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Monday, April 20, 2020

Property Developers - Tempting Privatisations

With property stocks badly battered following the market sell-off, this has opened up a window of opportunities for substantial shareholders to privatize their listed companies at bargain basement prices. Logically speaking, the suitable privatisation targets would be companies that are already trading at distressed PBV valuations but financially sound with net cash/low net gearing positions. An added pull factor is the cheap funding options available amid softer interest rates.

Over the past two years, 10 listed property companies saw take-over offers priced at PBV valuation range of between 0.18x to 1.47x. Our study reveals that about half of the listed companies in the KLPRP Index universe are presently trading at PBV multiples of less than 0.30x, signalling that this could be a conducive environment for such privatization exercise to be undertaken. To separate the wheat from the chaff, we dug deeper by analysing the balance sheet strength in terms of net gearing and book value quality.

Based on our anecdotal study, focussing on the smaller size property companies as probable privatisation candidates, we conjecture that: (a) MCT (current price of RM0.18 vs net cash per share of RM0.32), (b) SHL Consolidated (current price of RM1.90 vs. net cash per share of RM1.56), (c) MUI Properties (current price of RM0.18 vs. net cash per share of RM0.11), and (d) KSL Holdings (current price of RM0.56 vs. net cash per share of RM0.25) could be potential “take-private

The making of take-over offers. The free-fall of property stocks, as captured by the Bursa Malaysia Property (KLPRP) Index’s losing streak of -28.6% in 2018, -5.2% in 2019 and -29.1% YTD 2020, has forced their valuations to slump to distressed levels with the KLPRP Index currently trading -2.5SD below its historical mean, which is even lower than the trough of -1.5SD seen during the 2008/09 global financial crisis. Consequently, a window of opportunities could have opened up for major shareholders to take private their listed companies at bargain basement prices.

A historical guide. To get a sense on the essence of past take-over offers, we track recent deals (which include both privatisations and buy-outs between major shareholders) of property companies listed on our local bourse. Since 2018, there were at least 10 listed property companies seeing take-over offers (see Table 1). It is worth highlighting that these offers were priced at PBV valuation range of between 0.18x to 1.47x and the financial position of these companies was relatively strong with net gearing of less than 0.35x (except for two cases) with three of the companies in net cash positions.” targets.

Source: Kenanga Research - 20 Apr 2020

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