Move undertaken to reduce gearing ahead of pure play listing
AFTER the move to divest its stake in Seriemas Development Sdn Bhd (SDSB) for RM625mil cash, there are several other property assets Sime Darby Bhd may look to divest to reduce gearing ahead of the planned listing of its property arm.
The conglomerate, through its unit, Sime Darby Property Bhd, disposed of its 40% stake in SDSB to a unit of Permodalan Nasional Bhd, PNB Development Sdn Bhd (PDSB) for RM625mil cash.
It is estimated that Sime Darby will make a net gain of RM305mil from the transaction, after deducting the estimated cost of disposal, despite the selling price being at a discount of 39.4% to the revised net asset value of SDSB.
Sime Darby is in the midst of a corporate restructuring exercise to streamline operations and become a “pure play” of three stand-alone listed entities, namely Sime Darby Plantation Bhd, Sime Darby Property Bhd and the leaner Sime Darby Bhd itself.
Before the exercise is completed, however, the group is looking to unlock value from its assets, with the bulk of the proceeds to be channelled into repaying its debts.
In its announcement of the proposed disposal, the group says it plans to use the bulk of the proceeds for general corporate purposes and working capital including repayment of borrowings.
Another RM10mil will be put towards defraying the expenses in relation to the disposal. The group’s net gearing was at 0.30x as of end-March 2017.
Analysts have generally reacted positively to the recent sale of its 40% stake in SDSB, although the pricing has been cited as relatively inexpensive.
The consideration, which represents a discount of 39.4% to SDSB’s realisable net asset value (RNAV) falls within the range of discounts to RNAV ranging between 26.1% and 45.96%, based on transactions involving Malaysian property development companies over the past three years.
Analysts note that S P Setia Bhd’s recent proposed acquisition of I&P Group Sdn Bhd was also at a 39.3% discount to RNAV.
SDSB has 11 parcels of undeveloped vacant land, three parcels of land with ongoing development projects, two malls in Kota Seriemas and two hotels in Morib.
The market value of SDSB’s entire land and investment properties was valued at RM2.79bil, while Sime Darby’s 40% stake was valued at RM1.23b based on RNAV.
The parties arrived at the selling price of RM625mil after taking into account the RM2.79bil in market value, a valuation report by KPMG dated July 31, 2017 and the cash dividend of RM120mil received by Sime Darby from SDSB.
The group’s original cost of investment in SDSB was RM449mil.
RHB Research notes that the group’s rationale for the disposal is in line with its strategy to dispose of non-strategic assets and to unlock value via monetisation and opportunistic divestments.
“Since SDSB is only 40%-owned, it is considered a non-strategic asset,” it says.
The associate stake contributed RM31mil or about 1% to the group’s bottomline in FY16.
Besides SDSB, Sime Darby Property also has a 30% stake in Kuantan Pahang Holding Sdn Bhd, a 30% stake in Mostyn Development Sdn Bhd and a 36% stake in Shaw Brothers Sdn Bhd.
All three companies have property development projects and property investment landbanks.
“Disposing of these associate companies could give Sime Darby Property additional cash flow to repay its debts prior to listing,” RHB Research says.
Alliance DBS Research, which maintains its Hold call on Sime Darby pending further developments, expects the RM305mil net gain from the disposal of SDSB to ultimately contribute as one-off gain to the demerged Sime Darby Property, given the disposal timeframe - expected to complete by end-2017.
The group has stated that it expects to complete the listing of its pure-plays by the end of the year, and has already announced the appointments of senior leadership for each of its three pure play companies.
Group president and chief executive officer Tan Sri Mohd Bakke Salleh has said that they plan to submit the prospectus during the third quarter of the year and expect to complete the exercise by December.
The group had announced its plans to create three standalone entities on Feb 27, 2017 by spinning off its plantation and property businesses into two new listed companies, leaving it with the trading and logistics businesses.
The group has also completed the restructuring of its US$800mil multi-currency sukuk on May 23, 2017, in preparation for the new listed entities.
The divestment of SDSB represents the fifth transaction between Sime Darby and companies majority-owned by PNB.
According to data from CIMB Research, Sime Darby proposed to sell 297.5 acres of land to a unit of PNB for RM85.5mil in June 2017.
Earlier in April 2017, Sime Darby’s 40%-owned SDSB proposed to sell 342.5 acres of land to SP Setia for RM447.6mil. PNB has a 55% stake in SP Setia.
In October 2016, Sime Darby proposed to dispose of two parcels of land with development potential in Semenyih totalling 805 acres for RM429mil to Petaling Garden, a unit of Island and Peninsular (I&P).
PNB is a major shareholder in I&P.
Sime Darby has also proposed to acquire 768.5ha of plantation land and a 70 tonnes per hour palm oil mill in Johor for RM106.7mil from I&P.
The restructuring in Sime Darby is part of a bigger plan by PNB, under group chairman Tan Sri Abdul Wahid Omar and president and chief executive officer Datuk Abdul Rahman Ahmad, to reorganise its strategic firms.
Since their appointments, Wahid and Abdul Rahman have launched four major value-creating corporate exercises.
This includes the plan to split Sime Darby Bhd into three listed entities, the demerger of UMW Holdings Bhd and the recapitalisation of UMW Oil and Gas Corp Bhd, the acquisition of Silk Highway and the merger of property developer S P Setia Bhd with sister company Island and Peninsular Group Sdn Bhd.
As a result, the total market capitalisation of the six PNB strategic companies have increased by RM40bil since Aug 1, 2016 or RM29bil year-to-date.