Commentary On Hot Stocks

Its been a tough week for the markets. You know people are disturbed when I have readers emailing me to ask me to stop with the sea creatures mastheads, and switch back to louts flower as they made a lot of money when the lotus flower appears as masthead.



Realistically, nothing much has changed an markets uptrend is intact but in a moving market it will always be susceptible to minor negative news as those will always be reason enough for people to take chips off the table. I do think its a good time to reload your guns, both for traders and fundamental longer term players as the markets whipsaw action brought quite a number of opportunities.

Some of the stocks to take a look:

Air Asia - I have not been keen on it for the longest time. However the recent 3Q 2010 PBT was a shocker on the upside. Looks like it has surged past critical mass. The second factor which is causing analysts covering the stock to scramble to upgrade Air Asia is the potential of its Indonesia operations - looks to be surpassing the size of Malaysian operations soon if not already. That is testament to a good replication strategy and the ability to transplant its business model successfully in the region. The execution ability will be well regarded as that can only hint of future successes in other regional countries for Air Asia. Now, maybe the plethora of Air Asia covered warrants will finally start to move up. Its currently at a 30% to regional peers, watch funds surge to buy the stock.

EAH - Maybe its because of the missiles thingee but many investors may have missed the fact that it is trading cum-free warrants on Tuesday 30 Nov, which means its the last day to buy and still be entitled to the 1-for 2 free warrants. As the warrants are exercisable at 59 sen, its a no brainer. Company fundamentals are intact for this new kid on the block. Recently visited the company and am confident with their outlook. It does not want to be just another ACE company but with grander plans to move to the next level via smart acquisitions. Pipeline is healthy with a good chance of securing a couple of significant GLC related contracts, which should make current valuations cheap in 3-6 months time.



IJM Land / IJM Land-W - Both suffered the North Korean dengue, but among the recent flurry of property mergers, this looks to have the better upside. Even though it may take 6 months for the merger to be completed, the price is now too skewed to the negative. All things being equal, IJM Land should be at RM3.30 and the warrant should be closer to RM2.05. Let it be known that IJM Land is about the only one which will get an upper hand in these recent mergers, most of the rest are a merger of equals, while IJM Land gets in with something in hand and more.


NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

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Does A MRCB-IJM Land Merger Makes Sense?

Apparently the word has switched from an IJM Land privatisation to a merger with MRCB. Something along the lines of a UEM Land-Sunrise deal it seems.



MRCB
1.37bn shares
P/BV 2.4x
Net Gearing 62%

Major shareholders: EPF 42%, Public Mutual 9.6%

IJM Land
1.1bn shares
P/BV 1.7x
Net Gearing 21%

Major shareholders: IJM Corp 62.5%, GIC 7.3%



MRCB
The value in MRCB due to its expected involvement/major role in the redevelopment of the federal government’s land in Sg Buloh, and a possible strong uplift to the construction order book from the 10MP rollout. MRCB has been assisting the Employees’ Provident Fund (EPF) in drawing up the masterplan for the Sg Buloh land. Thus, the group should be among the favourites to get one of the first pockets of land there. Details are sketchy at this juncture but the government is expected to announce the award and details by 1Q11.

MRCB group usually prefers to go at it alone. But EPF could be smarter to suggests that MRCB do it with the strong IJM Land proven brand power. MRCB currently has two low-key township developments in Perak and Kajang, with a combined GDV of RM4bil. Its track record in residential development is not significant, which means a link up with IJM Land would make a lot of sense.

MRCB has guided analysts that its involvement in the redevelopment of federal land would most likely be limited to Sg Buloh given that the Cochrane land is now to be auctioned off, rather than given outright to MRCB as previously speculated by the market. The government and the Employees’ Provident Fund (EPF) will form a joint venture to promote the development of the 3,300 acre-land in Sg. Buloh into a new hub for the Klang Valley. This land is believed to have a gross development value of RM10bil. This is a very positive move by the government given the scarcity of land in the Klang Valley where high land costs have resulted in very pricey residential properties. Homebuyers are now looking at prices of RM0.7mil-RM1mil for double-storey link houses in prime areas such as Bandar Utama, TTDI, etc.

