This article first appeared in The Edge Malaysia Weekly on November 6, 2017 - November 12, 2017

ISKANDAR Waterfront City Bhd executive vice-chairman and controlling shareholder Tan Sri Lim Kang Hoo has expressed surprise that the market sees his proposal for Ekovest Bhd to privatise IWC last week as a bailout.

“I was very surprised,” Lim says following the market selldown of Ekovest after the announcement. “Shocked that the market would perceive it as a bailout.”

Ekovest’s share price collapsed after the deal was announced last week, falling as much as 18.5%, or almost RM460 million in market capitalisation. Clearly, the market did not take too kindly to the deal.

Lim and parties acting in concert control a cumulative 38% in IWC and slightly over 50% in Ekovest. Lim is also executive chairman of Ekovest.

He is proposing that Ekovest acquire the outstanding 62% holding in IWC held by minorities at RM1.50 a share — in cash or a one-for-one share swap with Ekovest shares.

Analysts and fund managers, however, are concerned IWC would weigh down Ekovest’s balance sheet and profitability. IWC may have a sizeable land bank in Johor of 1,052 acres but it does not have a strong earnings pipeline.

Some have criticised the deal, labelling it a bailout.

“Lim is using a profitable company with a strong balance sheet to buy up a company that does not have earnings and is struggling with debt. At the very least, he is using Ekovest to help warehouse IWC. It does not look like a good deal for Ekovest,” says one fund manager who disposed of his fund’s holdings in Ekovest following the news.

Lim: Not a bailout

Lim vehemently denies the proposal is a bailout.

“It is not a bailout. I am still holding my 38% stake in IWC, aren’t I?” he tells The Edge.

“As a substantial shareholder in Ekovest with more than 50% of the company, I would not want it to sign a bad deal either. I would be hurting myself.”

Note that through his private vehicle Iskandar Waterfront Holdings Sdn Bhd (IWH), Lim will continue to hold a 38% stake in IWC.

On top of that, he points out there is no guarantee the deal will go through. As an interested party, he will not have any say going forward.

The independent directors will have to accept the proposal and shareholders will then have to vote on it. At least 50% + 1 votes are needed to approve the acquisition.

“All I can do is propose it. Now, it is in the hands of the independent directors who need to approve it and put it forward to shareholders to vote. I cannot vote. Almost 30% of Ekovest’s shares are held by institutional investors, so whether this deal goes through or not is entirely up to them,” Lim explains.

In short, if institutional investors move to block the proposal, it would be dead in the water.

Rationale for the proposal

If the proposal is not a bailout, what is Lim’s rationale and intention in proposing the deal?

For many market observers, the exercise is seen as an avenue for IWC’s shareholders to exit the company after the failed rationalisation and restructuring (R&R) exercise with IWH.

Recall that IWC’s R&R exercise, simply put, has been meant as a backdoor listing for IWH. And along with it, the listing of the group’s crown jewel asset — the 36% effective stake in the prized 486-acre Bandar Malaysia development in the heart of Kuala Lumpur.

When news broke earlier this year, IWC’s share price shot up to dizzying heights, more than tripling to over RM3 per share.

But it all came crashing down when the government suddenly terminated the sale of the Bandar Malaysia land. As a result, many investors who held IWC shares were caught, and were hoping the R&R exercise would proceed in one form or another, even without Bandar Malaysia.

But last Tuesday, along with the new proposal, IWC made the expected announcement that the R&R exercise had been terminated.

While many who jumped on the IWC bandwagon at the peak would still be out of the money, few are expected to turn their nose up at this opportunity to exit en masse.

In short, IWC minority investors will be the biggest beneficiaries of the deal.

Asked about the rationale for the proposal, Lim simply says, “The R&R exercise was going to be scrapped. As a responsible corporate entrepreneur, I have undertaken to provide reasonable options to all shareholders to consider.”

While his explanation leaves some room for interpretation, he is less cryptic about the alternatives available to IWC’s minorities.

