Eco World (ECW) announced that they have decided not to pursue the proposed merger further with UEMS. Previously, when UEMS announced the merger with ECW, we were 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). With the merger being called off, we believe UEMS will be able to preserve its healthy balance sheet and pursue other corporate proposals that may be more complementary to its strategy and growth. On the flipside, the cessation of proposed merger might be seen as opportunity lost to UEMS to leverage on ECW’s expertise in marketing and branding. Overall, we believe the both companies are better off independent and focusing on their own business plan to maximise their own value. We maintain our forecasts and HOLD call with an unchanged TP of RM0.50 based on a 75% discount to our estimated RNAV of RM1.98.

NEWSBREAK

Eco World (ECW) announced that they have decided not to pursue the proposed merger further with UEMS. To recap, on 5th Oct 2020, UEMS received a letter from parent-co UEM Group (UEMG, 69.6% stake), proposing a merger between UEMS and ECW into an enlarged group via an exchange of shares and warrants (subsequently delisting ECW as it becomes a wholly-owned subsidiary) of the former.

HLIB’s VIEW

Maybe it’s for the better? At the onset, while it may seem that the merger between these 2 companies is a good deal to take advantage of synergies and forming property giant, it may not be the case for this time. Previously, when UEMS announced the proposed merger with ECW, we were slightly negative on the nearterm 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). With the merger called off, we believe UEMS will be able to preserve its balance sheet standing and pursue other corporate proposals that may be more complementary to its strategy and growth.

On the flipside, the cessation of proposed merger might be seen as opportunity lost to UEMS to leverage on ECW’s expertise in marketing and branding. After all, ECW is known for its marketing expertise and world-class township planner with a larger domestic earnings base that will help UEMS to reduce earnings volatility from its exposure to foreign operations. Furthermore, the merged entity will see an enlarged landbank (land bank increases to 14.5k acres from 9.9k acres) making it the one of the largest property development landowner in Malaysia. However, even if the merger exercise were to happen, we reckon the UEMS may require a longer time to monetize its overall land bank as it already has a large land bank as it stands now. Overall, we believe that both companies are better off independent and focusing on their own business plan to maximise their own value.

Forecast. Unchanged as We Have Not Imputed the Merger Into Our Forecast.

Transfer of coverage; maintain HOLD. With the transfer of coverage, we chose to maintain our HOLD recommendation on the stock with an unchanged TP of RM0.50 based on an unchanged discount of 75% to our estimated 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.

Source: Hong Leong Investment Bank Research - 14 Jan 2021