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Wednesday, December 26, 2018

Selangor Properties Bhd. 2019 Risk free investment

Author: Alan Neo | Publish date: Wed, 26 Dec 2018, 12:09 PM

Selangor Properties Bhd update - A Steady Arbitrage, Event Driven Trade

Event driven trade is a strategy that Malaysian investors still not too keen on or take for granted. In such "bearish" sentiment market, it's a luxury to have an investment that has a low volatility such as this, while yielding a decent return.

Since my last post early November (on a different app), SPB had gained 5% and are inching closer to privatisation. There's also a "bonus" in their latest development in that:

1) the acquirer have upped their terms, from RM 5.70 to RM 6.00, I guess to give better assurance of acceptance in the upcoming EGM, since some shareholders were making a bit of noise.

2) Tougher Conditions left for the deal to be completed are:
2a. Approval of entitled shareholders in EGM: whereby it is required that MAJORITY IN NUMBER approve the resolution AND 75% IN VALUE to the votes attached to disinterested SPB shares

2b. Must not be voted against by more than 10% of the votes attaching to all SPB shares held by disinterested sareholders.

3) Timeframe to complete (assumie all approvals done) is now "to be completed in second quarter of 2019"

Updated verdict: With the takeover price now increased to RM 6, that is a price that was last seen at 2014, and would probably swing a few more voters in EGM who's afraid that value in SPB takes too long to be unlocked.

I put a probability of 80% that this deal will go through. Assuming the deal is to be completed in the middle of Q2 2019, current arbitrage of 6.2% will be annualised to 15.5% return. That's not bad considering choppy and uncertain outlook of the market in 2019.

An event driven trade. A nice 6.5% Return or around 20% annualised return, but is the deal fair?

~ Facts first...
1) 68.23%-shareholder Kayin Holdings is proposing to take SPR private
2) Cash repayment of RM5.70/share which represents a 40.39% premium to pre-announcement price and a 19.62% premium over the one-year VWAP
3) Conditions include ≥75% of disinterested shareholders voting for the proposal, and ≤10% against
4) SPR's board has until 17 December in which to support the proposal. On the assumption the board backs the Offer, completion will likely take place within 3 months (Mid March 2019)

In the market as choppy as the current market, having an event driven trade idea that yields 20% p/a feels like a luxury!

~ Background
SPR is the largest landowners in Damansara Heights, owning abt 42 acres of prime land across Damansara Heights and Bukit Tunku, two of the most sought-after locations in Kuala Lumpur. They had built a number of well-known buildings such as Wisma Damansara, Wisma Perdana, Pusat Bandar Damansara and Menara Milenium, etc.

~ Valueing the deal - is the deal fair?
1) According to its last QR, SPB has a book value of around RM 2.5bil ringgit, that translates to about RM 7.2 per share (26% above offer price)
2) If we look at it from the market perspective, doing a peers and relative valuation, the offer do look fair. Price at 0.8x PB (while average is 0.7x) See attachment.
3) BUT as highlighted in The Edge piece, Pangolin Investment Management, a shareholder thinks the offer price is too low. They say that "the shares are worth as much as RM12.22... as they values the 30.71 acres of the group’s land/properties in Damansara Heights at RM1,400 psf"
4) I personally agree with this, as if you see SPB's annual report 2017 page 130, their property number 9 (a 15.3 acre land) or half of their total landbank, is only valued at RM 145 per sqft! That's not even 10% of what Pavillion paid in 2014 - RM 1647 per sqft

~ What do do?
Even if the deal might not be fair, the offer is decent overall in my opinion, to what is a very illiquid stock that's constantly trading well below its book value. Minority shareholders should argue their case for a larger payout. But I think the board will probably support the offer and the IFA will sign it of.

At RM 5.35, a high chance of deal going through & a choppy market, 6.5% return in 4 months is not a bad return. Bullish.

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