Looking at the neighbouring areas of the MRB land such as Subang, Kota Damansara, Shah Alam and Sungai Buloh, land scarcity is prevalent even in recently developed Kota Damansara where only 30-40 acres of land are left available for development – most if not all are meant for high-rise developments. At 3,300 acres, the MRB land is about 3x the size of Petaling Jaya. Given it is bounded by the matured townships in Subang and Damansara and partly Sg Buloh, this parcel of land most certainly has a significant development potential.



IJM LAND
The recent tender by the Penang state government for 93 acres at Bayan Mutiara for RM200psf may establish a new benchmark price for seafront land. This may lead to a repricing of implied land values at Phase II (103 acres) of The Light, which should cost less than RM50psf to reclaim. Newsflow momentum is re-accelerating. The imminent debut of Light Collections II (GDV: RM260m) in November 2010 is highly anticipated. IJM Land is actively negotiating with anchor investors to pre-commit on its highly sought after waterfront retail mall (GFA: 1.0msf) at Phase II.

IJM Land is acquiring some 2,000 acres of converted development land at Canal City, adjacent to the mature Kota Kemuning township. The said land will be acquired for about RM5.00psf or RM436m, with the payment to be staggered over four years. IJM Land will acquire a 50% stake in the project, with KEURO holding the balance 50%. The entire township development is expected to generate a significant GDV of RM6.5bil over 10-15 years. Canal City is accessible via the existing Kota Kemuning township as well as via the Saujana Putra Interchange along the ELITE Highway.

IJM Land will spearhead the entire development of Canal City. It will be positioned as a medium-to-high end development, with maiden launches of the bread-and-butter terrace houses expected by 4Q11. The indicative pricing range is between RM300,000 and RM350,000/unit. The land is at the edge of Kota Kemuning and neighbours Putra Heights, Bandar Saujana Putra and Puchong. These are growth zones given affordable home prices in the area. The significance of this deal is its attractive pricing, sheer size and immediate development potential given a large residential catchment in the locality.



ANALYSIS
The key here is pricing. IJM Land suffers from low liquidity and hence its unable to realise a proper valuation for the counter. As the size of both companies are almost similar, IJM Corp could end up with the controlling stake with EPF coming in second. EPF being EPF will not mind not being the largest shareholder.

By doing the deal, IJM Corp will have an absolutely mega sized property counter with immense reach. Going on its own IJM Land will not be able to realise the deep value in its counter. But just like the UEM Land-Sunrise deal, how the new company will be run will be a big matter to resolve. That could be the deal breaker.

A probable deal should value IJM Land at 2.2x P/BV against MRCB's 2.4x, hence it should favour IJM Land should it happen. The deal should be strongly favoured by EPF as it will guarantee success almost for the Sg Buloh development. Let's face it, its 3x the size of the Petaling Jaya township, you cannot afford for this not to be a huge success in the planning, implementation and delivery chain.

Even without this deal, IJM Land has deep unrealised value since its P/BV is at just 1.7x when the average for the sector is 2.2. If not this deal, I believe some other value unlocking deal should be in the works, making IJM Land a safe buy.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

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How To Spot A Good Trade Part 6

Back in September 2010, I posted something that came from a local broker which hinted on a possible privatisation of IJM Land. Looking at the way the warrants traded with volume, I would be leaning towards a corporate exercise for IJM Land. The counter suffers from low liquidity, and current shareholders all do not want to sell at current low levels. If you judge the way SP Setia and the rest of the high flying property counters, it would be silly not to take the vehicle private.

No liquidity means you cannot really raise much funds with it as no institutions would be keen to take up shares. There are not many attractive property counters left. I figure a valuation of at least 2.0x P/BV (RM3.29 or higher) if an exercise is to happen, considering that the market average for property counters is now at least 2.2x.

The warrants activity hints at something, no smoke without fire.

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This was from a local broker:

Market talk indicates IJM Land may be privatized by IJM Corp, its parent company. Further details are not available at this point. We spoke to management and they were unable to comment.

