This article first appeared in The Edge Malaysia Weekly on August 19, 2019 - August 25, 2019

WHEN the controlling shareholders of GSB Group Bhd announced recently that they would inject four assets worth RM714 million into it, the move was seen as a shot in the arm for the loss-making property developer. But the news clearly failed to excite the market, judging by the movement of its share price.

When the stock resumed trading on Aug 13, its price closed unchanged at 20 sen. Investor interest in the stock did not improve over the week as it finished lower at 19 sen last Friday, giving the company a market capitalisation of RM104.96 million.

The wariness may stem from the fact that the proposed investment is valued at seven times GSB’s market cap.

However, executive chairman Datin Toh Siew Chuon believes the asset injection will improve the earnings per share of GSB, which has been bleeding red ink for the past five years. Toh is one of the company’s three major shareholders, with the other two being her husband Datuk Tee Eng Ho, who is also the chairman of Kerjaya Prospek Group Bhd, and Eng Ho’s brother Tee Eng Seng, who is GSB’s executive director.

“The asset injection is expected to not only turn GSB around — making it profitable in the coming financial year (ending March 31, 2020) — but also significantly increase its asset size and market cap, so that it can be a more prominent property developer,” she tells The Edge in an email interview.

“We can’t draw conclusions on what affected GSB’s share price last week as the local and global stock markets have been volatile because of the (US-China) trade war and protests in Hong Kong.”

Toh explains that the four assets were appraised by independent valuers and that an independent adviser has been appointed to comment on the proposed injection.

Upon the completion of the asset divestment to GSB, the three major shareholders’ stake will be enlarged to 67.33% from 40.82% at present. GSB intends to apply to the Securities Commission Malaysia for an exemption from making a mandatory takeover offer.

The four companies to be injected into GSB — Aeon Frontier Sdn Bhd (AFSB), Kerjaya Prospek Property Sdn Bhd (KPP), Kerjaya Hotel Sdn Bhd (KHSB) and Desanda Property Sdn Bhd (DPSB) — are principally engaged in property development.

AFSB, KPP and DPSB are owned by the Tee brothers while KHSB is controlled by them with Toh.

The asset injection by the trio, which is deemed a related-party transaction, will be settled by a combination of cash, redeemable convertible preference shares and share subscription deals.

Apart from a return to profitability, GSB is also expected to benefit from its access to KPP’s ongoing property projects, which have a total outstanding gross development value (GDV) of RM1.74 billion.

Among the projects is mixed-use development Bloomsvale in Jalan Kelang Lama, Kuala Lumpur, that has a GDV of RM1.159 billion; a 30-storey serviced apartment and commercial tower in Seri Tanjung Pinang, Penang, called Straits Residence (GDV: RM346.6 million); and Kaleidoscope, which comprises four 25-storey condominium blocks in Setiawangsa, KL (GDV: RM237.56 million).

The asset injection will also provide GSB with investment properties, such as the four-star, 306-room Swiss Garden Hotel in Melaka as well as a new hotel, offices and mall in the ongoing Bloomsvale project.

“These investment properties are envisaged to provide stable recurrent income to the group going forward. Furthermore, the companies to be injected have completed condominiums and shops that will provide income and cash flow to the group in the short term upon the sale of the units,” says Toh.

“Some of the condominiums and shops are tenanted and will thus provide recurrent income.”

In FY2019, with the inclusion of the performance of its discontinued operations, GSB’s net loss widened to RM2.2 million from RM1.6 million in the previous year on the back of a 30.7% year-on-year increase in revenue to RM45.54 million.

In terms of balance-sheet strength, GSB had cash and bank balances of RM1.66 million as at March 31 while its borrowings stood at RM68.55 million.

Toh says the proposed asset injection will also give GSB access to cheaper funding due to a stronger balance sheet.

The question is, is now the right time for an asset injection, given that the property market has deteriorated with an increase in the overhang of properties and weak sales.

Toh acknowledges the subdued property market. “As the property market is soft right now, we opine that this will be a good time for the group to explore land banking. As the saying goes, there are more opportunities in a bad market than in a good one.”

If these opportunities do translate into returns, then that would be the deal’s sweetener for GSB’s minority shareholders.

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