UEMS has received a proposal letter from UEMG proposing a merger between UEMS and ECW into an enlarged group via (subsequently delisting ECW). The proposed issuance of new ordinary shares in UEMS at an issue price of RM0.443 is in exchange for ECW shares at an exchange price of RM0.469 for the latter (ECW:UEMS exchange rate of 1:1.0587). Based on latest available data, our pro-forma calculation implies that net gearing would increase to 0.5x (from 0.4x). We maintain our forecasts and HOLD call with a lower TP of RM0.42 based on an 80% discount to our estimated RNAV of RM2.11.

NEWSBREAK

UEMS has received a proposal letter from parent-co UEM Group (UEMG) proposing a merger between UEMS and Eco World (ECW) into an enlarged group via an exchange of shares and warrants (subsequently delisting ECW as it becomes a wholly-owned subsidiary). The Board of UEMS will be submitting their response by 30 Oct.

HLIB’s VIEW

Forming a property giant. The proposed exercise will result in the two entities forming the second largest listed property land bank owner in Malaysia. We are slightly negative on the near-term implications as UEMS will be inheriting ECW’s balance sheet which currently stands at a net gearing of 0.64x (vis-à-vis UEMS’ 0.4x). The entity will likely have to go through a gestation period before workforce culture and branding assimilation takes place over the longer term. Furthermore, the company may require a longer time to monetize its overall land bank as it already has a large land bank pre-merger (land bank increases to 14.5k acres from 9.9k acres). Nonetheless, in the long run, this exercise is a positive for UEMS given (i) its depleting exposure of land bank in the Central region (allowing ECW to fill this void), (ii) complementary target markets (mid to premium market), and (iii) potentially leaner workforce (when combined) after streamlining.

Share swap. The proposed merger will be carried out by way of securities exchange (without cash payments). The proposed issuance of new ordinary shares in UEMS at an issue price of RM0.443 is in exchange for ECW shares at an exchange price of RM0.469 for the latter. This would result in an exchange rate of c.1.0587 new UEMS shares for every one ECW share held. We deem this fair as it values both companies equally at a P/B per share of c.0.25x. The multiple is rather low as the property market remains subdued with both companies facing their own challenges i.e. UEMS’ exposure to the Johor market and ECW’s balance sheet position.

Pro-forma implications of merged entity. Based on latest available data (i.e. UEMS’ 2QFY20 and ECW’s 3QFY20), our pro-forma calculation implies that UEMS’ net gearing would increase to 0.5x (from 0.4x). UEMS will then be able to increase its land bank exposure to the Central region to 3.1k acres, from its existing 0.5k acres. This bodes well for UEMS given that 70% of its land bank (i.e. 7k acres) are located in Johor whereby the market remains rather soft. UEMG will remain the as the largest shareholder despite having its holdings reduced to 43% (from 66.1%) or 40%, assuming no conversion of its RCPS as it remains out of the money as seen in Figure#3. We expect the merged entity to potentially achieve an RNAV/share of RM2.17 (on the enlarged share base) which is somewhat similar to our current UEMS estimate of RM2.11.

Forecast. Unchanged.

Maintain HOLD with a lower TP of RM0.42 (from RM0.45) based on an unchanged discount at 80% to our estimated RNAV of RM2.11 as we take a conservative stance by lowering the realisable value of land bank held for potential sale given the subdued market. Despite positive longer-term prospects from increased land bank exposure in the central region and a potentially leaner workforce when combined as an entity, our HOLD call is premised upon near-term hiccups to be faced by the company, i.e. wider net gearing and workforce culture assimilation

Source: Hong Leong Investment Bank Research - 6 Oct 2020