Tuesday, November 16, 2010

How To Spot A Good Trade Part 6

Back in September 2010, I posted something that came from a local broker which hinted on a possible privatisation of IJM Land. Looking at the way the warrants traded with volume, I would be leaning towards a corporate exercise for IJM Land. The counter suffers from low liquidity, and current shareholders all do not want to sell at current low levels. If you judge the way SP Setia and the rest of the high flying property counters, it would be silly not to take the vehicle private.

No liquidity means you cannot really raise much funds with it as no institutions would be keen to take up shares. There are not many attractive property counters left. I figure a valuation of at least 2.0x P/BV (RM3.29 or higher) if an exercise is to happen, considering that the market average for property counters is now at least 2.2x.

The warrants activity hints at something, no smoke without fire.

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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

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.


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.

4 comments:

jackie said...

Hi Dali,do you know why IJM land is lagging against its warrants ? As you can clearly see in today's trades, the warrants were actively traded and close up 11cents whereas the mother share did not budge at all with significantly lower volume.
would you enlighten me and my lady friends who follow your blog everyday ? thanks in advance

Salvatore_Dali said...

warrants are cheaper in absolute px than mother share, and they are usually more liquid as well ... warrants r supposed to move when the mother share move up

when the warrant moves up with good volume, n the mother share stays stagnant, it can only mean that the warrant is under priced or there are a lot of people who know something extra buying up the warrant

usually the mother share would then catch up to the warrant's move in a few days time

Boon Sing said...

Hi Dali : would you mind to drop few lines on Century-W. I see the company is making great $ with 3Q eps at 28sen. The W is about in money. TQ

Boon Sing said...

Hi Dali: would you mind to drop few lines on Century-W. I saw the company making great $ with 3Q eps at 28sen. The W is about in money. TQ