will be a big matter to resolve. That could be the deal breaker.

A probable deal should value IJM Land at 2.2x P/BV against MRCB's 2.4x, hence it should favour IJM Land should it happen. The deal should be strongly favoured by EPF as it will guarantee success almost for the Sg Buloh development. Let's face it, its 3x the size of the Petaling Jaya township, you cannot afford for this not to be a huge success in the planning, implementation and delivery chain.

Even without this deal, IJM Land has deep unrealised value since its P/BV is at just 1.7x when the average for the sector is 2.2. If not this deal, I believe some other value unlocking deal should be in the works, making IJM Land a safe buy.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.


asd said...

Hi SD,

In a privatization / merger exercise, the offer price for warrants usually do not carry any premium over the mother share.

So does it make sense to go for the mother unless the warrant have minimal premium?

Your comments appreciated.

Salvatore_Dali said...

the ijm land wart ex at 1.35 and is due 9/2013..

if the exercise prices ijm land at 3.20, that would be 3.20-1.35 = 1.85 assuming no more premium.

as the wrt can be converted into shares, so u can assume that they will offer that if the deal is done at 3.2

u r right in instances when its out of money and has a huge premium, then don't buy the wrt for a M&A, swap share play. This one is ok.

asd said...

Thanks. Much appreciated.

jackie said...

hi Dali, its interesting to see people are still going for the warrants instead of mother share despite the huge premium ? with this observation, one can either buy into mother share now hoping it will catch up with warrants Or sell warrants now as it may trace back to lower level should mother share still stagnant.

Ooi Beng Hooi said...

Shares of Malaysian Resources Corp Bhd and IJM Land Bhd perked up amid a weak broader market yesterday after a popular finance blog speculated on a possible merger.

...."The Malaysia-Finance Blogspot, under a post headlined "Does a MRCB-IJM Land merger make sense?", noted that "the word had switched from an IJM Land privatisation to a merger with MRCB. Something along the lines of a UEM Land-Sunrise deal it seems"."