UEM Sunrise (UEMS) announced a proposed merger with Eco World Development Group (ECW) via an exchange of shares and warrants. UEMS and ECW have market capitalizations of RM 1.7bn and RM 1.2bn respectively as at 25 September 2020, and will have c.17k acre of undeveloped landbank with estimated GDV in excess of RM170bn, combined. This enlarged entity will have larger landbank than SP Setia which currently has c.8.7k acres of undeveloped landbank with GDV of RM139bn. The merger, we reckon, is not surprising given current challenging property market conditions. Sector consolidation is ripe to happen to strengthen market positioning. Pending more details, we maintain our Neutral call on UEMS for now with an unchanged TP of RM0.55, pegged at c.75% discount to RNAV.

• Deal mechanics. For the proposed merger, new shares in UEMS will be issued at a proposed 44.3sen each to holders of ECW shares priced at 46.9sen, or an exchange ratio of c.1.0587 new UEMS shares for every one ECW held. Meanwhile, the proposed new warrants in UEMS will be issued to all holders of the outstanding warrants in ECW at the share exchange ratio, which translates into 1.0587 new UEMS warrants for every ECW warrant. We understand that UEM Group expects a decision on the proposal by Oct 30 for further discussions on the merger to commence. Chairman of the enlarged entity has to be led by an existing board member of UEMS, though there is no mention on the new management team.
  
  Post-merger, Khazanah Naasional — through UEM Group — will remain the single largest shareholder of the combined entity with 43% stake whilst ECW executive chairman Tan Sri Liew Kee Sin will have a 3.6% stake. His son and executive director Liew Tian Xiong will hold 2.8%. Three other entities that have stakes in EcoWorld — namely Sinarmas Harta, Eco World Development Holdings and Jernih Padu — will hold stakes of 12.6%, 3.4% and 1.9% respectively.
   
• Merged entity will have the highest GDV. The merged entity will see an enlarged landbank of c.RM17k acres, making it the one of the largest property development landowner in Malaysia, second only to Sime Property with c.20k acres (IOI Properties: c.10k acres, SP Setia; c8.7k acres). It will be the largest in terms of GDV at RM176bn however (SP Setia: RM139bn GDV). Based on the proposed price, the price to book value of UEMS is close to ECW at 0.29x and 0.3x respectively. Latest net gearing for UEMS is 0.45x vis-à-vis ECW’s net gearing at 0.64x. We believe the merger is beneficial to both companies as UEMS could leverage on ECW’s marketing prowess to monetize its landbank faster. ECW’s track record is impressive with 25,357 properties launched that have garnered cumulative sales of RM20.5bn since 2013.

Source: PublicInvest Research - 6 Oct 2020