“If this exercise is not approved, we do not have any further plans to take IWC private. By putting this proposal on the table, I have done my duty,” he says.

Should Ekovest take the deal?

The deal’s headline figures may impress some. At RM1.50 per share, it values IWC at RM1.25 billion. In turn, this implies that the group’s land bank of 1,052 acres is valued at only RM27.38 psf.

Even if the property market in Johor is soft, that is still a fairly low price to pay on paper.

Simply put, the 62% stake in IWC should cost Ekovest about RM777.85 million, in a combination of shares or cash.

However, there are a few other considerations.

As at June 30, 2016, IWC only had a net asset value of 97 sen per share. Thus, the RM1.50 price values it at a 54.6% premium. Of course, this is based on dated valuations.

Another issue is IWC’s weak balance sheet. The company has RM48.43 million in cash against RM245.3 million in debt, giving it a net debt of RM196.8 million.

Factor this in, and the net land cost rises to RM31.82 psf.

IWC also has RM494.8 million in payables against RM138.1 million in receivables. Factoring in the payables-to-receivables deficit of RM356.7 million, the land cost rises to RM39.60 psf.

That said, looking at the value of the land itself may be a moot point if IWC does not have substantial plans in the pipeline to unlock the value of this land bank.

Thus Lim stresses that the proposed exercise is not a land deal. Instead, Ekovest shareholders should view it as “a good investment opportunity”.

But buying assets cheap is only one side of the equation. How can Ekovest realise returns on this “investment opportunity”?

“We have something in mind, but we can’t talk about it now. We will announce our plans once we have more clarity on the exercise, once Ekovest’s independent directors and the shareholders have approved the proposed scheme,” says Lim.

Lim: IWC won’t need Ekovest’s funds

Another major concern for Ekovest shareholders is the health of IWC’s financials.

For the six months ended June 30, IWC posted a cumulative net loss of RM56.3 million (up from a net loss of RM8.6 million last year). This is relatively high compared with the RM26.16 million in revenue recognised in the same period (down 11% y-o-y).

Lim, however, insists that Ekovest will not have to support IWC.

“We have already secured a payment schedule from Greenland (China-based Greenland Group), which will contribute positively to IWC’s earnings. On top of that, we have over RM500 million of landed property to be launched in the first half of next year,” he says, stressing that IWC would be earnings accretive for Ekovest.

Recall that IWC earlier this year finally managed to secure payment from Greenland.

While less than ideal, IWC has agreed to allow Greenland to repay RM2.4 billion owed from the sale of 128 acres of land over three years up to May 2020.

This year, only RM231.6 million will be paid. This should help IWC recognise a profit in the second half.

Also note that the payment schedule is loaded towards the tail-end. For 2018, 2019 and 2020, Greenland is due to pay RM343.75 million, RM432.2 million and RM1.13 billion respectively.

IWH IPO still on the cards

Interestingly, some IWC minorities may want to opt out of the proposed exercise to maintain their exposure to the group, even if it is delisted.

“Listing IWH is still our top priority, but it will take a little more time,” Lim says.

He adds that IWH has been able to address all the necessary regulatory requirements in order to list, and will no longer need to do so by tapping into IWC’s listing status.

For perspective, IWH posted a revenue and profit after tax of RM130.3 million and RM39.66 million respectively for the year ended Dec 31, 2016.

That said, if Lim were confident of listing IWH in the near future, it would have made more sense to simply take IWC private with IWH, perhaps by using a bridging loan from the banks — a sum that can easily be recovered upon listing.

Of course, this might be risky if market conditions deteriorate. As it stands, the market may not have the appetite for a massive offering by a Johor-based property company, or as Lim prefers to define IWH — a “master developer”.

But if he can pull it off such a listing, it would be a rerating catalyst for IWC — and for Ekovest if it takes up the 62% stake in IWC.

But perhaps this is a little too far down the road for investors. The market is clearly less than thrilled about the latest episode in the roller-coaster ride of companies linked to Lim.

If he cannot convince Ekovest’s shareholders to stay for this deal, an IPO would not be any easier.

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