Acquiring 10% Stake in Magna Prima Bhd

In a surprise move, Hua Yang announced that it has acquired 36mn shares (or 10.84% stake) in Magna Prima Bhd (MPB) for a cash consideration of RM66.6mn via an off-market direct business transaction. Vendors are Chun Mei Ngor and Chun Yee Ying, who respectively held 7% and 5.6% in MPB. Post this direct business transaction, the vendors have ceased to be the substantial shareholder of MPB. The company intends to fund the acquisition through internally generated funds.

More about MPB

MPB has been around in the local property scene for more than 20 years. It was listed on Bursa Malaysia in 1997. MPB’s current signature projects include the development of: 1) The Avare, a 6-star super luxury condominium located near KLCC, and 2) The Istana Melbourne, a 25-storey single tower apartment located in the heart of Melbourne’s Central Business District. MPB also owns and operates a construction and engineering division, which is mainly involved with internal projects. According to MPB’s latest annual report, the group’s largest shareholders are individuals Lee Hing Lee and Lee Siong Hai, who, via their vehicle Fantastic Realty Sdn Bhd, control 20.6% of the company. We understand that the largest shareholders are not in MPB’s management team. Managing director Datuk Rahadian Mahmud Mohammad Khalil is the only director of the company who has a substantial stake — 6.43%.

MPB’s Shah Alam developments worth RM1.6bn

MPB owns: 1) 20 acres of leasehold land in Section 15, Bandar Shah Alam, which has a net book value of RM125.1mn; 2) about 7 acres of freehold land valued at RM65.0mn in Jalan Gasing, Petaling Jaya; and 3) 2.6 acres in Kuala Lumpur valued at RM171.8mn. There are also pockets of land in Mentakab. In June last year, MPB had proposed to acquire a piece of leasehold land measuring about 5.25 acres at Bandar Shah Alam, Selangor, for a consideration of RM43mn, to undertake a residential development with an estimated gross development value (GDV) of RM220.8mn. Meanwhile, the 20 acres land in Section 15, Bandar Shah Alam, dubbed Magna Eco-City has an estimated GDV of RM1.4bn. With this, we estimate MPB’s upcoming GDV to be around RM1.6bn.

MPB owns prime land in the heart of KL

Meanwhile, media sources reported that MPB had appointed Rahim & Co to sell their plot of 2.6 acres land, representing the Lai Meng School that is located close to KLCC. This news first surfaced in August-2015. MPB was looking to sell the land for RM400mn or RM3,500 psf. It was also reported that the freehold land comes with approval for the development of offices, a hotel and/or serviced apartments at a plot ratio of 1:12. Nevertheless, we also note that the offer for sale was closed in Sept 2015 and there has been no newsflow about it since.

A Fair Acquisition

The acquisition price of RM1.85/share represents a 13.5% premium to MPB’s last traded of RM1.63 prior to the announcement. Based on 9M16 annualised results, we estimate that the price tag translates into a fair 8.3x CY16 MPB’s earnings and P/NAV of 1.0x (NAV of RM1.83/share as of 3Q16). In comparison, the average small cap property stocks’ CY16 PER and P/NAV are 8.4x and 0.7x respectively, based on our research universe. Table 1 shows that the recent M&A deals in the property sector are concluded at a P/NAV of 1.1x. Excluding privatisation offers from the major shareholders, which usually value the company below its book, the average P/NAV of the past acquisitions is 1.5x. We see Hua Yang’s net gearing to inch up to 39% from 32% as at Dec-16, assuming the purchase is financed entirely through equity.

Rationale for Buying Into MPB?

Management believes this acquisition will present an opportunity to Hua Yang to invest strategic landbank, given that MPB’s landbanks are situated in prime area within the Klang Valley. In addition, the acquisition could potentially create an avenue for Hua Yang to explore further collaboration opportunities with MPB to jointly acquire and/or develop properties. According to the announcement, Hua Yang will seek for a board seat to represent the group’s interest in MPB and to stay abreast of the developments in the investee company. We are encouraged by this move to safeguard Hua Yang’s interest. With a board representative in MPB, we foresee that Hua Yang will likely be given the priority to participate in MPB’s future property development.

Neutral on the Deal. Maintain Hua Yang as Sell

All in, we are Neutral on the deal. Although we acknowledge that the MPB deal provides more business opportunities over the long term, we believe a strong rerating to share price would be capped by further earnings risks come 2018- 2019 due to sluggish property sales. We are leaving our earnings forecasts unchanged pending further guidance from management. Target price is maintained RM1.09/share, based on unchanged CY17 P/E target multiple of 6x. Maintain Sell.

Source: TA Research - 26 Jan 2017