INVESTMENT MERIT

The proposed merger of IWH and IWCITY (post exercise, IWH will resume the listing status of IWCITY) will create a new breed of developers in town, which focuses on land sales. Its land bank in prime areas in both Johor and the Klang Valley (7,853 acres) have a potential market value of RM45.2b, which IWH could readily monetise. No earnings projections at this juncture, pending the completion of the entire exercise including Bandar Malaysia. NOT RATED, FV: RM3.19.

Merger & Acquisition play. 8th March 2017 marks the date of the proposed merger of Iskandar Waterfront Holdings (IWH) and Iskandar Waterfront City Bhd (IWC), of which IWH has proposed 1 for 1 merger offer to take up the remaining 61.7% equity stake in IWC at an offer price of RM1.50/share**. Post-merger, IWH would assume the listing status of IWC. Concurrently, IWH will undergo a restructuring exercise with its Director cum Executive Vice Chairman Tan Sri Dato’ Lim Kang Hoo via internal rationalisation of minority stakes within IWH and various Johor state entities, i.e. Kumpulan Prasarana Rakyat Johor (KPRJ), the investment arm of Johor State Government and Ministry of Finance (MOF) to consolidate the land banks under IWH of which all asset injections will be satisfied by a combination new shares and RCPS (RM5.5b) priced at RM1.50. Its RCPS is convertible at 2 RCPS for 1 share upon IWH generating cumulative profit after tax of more than RM1.0b. (Refer overleaf for more details.)

The prime landbank owner. Assuming that every party agrees to inject their land into IWH, IWH would effectively own 7,367 acres of prime land in Johor as most of these lands are located within prime areas, i.e. Danga Bay, Plentong, and Johor CBD. Citing its press release, its Johor lands have a total OMV of c.RM30.0b that is assessed by independent valuers for its 7,367 acres of prime land-bank in Johor, which implies an average market price of RM93.5psf. As for its Bandar Malaysia land (486 acres) (effective stake of 36%) it will only be injected into IWH after the land gazette is lifted. Based on an illustrative selling price of RM2,000.0psf, Bandar Malaysia alone would carry a total market value of RM42.3b and at 36% stake, this will add another RM15.2b to its Johor land market value of RM30.0b, implying a combined market value of RM45.2b for its land, which management intends to monetise through land sales in the future. (Kindly refer overleaf for land price sensitivity to its OMV.)

Superb earnings potential in the future. Given its straightforward business model of selling prime lands to developers, we foresee that IWH may have great earnings potential given that they have identified buyers for c.150.0 acres of Bandar Malaysia. Assuming an average selling price of RM2,000.0psf, the potential land sale of c.150.0 acres of land would contribute c.RM2.5b to its bottom-line or RM0.8b per annum over three years, allowing IWH to convert its RCPS as it would have then achieved a cumulative profit after tax of RM1.0b. To recap, IWCITY has entered into a land sale agreement with Greenland, China back in 2015 for the disposal of three parcels of land in Johor (127.9 acres) for total consideration of RM2.4b which could potentially generate PAT of RM1.2b which is to be recognised over three years. However, this particular deal has yet to be completed as they have received further extension till 5th May 2017.

NOT RATED. While we have a NOT RATED recommendation on the stock, we value IWCITY at RM3.19 implying 49% discount to its RNAV of RM6.24. We derived our Fair Value by ascribing RNAV discount of 60% and 20% to its Johor and Bandar Malaysia land, respectively, which is narrower than the range applied for Johor-based developers (66%-82%) and Klang Valley based developers (25%-57%) given that we valued IWC’s RNAV on a land-bank basis rather than a DCF of development profits methodology

Source: Kenanga Research - 28 Apr 2017