We are quite surprise by the rumor given injection of IJM Properties (previously 100% owned by IJM Corp) into RB Land and subsequent rebranding into IJM Land in mid 2008. IJM Land has suffered low liquidity as it is tightly held by its parent, IJM Corp, which has 62.5% stake. Inclusive of EPF (8.7%) and GSIC (7.3%) stake, free float is 21.5%. The stock has been a laggard with only +0.9% Ytd returns vs. KLPRP +11.3%.

Catch-22 situation. Although it is unorthodox to take private a subsidiary that has been listed not too long ago, we will not be surprised if it happens. IJM Corp is unlikely to dilute its interest as more than 50% of its pretax profit is derived from property division in the future. Given the difficulties in replenishing its large orderbook of more than RM5b, the group will be more reliant on IJML earnings.

However, the low liquidity of the stock meant that IJM Corp will never be able to fully realize the value of IJML. In fact, many foreign funds are interested in IJML given that it is an alternative proxy to SP Setia and the Malaysian property sector, but are unable to invest due to lack of liquidity.

(Privatisation is possible as none of the substantial shareholders are wanting to sell at current levels. No liquidity means no other institutions are likely to buy in as they may find it hard to buy big blocks or sell them when they want to. This will make it less attractive as a listed vehicle).

IJM Land valuations. At current price of RM2.38, IJML is trading at 1.4x FY11E PBV while FY11-12E PER is 14x-13x. Our RM2.80 fair value (SoP RNAV) implies 1.7x FY11E PBV, which is a discount to SP Setai’s current FY11E PBV of 2.2x or a premium to average property development companies’ average P/BV of 0.9x. Assuming privatization price at our TP, which is 18% premium to current price or 1.7x FY11E PBV, The value of the shares not owned by IJM now is worth RM1.16b.

FY11E BV/sh (RM)			1.64
PBV (x)			RM
2.2	0%	discount to SP PBV	3.61
2.1	-5%	discount to SP PBV	3.45
2.0	-9%	discount to SP PBV	3.29
1.9	-14%	discount to SP PBV	3.12
1.8	-18%	discount to SP PBV	2.96
1.7	-23%	discount to SP PBV	2.79
1.6	-27%	discount to SP PBV	2.63

RCULS conversion. There is RM400.0m nominal value RCULS (maturity in 2013), owned by IJM Corp, which is unconverted in IJML’s books. IJM Corp can convert these into shares at any time at a conversion rate of RM1.74, which is ‘in the money’. If IJM Corp converts all RCULS, share base will be enlarged by 21% to 1.34b whilst IJM Corp’s shareholding increases to 68.9% from current 62.5%, giving them a higher shareholding to start the privatization exercise with high chances of success. Alternatively, the other two substantial shareholders EPF and GSIC could also be persuaded to act in concert with IJM for the privatization exercise.

Privatization of listed property arm of construction and conglomerate companies is not unusual. Sime Darby privatized Sime Properties in its mega merger. WCT and IOI privatized WCT Land and IOI Properties respectively. Both WCT Land and IOI Properties were privatized at 1.5x – 1.7x P/BV and at 4%-17% premium over the market price on the date of announcement.

The incentive to privatize becomes more apparent. Listed property developers are under pressure to maintain a pipeline of launches to maintain an increasing profit track record. By privatizing the property company, it has no pressure to do so especially in light of a slowdown in the growth rate of property launches, prices and take-up rates as BNM is mulling on capping LVR and pulling the plug on interest absorption schemes.

We think the privatization is possible. At IJM Corp’s Company level, net gearing is 0.22x, which is ample room to gear up further. On IJM Land’s level and assuming all RCULS converted, its net gearing will be very low at 0.03x. Assuming if IJM undertake an LBO structure to privatize IJML and subsequently “push” the debt down to IJML operating levels, IJM Land’s net gearing will be 0.69x. Given a strong FCF of RM200m-RM240m p.a. in the next 3 years, it can easily service a 5-year RM1.16b debt in addition to the current operational debt outstanding.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

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