Trade Wise: Hunza worth multiple times privatisation offer

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Hunza-Properties-Chart_tw10_1060THE privatisation offer by the controlling shareholders of Hunza Properties Bhd will likely come under the scrutiny of the minority shareholders. Many are questioning whether the offer price of RM2.50 per share represents a fair value, especially after taking into account the group’s prime land and property assets in Penang.

As the company is considered a proxy for the booming property market in the northern state, market observers say the minority shareholders deserve a much higher exit offer.

To recap, on March 20, Hunza announced that the Khor family — led by the company’s non-executive director Datuk Khor Teng Tong — and members acting in concert are proposing to take Hunza private via a selective capital reduction (SCR) and repayment exercise.

This entails the acquisition of the remaining 41% stake not held by the offerors at a total cost of RM230.72 million or RM2.50 per share.

As is normally the case in an SCR, the acquisition will be partly funded by the group’s cash pile. Hunza’s cash and cash equivalents stood at RM92.86 million or 41.3 sen per share as at Dec 31, 2014, meaning that the offerors will have to fork out about RM137.86 million to finance the deal.

While it is notable that the offerors did not provide proof of financing in their initial announcement, a closer look at the group’s core assets indicates that funding the privatisation exercise would not be a problem.

Hunza’s unaudited net assets stood at RM771.34 million or RM3.50 per share as at Dec 31, 2014. This represents a 40% premium to the RM2.50 offer price, which valued the firm at RM562.7 million. In a November 2014 report, AllianceDBS Research pegs Hunza’s revalued or realisable net asset value at RM4.32 per share, which would value it at RM972.4 million.

Hunza’s total borrowings amounted to RM431.4 million as at Dec 31, 2014, compared with cash of RM92.86 million. Its net gearing translated into 0.44 times its shareholders’ funds, which was within the optimum level of 0.5 times net gearing for property developers.

According to Hunza’s latest annual report, the cumulative carrying amount of its land and property assets was RM1.08 billion, the bulk of which was contributed by its Gurney Paragon Mall that is valued at RM655 million.

Most of the company’s land assets are in Penang, including a 703.6-acre first-grade, freehold development tract in Seberang Perai Utara that it purchased in 2000.

While the five parcels that make up the 703.6 acres have a total carrying amount of RM46 million, recent listings of land available for sale in the same area show they are fetching a minimum of RM500,000 per acre or RM11.50 per sq ft, meaning that Hunza’s tract could be worth well over RM350 million.

With such a low land cost, Hunza could reap handsome development margins compared with other developers in the area. It also has the flexibility to reap huge gains by just disposing of some of the parcels to other eager developers.

“Residential property prices in Seberang Perai have appreciated about 10% per annum over the past four years. The market remains resilient due to an overflow of demand from the Penangites who have been priced out of the island due to high property prices,” says a Penang-based property analyst.

It is worth noting that Hunza’s cream of the crop is in Penang island. A 42-acre tract in Bayan Baru, which the group acquired in 2009 for RM93 million (RM51 psf), is earmarked for a mixed-use development with an estimated gross development value of RM6 billion.

This tract is believed to be carrying a market value in excess of RM500 million, according to AllianceDBS Research in a report. This is because a similar 102-acre tract in Bayan Baru was sold by the Penang Development Corporation to a property joint venture at RM240 psf in 2011, underlining the rapid price appreciation of prime land in the area.

Elsewhere on the island, Hunza’s Gurney Paragon Mall is gaining traction. In the first half of the financial year ending June 30, 2015 (1HFY2015), Hunza’s property investment division delivered a pre-tax profit of RM10.64 million on revenue of RM27.29 million — a significant improvement from the same period last year. In 1HFY2014, the segment reported a net profit of RM8.86 million on revenue of RM16.74 million.

The mall is located in the Gurney Drive area, which is arguably the most highly valued retail location in Penang. The area saw shopper traffic of 16.1 million people last year, according to CapitaMalls Malaysia Trust, which owns the Gurney Plaza shopping mall right next door.

Hunza-Properties-Table_tw10_1060Interestingly, Gurney Plaza is independently valued at RM1.29 billion. The mall reported gross revenue of RM122.59 million and net property income of RM83.28 million in CapitalMalls’ full 2014 financial year.

These figures provide a clue to how Hunza’s Gurney Paragon Mall may perform financially over the next few years. AllianceDBS Research says the mall will reach a valuation of RM931 million upon maturity based on Gurney Plaza’s existing net property yield and income margin (see table).

Gurney Paragon Mall cost about RM475 million to build and has been operating for less than two years now. It will reach maturity, or the end of its three-year rent cycle, by mid-2016.

While new malls typically offer lower rents to attract tenants, the renewal of leasing agreements to be made at the end of the cycle will bump up Gurney Paragon Mall’s rent income considerably. This will turn Gurney Paragon Mall into a significant recurring income source for Hunza and offer the group the possibility of monetising the asset either via a direct sale or injection into a real estate investment trust.

Assuming the privatisation is successful, it is possible that the offerors will monetise part of the group’s assets to trim its borrowings or raise funds for new developments.

Apart from having valuable assets, Hunza also clearly needs a major cash injection to develop its land assets and unlock their value. Its current cash pile is deemed insufficient to undertake projects with multibillion-ringgit GDV and it is also encumbered by its current debt obligations.

While the controlling shareholders may be keen to privatise the company, the minority shareholders would certainly feel entitled to a higher exit offer. After all, the Seberang Perai Utara tract, the Bayan Baru tract and Gurney Paragon Mall could each fetch valuations close to Hunza’s entire assumed market capitalisation of RM623.96 million based on the RM2.50 per share offer price.

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This article first appeared in The Edge Malaysia Weekly, on March 30 - April 5, 2015.