What value will Goldis-IGB Corp merger unlock?


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This article first appeared in The Edge Malaysia Weekly, on March 27 - April 2, 2017.

 

IF all goes well, Goldis Bhd may finally be able to take IGB Corp Bhd private later this year and the Tan family’s sprawling property empire will reside in a simpler and flatter organisation.

So far, the recently proposed scheme to buy out the remaining 26.57% of IGB’s minorities looks set to end with minimal resistance. After all, the three options offered to the minorities give them the choice to cash out or stay invested in Goldis with reasonable upside.

The independent report on the deal may not be out yet but the offer is far from unreasonable.

“It is a win-win situation for both sides,” Goldis executive director Colin Ng tells The Edge. “We are giving them (IGB minorities) a choice. If they want to cash out at RM3, at a premium, they can. If they think the stock is worth more or they want to stay loyal, they can take option two or three. Keep in mind that these options will also dilute Goldis’ existing shareholdings.”

But thinking a few steps ahead, what will happen if the deal goes through?

It would certainly be a re-rating catalyst for Goldis. Some are already beginning to take measure of the potential value in the group once Goldis’ holding company discount is lifted.

Last week, AllianceDBS Research published an unrated report on Goldis, ascribing a fair value of RM4 a share to the company. This translates into an upside of roughly 42% from Goldis’ closing price of RM2.81 last Thursday.

AllianceDBS’ investment case is straightforward. As it stands, Goldis has a fully diluted revised net asset value (RNAV) of RM8.04 per share. Hence, it is currently valued at a whopping 65% discount to its RNAV.

The merger with IGB Corp should be a re-rating catalyst for Goldis, allowing it to command a slightly higher discount-to-RNAV of 50% or RM4 per share.

Besides removing the holding company discount, Goldis will also be buying the remaining 26.5% stake in IGB Corp for a relatively cheap price.

AllianceDBS’ own calculation places IGB’s RNAV at RM6.36 per share. Based on Goldis’ offer of RM3 per share, it will effectively be acquiring the remaining 26.5% stake at a 52.8% discount to RNAV.

To be fair, the acquisition price is still at a modest 20% premium for IGB’s shareholders, given that the company’s share price has been languishing at around RM2.50.

Nonetheless, this is good for Goldis’ shareholders as well.

But looking beyond the post-merger gap-up in valuations, there is not much visibility in Goldis’ plan to unlock more value for shareholders. Granted, the property market is relatively soft at this juncture.

An elephant in the room is Goldis’ dividend policy going forward. It pays out only two sen a share, which means a very thin yield of 0.7%. IGB’s dividend payout of 10 sen per share is substantially better, giving a yield of 3.4%.

What will the post-merger dividend payout look like?

“At this juncture, we can’t speculate on the dividend payout. It is something that the board will decide once the deal is completed. Until then, we need to take this step by step. The deal still needs to pass several approvals and EGMs,” says Ng.

It is also interesting to note that in the third option of the privatisation scheme, the redeemable convertible preference shares (RCPS) will pay a dividend of 4.3% per annum for up to seven years.

“Goldis might be a little constrained to pay out a higher dividend simply because it might trigger the conversion of the RCPS. Why hold 4.3% of RCPS if Goldis shares have a high yield? A dividend of more than 14 sen should trigger RCPS conversion,” notes a fund manager.

That said, any investor seeking a better yield can always turn to IGB Real Estate Investment Trust, notes Ng.

IGB REIT is Goldis’ jewel in the crown, housing the retail property assets — Mid Valley Megamall and The Gardens Mall. Currently, IGB REIT boasts a yield of 5%. Post-merger, Goldis will have a 51% direct stake in IGB REIT. IGB had a 49.56% stake in IGB REIT as at Feb 13.

With a market capitalisation of RM5.84 billion, IGB REIT is worth about RM3 billion or 46% of Goldis’ RNAV.

Hence, the question investors should be pondering is, what is the value of Goldis’ remaining assets and how much of that value can be unlocked?

“If the price is right, anything is for sale. But right now, we are not actively looking to sell any assets. There just isn’t any pressure on us to dispose of assets like it’s a fire sale. But if the price is right, we will. For example, we recently disposed of Renaissance Hotel,” says Ng.

If not for the asset disposals, the rest of Goldis’ property investment portfolio would not see as much growth, given the glut in the Kuala Lumpur office market, which will put a dampener on rental hikes.

To be fair, Goldis’ average occupancy is about 90%. There are only two exceptions — Centerpoint North Tower in Mid Valley that has an occupancy of 55% due to the recent departure of a tenant, and GTower, which has an occupancy of 82%.

While earnings might not be able to grow, perhaps Goldis can recognise some cost-savings from the merger. Clearly, there will be some savings from maintaining only one listing status.

But beyond that, will there be more restructuring?

“It’s too early to speculate. Let us finish the deal first, then the board can sit down and decide how we want to strategise and proceed,” explains Ng.

Looking ahead, IGB’s minorities may find themselves in an interesting position. If they share AllianceDBS’ view and expect Goldis, as a merged entity, to unlock value trapped in its assets, then they should opt for option 2.

But if they expect value to be unlocked over a longer period of time, then they should opt for option 3.

Of course, investors could always opt for option 1 — take the cash and invest directly in IGB REIT, a company that has clear visibility in earnings and dividends.