MACQUARIE Capital Securities suggested in a recent research report that Sime Darby Bhd could unlock the full value of its property division, which has a huge land bank, if it were merged with Eco World Development Group Bhd.

EcoWorld is controlled by Tan Sri Liew Kee Sin.

The Feb 7 report came out shortly after Sime Darby and its controlling shareholder, Permodalan Nasional Bhd (PNB), confirmed that they were looking at breaking up the conglomerate through separate listings of its property and plantation businesses, after The Edge had written about the plan in its Jan 23 issue.

“Hypothetically, we believe Sime Darby may consider an M&A route to unlock the value in its property business. We believe that Sime Darby may consider merging (or acquiring) a smaller developer with stronger management, branding and project executions,” Macquarie says in the report.

“While Sime Darby’s management has not shared its plans for the property business and no property company has expressed interest to merge with Sime Darby, hypothetically, we think a Sime Darby Property-EcoWorld merger is sensible.

“The merged entity should have the key ingredients to be successful — entrepreneurship (EcoWorld), branding (EcoWorld), overseas experience (EcoWorld), balance sheet (Sime Darby Property) and land bank (Sime Darby Property).

“Sime Darby Property and Eco-World are both trading below their RNAV (revised net asset value), at an estimated discount of 35% to 50%. The combination of leadership (EcoWorld) and financial backing (Sime Darby Property/Sime Darby) should help narrow the discount. To recap, Liew’s S P Setia (prior to 2012) traded up to a 20% premium to RNAV during the 2005-11 period. A merger could create a stronger entity, thereby narrowing their discounts to RNAV.”

It adds that the timing is ripe, considering Sime Darby’s 54% parent PNB is looking to unlock value in the diversified group while EcoWorld, as the research house puts it, is “facing a heavy financial burden”.

For its financial year ended Oct 31, 2016, EcoWorld posted a net profit of RM129.28 million on revenue of RM2.55 billion. In FY2015, it registered a net profit of RM43.95 million from RM1.71 billion in revenue.

As at end-October 2016, Eco-World had cash and bank balances of RM338.84 million and deposits of RM234.64 million.

On the other side of the balance sheet, the company had long-term debt commitments of RM2.04 billion and short-term borrowings of RM800.33 million.

In a nutshell, EcoWorld’s gearing of 67% is the highest among property developers of its size. The company paid finance costs amounting to close to RM31 million in FY2016 or almost a quarter of its net profit for the year.

“The company is highly geared as it is currently expanding its land bank and at the same time, launching new property developments across the country. On top of the business expenses, EcoWorld has also spent a large sum of the turnover on marketing in its bid to expand the brand,” says Macquarie.

“We believe that with the injection of Sime Darby Property’s balance sheet into EcoWorld, it may lessen the stretch of EcoWorld’s balance sheet. With an injection of assets from Sime Darby Property, EcoWorld will have access to prime land parcels in the central region.”

Sime Darby Property has choice tracts such as the 6,000 acres in Subang Jaya, 2,200 acres in Bukit Jelutong, 700 acres in Ara Damansara and 1,500 acres in Bandar Bukit Raja 1. It is also looking at developing townships such as Vision Valley on 3,500 acres, Elmina East and West on 2,234 acres and Bukit Raja 2 and 3 on 2,767 acres.

Also under Sime Darby Property’s belt is a 40% stake in the 39-acre Battersea Power Station, London (a project driven by S P Setia Bhd), which Macquarie estimates to have a market value in excess of RM2 billion.

Macquarie pegs an RNAV of RM26.83 billion to Sime Darby Property and RM8.46 billion to EcoWorld.

The research house says a Sime Darby Property-EcoWorld merger will likely involve the injection of the Sime Darby Property division into EcoWorld for new shares.

“Assuming the RTO (reverse takeover) is done at EcoWorld’s current price of RM1.46 (market capitalisation of RM4 billion) and Sime Darby Property is injected at our implied fair value of RM17 billion, free from encumbrances, the merged entity will have a market capitalisation of RM21 billion, a 40% discount to our estimated RNAV of RM35 billion.”

Also, Sime Darby’s shareholders would hold an 81% stake in the merged entity and EcoWorld, the remaining 19%. EcoWorld’s current directors and management team would have a 13% stake in the merged company.

Is there any chance that Macquarie’s hypothesis will come true?

All parties mentioned could not be contacted for comment while the analyst at Macquarie declined to speak on the matter.

While Macquarie may have a case for the merger to happen, any such move will not be based purely on financials as the chemistry and culture of both sets of shareholders and management have to be right.

After all, EcoWorld exists today only because of a falling-out between Liew and the then PNB leadership over the hostile takeover of S P Setia in 2011.

Although PNB now has a new leadership in chairman Tan Sri Abdul Wahid Omar and CEO Datuk Abdul Rahman Ahmad, who are said to be on very cordial terms with Liew, the scars of 2011 are probably still there.

To recap, PNB made a takeover bid for S P Setia in September 2011, offering RM3.90 per share after crossing the 33% mandatory general offer threshold via direct and indirect holdings. Most viewed the offer as low, and the company’s board pegged the value of S P Setia at RM4.20 per share.

PNB raised the offer to RM3.95 per share in January 2012, but this was still seen as a low price.

Liew was vocal about PNB’s offer and even came out to say that S P Setia’s shares would be trading at the RM5 level — 50% higher — had PNB not bought a chunk of the company.

He sold his 200.5 million shares or an 11.27% stake in S P Setia to PNB at RM3.95 apiece and ceased to be a substantial shareholder in the company he helmed for 18 years. He then went on to build EcoWorld aggressively, albeit with high gearing, together with some 200 S P Setia employees who left with him.

In the past year, he has managed to pare part of EcoWorld’s huge debt and split its local and international businesses. Also, the upcoming listing of Eco World International Bhd got a boost with the emergence of Tan Sri Quek Leng Chan as a partner. Liew has also been able to tie up with the Employees Provident Fund as a project partner, thereby easing EcoWorld’s capital commitments going forward.

Observers say Liew and his team had worked tirelessly in the past 24 months to launch projects, build the EcoWorld brand, bring in partners and improve the company’s balance sheet. The company is running with full entrepreneurial verve, like in the early years of S P Setia before PNB started becoming an intrusive major shareholder.

But if PNB, under the new team, does dangle the idea of a merger with land bank-rich Sime Darby Property, would Liew be tempted to bite?

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