After two consecutive suspended trading days, IJM Corp (IJM) finally announced that it is privatising its 64.2%-owned subsidiary, IJMLAND (ACCEPT OFFER; TP: RM3.55). IJM made an announcement it is acquiring the remaining 35.8% stake currently owned by IJMLAND’s scheme shareholders via share swap and cash. Pertaining to the corporate exercise, IJM held an Analysts’ Briefing yesterday to explain in details the rationale of the privatisation. We came away from the briefing feeling POSITIVE on this corporate exercise. Despite offering IJMLAND’s minority interest a 14.9% premium to the latter’s 5-day VWAMP, IJM only has to fork out RM112m from its RM2.0b strong cash pile. It is also interesting to note that although IJM is issuing new shares, which will increase its share capital by 16%, the privatisation deal is still earnings-accretive in the near-medium future thanks to its recent strong share price performance (meaning IJM issuing less shares to IJMLAND’s MI) and IJMLAND’s decent 9% earnings growth. Post privatisation, we estimate IJM’s absolute earnings forecast to increase by 5%-20% in FY15 and FY16. More importantly, IJM’s shareholders will be enjoying both upbeat prospects of the group’s construction and property divisions. We upgrade IJM to OUTPERFORM with higher TP of RM7.57 from RM6.83.

Privatisation details. IJM announced yesterday that it has proposed to IJMLAND’S board to take its 64.2%-owned subsidiary, IJMLAND private by way of scheme of arrangement. The offer price to the remaining 35.8% of IJMLAND’s scheme shareholders is RM3.55/IJMLAND’s share (14.9% premium to its 5-day VWAMP of RM3.09). This will be satisfied via: (i) issuance of 0.5 of IJM share for every 1 IJMLAND’s share at an issue price of RM6.70 (1% premium to 5-day IJM’s VWAMP) and (ii) RM0.20 of IJMLAND’s share.

No impact to balance sheet, earnings-accretive in future. As most of the privatisation costs will be funded by share swaps, we do not see any significant impact to IJM balance sheet. Meanwhile, earnings-wise, even if IJM’s share capital increases by 19%, we estimate the privatisation will not dilute the group’s EPS in near-medium future.

The rationale for IJM to take IJMLAND private are: (i) to obtain full control of IJM Land, hence providing the group with greater liberty to plan and decide on the strategic and future business direction of IJMLAND, (ii) to enable IJMLAND to leverage on IJM’s strong balance sheet to grow more rapidly, which will result in cheaper cost of funding for IJMLAND. Note that IJMLAND has a lot of heavy CAPEX requirements with its sizeable on-going property projects, i.e. The Light Phase 2 (GDV: RM3.0b), Royal Mint @ London (GDV: RM1.0b), Pantai Sentral Park and Nasa City mall, (iii) to resolve tight share free float liquidity issues at IJMLAND level, (iv) align shareholders of both companies into one entity as they both share similar shareholders (e.g. EPF, PNB, KWAP, GIC), (iv) reduce RPTs, and (v) potential cost savings as a result of streamlining and rationalising resources.

POSITIVE on the exercise. Although IJM’s offer price is at 14% premium, we are POSITIVE on the deal as the new share issuance will not dilute its earnings but, in fact, will enhance its EPS going forward. Based on our estimates, assuming the exercise is completed within 6-8 months, after taking into account the 19% increment in share capital, our FY16E EPS will be 49 sen from our previous forecast of 48 sen. More importantly, post privatisation, IJM’s shareholders can fully enjoy and ride on both upbeat prospects of the construction and property divisions.

Forecasts. While we expect the privatisation to complete in 6-8 months, we revise higher our absolute FY15-FY16 earnings forecasts by 5%-20% after taking into account IJM owning 100% stake in IJMLAND post-privatisation.

UPGRADE to OUTPERFORM with higher TP of RM7.57. While we advocate the scheme shareholders to ACCEPT IJM’s offer (see IJMLAND’s report today: “Privatisation, finally!”) to privatise IJMLAND, we are now upgrading IJM’s SOTPbased TP to RM7.57 from RM6.83 previously. This is because (i) we have taken into account IJMLAND’s 100% stake from 64.2% previously in our SOTP, (ii) we revised higher IJMLAND’s fair value in our SOTP to RM3.55 from RM3.31 previously based on the IJM’s offer price implying 9% discount to our RNAV of RM3.89 and (iii) the increase in share capital by 19% after the privatisation.

Source: Kenanga