IT may be an ideal decision after all for Eco World Development Group Bhd to discontinue the pursuit of its proposed merger further with UEM Sunrise Bhd.
Hong Leong Investment Bank (HLIB) Research is of the view that both companies are better off being independent and focusing on their own business plan to maximise their respective value.
“At the onset, while it may seem that the merger between these two companies is a good deal to take advantage of synergies and forming property giant, it may not be the case for this time,” opined analyst Nazira Abdullah in a company update.
“With the merger called off, we believe UEM Sunrise will be able to preserve its balance sheet standing and pursue other corporate proposals that may be more complementary to its strategy and growth.”
Recall that on Oct 5 last year, UEM Sunrise received the merger proposal from its parent company UEM Group (69.6% stake) which would create an enlarged property group via an exchange of shares and warrants.
Subsequent to the proposed merger, Eco World would be delisted to become a wholly-owned subsidiary of UEM Sunrise.
HLIB Research was slightly negative on the near-term implications of the proposed merger on UEM Sunrise given it will be inheriting Eco World’s balance sheet which currently stands at a net gearing of 0.64 times (vis-à-vis UEM Sunrise’s 0.4 times).
On the flipside, the cessation of proposed merger might be seen as opportunity lost to UEM Sunrise to leverage Eco World’s expertise in marketing and branding, according to HLIB Research.
“After all, Eco World is known for its marketing expertise and world-class township planner with a larger domestic earnings base that will help UEM Sunrise to reduce earnings volatility from its exposure to foreign operations,” justified Nazira.
“Furthermore, the merged entity will see an enlarged land bank (an increase to 14,500 acres from 9,900 acres) making it the one of the largest property development landowner in Malaysia.”
Nevertheless, HLIB Research reckoned that even if the merger exercise were to happen, UEM Sunrise may require a longer time to monetise its overall land bank as the company already has a large land bank.
All-in, HLIB Research maintained its “hold” rating on UEM Sunrise with an unchanged target price of 50 sen based on an unchanged discount of 75% to its estimated revalued net asset value (RNAV) of RM1.98.
“We see a lack of near-term catalyst given the subdued sentiment for property outlook in Johor coupled with weak sales and launch activities by the company during this pandemic,” added the research house.
At 9.05am, UEM Sunrise was unchanged at 43.5 sen with 62,500 shares traded, thus valuing the company at RM2.2 bil. – Jan 14, 2021
