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Wednesday, December 8, 2010

Space for smaller property players

KUALA LUMPUR: Amid the large mergers taking place in the property industry, smaller players believe there is still space for niche property developers.

The recently announced mergers of six big property developers to create three enlarged entities will invariably change the Malaysian property scene.

In November, the property industry was jolted by the news of three proposed mergers as developers race to become bigger.

UEM Land Holdings Bhd got the ball rolling with the proposed takeover of Sunrise Bhd. With a combined market capitalisation of nearly RM10 billion and a landbank of over 12,000 acres, it will create the country’s largest property company by market capitalisation.

Shortly after, IJM Land Bhd and Malaysian Resources Corp Bhd (MRCB) announced plans for a marriage that will make the new entity the second largest, with a market capitalisation of about RM7.2 billion and over 9,000 acres of land.

Then Sunway Group’s Tan Sri Jeffrey Cheah and his daughter Sarena proposed to merge Sunway Holdings Bhd and Sunway City Bhd into a single entity, which will have a market capitalisation of RM3.3 billion and over 2,000 acres of land.

Being big has its advantages, as the players in the three merger exercises note. They include access to cheaper funding, increased investor interest and better economies of scale.

In the old landscape, two large players — S P Setia Bhd and UEM Land — stood out among many mid-tier companies. Even then, only S P Setia managed to garner substantial foreign investor interest, fetching premium valuations. By comparison, most property stocks traded below book value.

With the changing landscape, there will be four large players — UEM Land-Sunrise (market cap: RM10 billion), IJM Land-MRCB (RM7.2 billion), S P Setia (RM5.2 billion) and the merged Sunway (RM3.5 billion).

The three largest players will have price-to-book ratios of over two times, and price-to-earnings ratios of well over 20 times, which could set a new benchmark pricing for the sector.

Can the smaller players still hold their own and occupy strategic niches in the market post-merger?

Eric Chan, executive director of Eastern & Oriental Bhd (E&O), said there will still be a need for small property developers with a strong brand.

“There is definitely room for smaller, niche players. We can move faster, we have less red tape to deal with, we can have faster turnaround for our projects,” said Datuk Fateh Iskandar Mohamed Mansor, Glomac Bhd’s group managing director and CEO .

Tan Sri Leong Hoy Kum, Mah Sing Bhd’s managing director and group chief executive, said, despite the bigger merged entities’ stronger balance sheets there would still be room for niche players with a focus on their own strengths.

With a market capitalisation of RM1.5 billion, Mah Sing will rank among the top ten largest developers in the new pecking order. E&O and Glomac have smaller market capitalisation of RM940.6 million and RM505.2 million, respectively.

Interestingly, all three companies have also evolved into their current form from quite different entities, either through mergers and acquisitions, or diversification exercises.

Within the last decade, Mah Sing has evolved from being a successful plastics manufacturing company into a far more successful property developer, led by Leong, its entrepreneurial CEO and founder.

Meanwhile, E&O has a corporate history as colourful as the hotel it is named after, and is no stranger to mergers and acquisitions.

Helmed by low-profile businessman Datuk Terry Tham Ka Hon, E&O most recently conducted a Sunway-like merger exercise in 2008. Back then, E&O privatised its listed subsidiary, E&O Property Development Bhd (E&O Prop) into a single larger entity. That wasn’t the first privatisation attempt — a general offer exercise in 2005 saw E&O increasing its stake in E&O Prop, but not enough to privatise the company.

Glomac was listed in 2000, but its history started in 1988 when two entrepreneurs, Tan Sri FD Mansor and Datuk Richard Fong, joined forces to start a property development company.

Today, Glomac is recognised as a successful niche developer with a landbank of 900 acres. It continues to be run by the two founders, together with FD Mansor’s son, managing director Fateh. Glomac also holds the distinction of having sold the most expensive office space in downtown Kuala Lumpur. Menara Glomac, next to the KLCC Petronas twin towers, was sold for a record RM1,120 psf at the end of 2007, just before the financial crisis.

By The EDGE Malaysia (This article appeared in The Edge Financial Daily, December 8, 2010.)

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