Capital Reduction and Repayment Exercise

Selangor Properties Bhd (SPB) announced that it has been requested by its major shareholder, Kayin Holdings Sdn Bhd (Kayin), to undertake a selective capital reduction and repayment (SCR) exercise, which will involve Kayin offering a total repayment of RM622.3mn, or RM5.70share, to all shareholders, except Kayin and its person acting in concert (PACs), to cancel their shares.

The offer is subject to approval from minority shareholders and relevant authorities. Having said that, this proposal will require the approval of 75% of the minority shareholders of SPB. In other words, Kayin and its PACs, which controls 68.2% of SPB, will not be able to vote on this proposal.

Post SCR exercise, Kayin and the PACs will become the sole ordinary shareholder of SPB, and subsequently be de-listed from the main market of Bursa Malaysia.

Our View

Recall, SPB has 31 acres of land in Damansara Heights, out of which, 15 acres is located within the Damansara Town Centre. Nevertheless, we reckon that the two mega projects i.e. GuocoLand’s Damansara City and Tan Sri Desmond Lim’s Pavilion Damansara Heights near SPB’s existing properties would likely drive vacancy rates higher and depress effective rental of its existing investment properties. The huge supply of residential and commercial space within the vicinity will also limit the group’s developments activities, especially on its landbank in Damansara Heights in the short to medium term.

In view of the prevalent oversupply of commercial and luxury residential sectors, we also believe the government will become very selective in approving high-end real estate development. Specifically, management has put the redevelopment of Wisma Damansara in Damansara Heights on-hold, until the government’s freeze on shopping complex, offices, serviced apartments and condominium development priced above RM1.0mn each is reviewed/lifted. As such, we see slim chance of landbank value realisation over the next 12-month. In addition, the prolonged delay in new launches will also further dampen the group’s property sales outlook.

Meanwhile, the trading liquidity of SPB shares has been low, with an average daily trading volume of approximately 57,617 shares for the past 3 years, or a mere 0.05% of the free float as at 24 Oct 2018.

The capital repayment of RM5.70/share is at a premium of RM1.64, or 40.4% over SPB’s last traded share price of RM4.06 before the announcement, and it is at a RM1.53 or 36.7% premium against its one-month volume weighted average market price of RM4.17. Note that the shares have not traded at or above the SCR offer price since Mar-16. Furthermore, the SCR offer price translates to 0.8x CY19 P/B, a premium to the stock’s 5-year historical P/B ratio of 0.6x and the sector’s average CY19 P/B ratio of 0.5x.

Given the challenging environment and low trading liquidity of SPB’s shares, the selective capital repayment represents an opportunity for entitled shareholders to realise their investments in SPB at an attractive premium above the historical trading prices. As such, we advise investors to accept the offer at RM5.70/share.

Forecasts

No change to our earnings projections.

Valuation

We raise our target price to RM5.70/share, on par with the offer price from Kayin and the PACs. We advise investors to accept the offer.

Source: TA Research - 26 Oct 2018