KUALA LUMPUR: The build up of interests by Ecofirst Consolidated Bhd’s chief executive officer (CEO) Datuk Tiong Kwing Hee in Meda Inc Bhd has raised eyebrows.

From only an 8.2% stake in Meda last November, Tiong has over the past few months raised his holdings in the property developer to 14.72% as at Feb 10, almost similar to his 15.76% stake in Ecofirst as at Feb 11.

Both Meda and Ecofirst share many similarities. Their core businesses is property development, and their sizes by virtue of market capitalisation are not that far apart, at RM287.53 million and RM226.4 million respectively on Feb 17. 

Interestingly, aside from Tiong, both companies also share common substantial shareholders in Teoh Seng Aun and Teoh Seng Kian. The Teoh brothers together own 25.8% of Meda, and 22.8% in Ecofirst.

With such similarities, market observers have been waiting for a corporate exercise to happen between the two listed property developers. More precisely, some say Tiong’s recent purchase of shares in Meda could fuel speculation of a potential merger between Meda and Ecofirst.

Both companies could not be reached for comment as of press time.

In theory, such an exercise is not without merits, said corporate finance advisers, adding that a merger between both firms could create a mid-size property developer with a combined market capitalisation of more than RM500 million. This would then allow the merged entity to implement large property development projects.

“For any given listed entity, RM500 million is a good size to attract support from fund managers and financiers,” says a deal arranger.

It is worth noting that Ecofirst has its eye on a 61.64 acres (24.94ha) freehold land in Hulu Klang, said to have a potential gross development value of over RM2 billion.

The firm had actually proposed in December 2013 to acquire the land (made up of two adjoining pieces) for RM145 million from Zurich Insurance Group.

Both parties were supposed to wrap up the land deal by the fourth quarter of 2014, but it was delayed for the second time and Zurich has agreed to grant Ecofirst another six months until July 31 to seal the deal, with the latter required to pay late payment interests.

The vacant land is located near the Kuala Lumpur city centre and is easily accessible via Jalan Tun Razak, the Ampang-Kuala Lumpur Elevated Highway and the Middle Ring Road II.

Ecofirst has recently denied rumours that it faced funding issues for the land, and clarified that the deal was delayed pending “further clarification and information from the relevant authorities on a planned elevated highway that may affect certain parts of the land”.

That said, the firm’s financial position showed that it could need further fund-raising efforts for the RM145 million acquisition.

As of end-November 2014, Ecofirst has short-term borrowings of RM5.43 million and long-term borrowings of RM133.27 million, versus cash of RM21.55 million. Its net borrowings of RM117.15 million translates into a net gearing of 0.58 times against its shareholders equity of RM201.2 million.

The ideal net gearing ratio for property developer would be below 0.5 times.

At Meda, its balance sheet seems stronger. The firm has short-term borrowings of RM21.17 million and long-term borrowings of RM28.37 million as of Sept 30, 2014, versus RM4.61 million cash. Its net total borrowings stood at RM44.93 million or just 0.19 times of its shareholders equity of RM238.72 million.

In terms of profitability, Meda posted a net profit of RM5.26 million and earnings before interest, taxes, depreciation and amortisation (Ebitda) of RM9.76 million for the nine months ended Sept 30, 2014, on revenue of RM91.4 million, while Ecofirst posted a net profit of RM848,000 and Ebitda of RM585,000 in the six months ended Nov 30, 2014, on revenue of RM10.48 million.

Both property developers would appear to be in need of land bank replenishment and more property projects to boost their earnings to another level. While this requires stronger capital, the pooling of strength between both firms that share common substantial shareholders could be one of the solutions.

The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for details on a company’s financial dashboard.

This article first appeared in The Edge Financial Daily, on February 23, 2015.