“Ekovest’s proposal to acquire a 62% stake in IWC comes as a negative surprise. The proposal could see Ekovest forking out up to RM764mil cash for the stake (at RM1.50 per share).
“While the proposal would need to be deliberated by the board (and approved by shareholders), we foresee negative near-term impact on share price. Downgrade to ‘sell’ with a lower target price of RM1.04,” UOB Kay Hian said in a report.
At 11.40am, Ekovest tumbled 16.38%, or 19 sen to 97 sen with 251.3 million shares done.
Ekovest has received a proposal letter from Tan Sri Lim Kang Hoo, the major shareholder of Ekovest, in relation to a reorganisation exercise which involves Ekovest acquiring all the ordinary shares in IWC held by the existing shareholders of IWC, excluding shares held by Iskandar Waterfront Holdings (IWH).
Minorities own approximately 62% of the issued and paid-up share capital of IWC. The proposal would see Ekovest offering minorities of IWC for either a cash consideration of RM1.50 per share, or swap one IWC share for Ekovest share at RM1.50 per share.
Currently, about 62% of IWC is held by minorities, worth about RM713mil (based on IWC’s share price of RM1.40).
UOB Kay Hian said the proposal to merge the two entities came as a “negative surprise”. It said assuming that the minorities take up the cash offer (instead of the share swap), Ekovest would have to fork out up to RM764mil in cash for the 62% stake.
“Acquisition implies a P/B of 1.5 times but is at a 65% discount to company’s assessed market value of lands which sits on 1,052 acres in Johor. Nevertheless, acquisition of assets which cannot be monetised in the near term even at big discounts is negatively perceived by institutional investors,” the research house said.
Assuming only cash acceptances are received, UOB Kay Hian said Ekovest’s gearing would rise up to 1.1 times (from 0.8 times), and could cost the group RM38mil in financing cost per year (at a 5% rate).
While equity fundraising could be an option, EPS would be diluted given the long-term nature of IWC’s business, which focuses mainly on land disposals, making earnings delivery rather lumpy.
Additionally, it said Ekovest’s prospective PE could rise to 18.5 times assuming 50% of IWC shareholders accept share swap.
“We downgrade Ekovest to ‘sell’ after raising our SOTP discount to 50% (from 30%), anticipating a potential negative reaction to shareholders sentiment post proposal announced.
“Nevertheless our target price could potentially be revised upwards (but not fully restored) should the deal be blocked and no longer pursued by management,” UOB Kay Hian said.
Did you find this article insightful?