UEM Group, the substantial shareholder of Uems (66.1% ownership) has proposed a merger between Ecowld and Uems. The proposed merger will be done through an all-share deal without any cash involved. While the merger would be great for Uems to tap into Ecowld’s marketing prowess and world-class township planning to help boost sales, we think that the existing M&A terms presented by UEM Group may be tilted slightly in favour of Uems. We say this because Ecowld’s key shareholders would lose their majority rights, listing status, brand name (potentially) and autonomy while perks from the merger: land bank from Uems can actually be tapped through a simple joint venture and need not necessarily be obtained through a merger. That being said, the enlarged entity does provide Ecowld a stronger financial partner ie Khazanah (through UEM Group). This would be beneficial for Ecowld should the weak economy persist for the foreseeable future and impede their ability to service their existing debt loads worth RM3.4b. However, for the time being, with Ecowld still having healthy sales, cash flows and a declining net gearing, we opine that the deal in its existing form benefits Uems more than Ecowld and UEM Group might need to provide additional incentives to Ecowld for the merger to go through. For now, we maintain our rating and call for Uems (OP; TP: RM0.555) and Ecowld (OP; TP: RM0.49). We have a NEUTRAL sector rating, which was downgraded from OVERWEIGHT in our 4QCY20 strategy report released today.

UEM Group, the substantial shareholder of UEMS (66.1% ownership) has proposed a merger between Ecowld and Uems. The proposed merger will be done through an all-share deal without any cash involved. The idea is to have Uems issues new shares in exchange for Ecowld’s existing shares and Ecowld would subsequently be delisted forming part of the enlarged Uems entity.

In a nutshell, Uems will be required to issue 3,117m new shares in exchange for 2,944m Ecowld shares held by existing Ecowld shareholders. Tentatively post-merger, UEM Group will be the biggest shareholder with 43% while Ecowld’s existing key shareholders (Tan Sri Dato Sri Liew Kee Sin and related parties) will cumulatively hold 24% of Uems vs their current 64% stake in Ecowld. Should the merger go through in the existing form.

Assuming the merger succeeds, we see it positively due to the synergistic elements of the combined entity and would value the enlarged UEMS entity at 0.4x FY21 PBV translating to Fair Value of RM0.61 (higher than our existing TP of RM0.555 for UEMS). Currently, we have ascribed 0.37x PBV for UEMS and 0.34x for ECOWLD, both pegged at -1.5SD below their respective 5 year means.

Our thoughts

Our preliminary thoughts on the deal is that its benefits are tilted slightly in favour of Uems. Uems stands to gain from tapping into Ecowld’s marketing prowess and world-class township planning that will help boost sales. Also, with a larger domestic earnings base, this will help reduce earnings volatility from UEM’s lumpy overseas contribution (especially in countries where earnings recognition is based on hand over ie Australia).

As for Ecowld, we think a potentially strong reason in favour of the merger is that its key shareholders may be worried that the property sector and economy remain in doldrums for the foreseeable future, which would cap their ability to convert bookings to sales and impede their ability to repay existing bank loans (worth RM3.4b as of July-20). In such a situation, we reckon Ecowld would prefer the backing of a stronger shareholder, ie Khazanah (through UEM Group), should equity fund raising be required. At the current juncture, we note that Ecowld is still registering healthy sales, declining net gearing and positive operating cashflows; which eases concerns about gearing levels.

On the flipside, we have some lingering questions in our mind as to the rationale for Ecowld to agree to the merger. From a management and operational standpoint, Ecowld’s key shareholders would lose its majority ownership, brand name (potentially) and possibly become less agile in terms of decision-making. Also, there may be concerns as to the fit in terms of culture.

From a land banking perspective, we also do not see much lands belonging to Uems that fits Ecowld’s current appetite. If we look at Ecowld’s development strategy so far, it is centred towards township planning, which require large tracts of land (i.e. >200ac) for them to effectively inject the brand’s DNA. Looking at Uems’ available land banks, we only see two areas that could fit into Ecowld’s strategy i.e. (i) Johor - Nusajaya/Kulai/Mersing of c.9,000ac and (ii) Perak - Tapah of c.2,400ac. This makes us wonder if Ecowld would be better served by a simple JV structure. To recap, Uems had previously formed joint-ventures with Gamuda, Klk and Mulpha for Iskandar Malaysia lands; so land JVs are not entirely new to Uems. Also, Ecowld is not in a rush to replenish their Johor land banks with 1,700 acres of undeveloped land bank within the Southern region.

Overall, we opine that the deal in its existing form benefits Uems more than Ecowld and UEM Group might need to provide additional incentives to Ecowld for the merger to go through. Both Uems and Ecowld have until 30 Oct 2020 to respond with their decisions on the proposal. For now, no change to our calls and TPs for Uems (OP; TP: RM0.555) and Ecowld (OP; TP: RM0.49). We have a NEUTRAL sector rating, which was downgraded from OVERWEIGHT in our 4QCY20 strategy report released today.

Source: Kenanga Research - 6 Oct 2020