SINGAPORE (July 3): The two property developers in our Singapore Market Portfolio have performed well since they were added earlier this year. So far, our position in UOL Group has returned 10.2% while that in CapitaLand has returned 15%. As the property industry is expected to recover, both companies appear set to continue their positive performance. But UOL has yet another thing going for it.
On June 22, UOL announced it had signed an option agreement with Haw Par Corp — the company known for its Tiger Balm ointment. The agreement gives UOL a call option and Haw Par a put option. Upon the exercise of either option, UOL will allot and issue 27.27 million new shares to Haw Par in exchange for 60 million shares in property develop er United Industrial Corp (UIC).
UOL says the proposed transaction will enable it to acquire a “significant” minority interest in UIC, something that the lack of trading liquidity in UIC shares has prevented UOL from doing. UOL adds that it intends to consolidate its interest in UIC and achieve statutory control of the latter in the “future”.
The proposed transaction is subject to shareholder and regulatory approvals, with all conditions to be satisfied by Oct 31. If all goes well, the company will see its stake in UIC enlarged to 48.94% from 44.71% now.
According to UOL, the Securities Industry Council of Singapore has waived the company’s obligation to make a mandatory general offer for UIC, following the proposed transaction. This is so long as its shareholding in UIC does not exceed 49%.
Analysts are optimistic on the proposed deal. OCBC Investment Research says the transaction, if approved, will be accretive for UOL. This will come from the company’s deeper effective ownership of UIC’s assets, such as Singapore Land Tower and Marina Square. “We believe UOL’s move makes strategic sense,” analyst Eli Lee writes in a note dated June 27.
OCBC upgraded its rating for the stock to a “buy”. It also raised its fair value estimate to $8.39 from $7.30 previously. This implies an upside potential of 9.1% based on its June 27 closing price of $7.69.
Credit Suisse is even more optimistic. The research house rates the stock an “outperform” and has a price target of $9. This implies upside potential of 17%. Credit Suisse says, assuming UOL attains full ownership of UIC, its earnings per share will rise 33% and its net asset value, 11%.
Analysts Louis Chua, Nicholas Teh and Daniel Lim write in an initiation report dated June 5: “Beyond operational synergies, we believe a bigger prize to UOL would be opportunities for unlocking value within the enlarged portfolio, realising the restructuring potential of the current complex cross-holding of assets and the potential for capital recycling platforms to crystallise value.”
Wresting control of UIC
This is not the first time that UOL has attempted to wrest control of UIC. In 2009, the company made a mandatory conditional offer for UIC at $1.20 a share. It was subsequently deemed “not fair” by the independent financial adviser and the offer lapsed.
UOL also is not the only party interested to assume control of UIC. In 2005, Philippine-based and listed conglomerate JG Summit Holdings made a mandatory conditional offer for UIC at $1.90 a share. JG Summit was required to make the offer at the time, as it had crossed the 30% shareholding threshold. The offer lapsed because the deal was deemed unfair “from a financial point of view, for the shareholders as a whole” by the UIC board in concurrence with the independent financial adviser.
Credit Suisse reckons UOL’s next takeover attempt will be successful. It says UOL’s accumulation of UIC shares since the 2009 attempt has raised the indirect stake of veteran banker Wee Cho Yaw, chairman of UIC, to 49.76%. Part of that indirect stake is held by Haw Par, which owns 4.9% of UIC. The indirect stake, it believes, grants Wee and his controlled entities near-statutory control of UIC.
“We believe crossing the key 50% control threshold is likely over the next six months, which will be a key catalyst for UOL,” say Chua, Teh and Lim of Credit Suisse. “The remaining 0.24% stake to be acquired would translate into only about 3.4 million shares, significantly below the 10 million shares UOL has been acquiring on an annual basis since 2014.”
Once Wee’s stake in UOL crosses 50%, it will become easier for him to accumulate more shares in UIC. Singapore’s code on takeovers and mergers says if a person holds more than 50% of the voting rights of a target company, he will not be required to make a takeover offer if he acquires additional voting rights. This would give Wee and UOL “free rein to aggressively increase its ownership stake in UIC”, Credit Suisse says. It could also pave the way for a mandatory delisting of UIC, as its free float is currently at just 13.2%. To remain listed, companies have to maintain a 10% free float.
According to Credit Suisse, the consolidation of UOL and UIC will result in greater management flexibility and efficiency in resource allocation. It would also enhance operational synergies, given economies of scale, and provide better overall alignment of strategic objectives between the two groups.
“In our view, the bigger prize to UOL would be the possibilities of unlocking value within the enlarged portfolio. Control would allow UOL to realise the restructuring potential of the current complex cross-holding of assets, narrowing the current complexity discount applied to the group. With 55 properties worth an estimated $15.7 billion on a 100% basis, control would also provide for the potential to initiate capital recycling platforms to crystallise value as with its developer peers,” says Credit Suisse.
Still underperforming
Meanwhile, our portfolio underperformed the Straits Times Index in the one-week period to June 28. Our portfolio returned a loss of 1.4% versus the benchmark index’s loss of 0.3%. Since its inception, it has recorded total returns of 4%, lagging behind the STI’s 11.9%.
The biggest culprits this past week were logistics player Cogent Holdings and components manufacturer Memtech International, declining 6.9% and 6.4% respectively. Lubricant distributor AP Oil International and gold miner CNMC Goldmine Holdings ended the week flat. Only shares in UOL managed to eke out a 0.13% increase.
