Wednesday, November 1, 2017

Lim Kang Hoo's reverse psychology

Lim Kang Hoo is either a brilliant strategist or a desperate man. However, come to think of it - how is the deal between Ekovest and IWCITY  a desperate deal? Ekovest, which is a family controlled (>60%) company of Lim Kang Hoo, family and friends is offering to buy MINORITIES IWCITY's stake at RM1.50 per share.

He is not buying his shares of 37% in IWCITY which is held through IWH. He is buying the shares held by the other parties 62% - 63%. There is no injection of cash into IWCITY. He is not desperate to rescue IWCITY. In fact, he is taking OPPORTUNITY. This deal is done at its best so that it does not touch KPRJ which is related to the Sultan of Johor - it seems.

I am of course perplexed when the shares of Ekovest dropped massively - so stupidly I buy some more.

As can be seen IWH which is owned by Lim Kang Hoo and KPRJ will still directly own IWCITY which will be delisted. Ekovest is not buying Lim Kang Hoo's stake in IWCITY

Having said the above, I can understand the investment communities concerns. IWCITY holds land in Bandar Iskandar which to them cannot be transacted as there is a doldrum in properties especially down south. Moreover, Ekovest will need to fork out RM800 million which it does not have to buy over the minority stake - hence delisting IWCITY.

However, that is flawed thinking. IWCITY just did a deal worth around RM2.1 to RM2.3 billion with Greenland group from China and they are paying for 127 acres of land in Bandar Iskandar.

Because even reading yesterday's one pager announcement cannot even be done properly by those who invested into Ekovest, I hence will put down the payment schedule for IWCITY - Greenland deal below. There are obviously a lot of milestones and the sweet side is that IWCITY has collected the first payment of RM46.2 million. I know that's small but it also means the collection will be going to Ekovest in future rather than the listed IWCITY.

As for raising the RM800 million to buy up the IWCITY minorities stake, I have this prophesy. The payment schedule above will help a bit, then the amount paid by EPF of RM147 million just last week AND more importantly, in its announcement yesterday, one can also opt for an Ekovest share equivalent which is valued at RM1.50. Obviously, Ekovest shares is not worth RM1.50 now and the latest as at my writing now - it is priced at RM0.97. No chance to trade in shares?

If the transaction is done now, all IWCITY minorities will be opting for the cash - me too. But obviously again, the deal is not done now. It is many months down the road, if it is ever pulled through.

Now, my question to Tan Sri Lim Kang Hoo (who is many times more brilliant than me) is which option he prefers - cash or shares. If cash, then obviously again Ekovest is worth more than IWCITY at per share price of RM1.50 or more as he does not want to waste the value of Ekovest to be given to minorities. If shares, then IWCITY is more valuable.

Having seen how he does his deals, it is not going to be that smooth and straight forward. There will be challenges and hurdles.

On the strategy with this deal, as mentioned above there will be challenges but strategically it is there. IWCITY is a land owner. Ekovest is a developer, contractor. There are still some 900 acres of land in IWCITY after the sale to Greenland. Moreover, part of the deal will need IWCITY to reclaim (worth RM400 million) the land which Ekovest can obviously do.

To me what was obvious yesterday has now become murky. An analyst said that the deal is bad. He is perhaps not being straight or thinking clearly.

Or could it be I am too slow to have a clear head as I have become too complicated.

To me if the deal can be pulled through, it definitely looks like it is positive for Ekovest. If however, the deal is not able to be pulled through then back to original as it is today - but why the drop of 20 sen?


Kai said...

But given the current capital control imposed by China Govt, there is still risk that the payment might not be coming.

felicity said...

You are right. There is too many uncertainties in this deal.

Different Thoughts said...

why do all these kind of assets shuffling when the property market is in the doldrums? Why not just try to improve earnings and conceptualize more market orientated projects. LBS and Sunway has done pretty well and so has SP Setia, Ecoworld.

felicity said...

HI Different Thoughts

There is no asset shuffling actually. The proposal is to delist IWCITY. It was not mentioned but it is just delisting and using Ekovest to acquire.

reyes430 said...

if the payment is intact, do u think that the deal is good for ekovest? What could possibly be the reason of such corporate restructuring, i don have any clue.

felicity said...

Let me put this food for thought.

If the acquirer is doing a delisting, are we on the side of the acquirer or the minorities. More often than not, the minorities are the one that is being taken for a ride.

In this case, Ekovest is the acquirer. IWCITY if the minority.

Can see the point? No acquirer would do a deal that is bad for themselves.

Choivo Capital said...

"No acquirer would do a deal that is bad for themselves."

Isnt the trend for acquirers to overpay? Bursa is full of tan sri's taking money out via purchasing sdn bhd's or other related co's.

This does not appear to be the case here. But i do know, that given the current chinese property markets, they severely overpaid for the goldenland deal, so the open market value of iwcity is not accurate. But even if we apply a 50% discount, NTA wise, ekovest is still getting a good deal.

But honestly, the real love for ekovest is in the tolls, everything else, i'm honestly not that keen.

Valuations wise, using LITRAK, the toll division can be valued at say 1.3bil (13 times EV/EBIT) (this is not conservative) but this does not take into the account the future highways. Is the construction arm worth 800 mill? Maybe. No idea. I think so.

But this is definitely a long term play. I have not owned ekovest since RM2.0, i sold at RM2.5. But its time to rethink. If it goes to 80 cents, its a no brainer. 95 cents, looks good-ish.

felicity said...

Haha, Acquirers will never overpay especially in Malaysia and this is a related party deal.

Anonymous said...

Head you win, tail we lose..who want to play with you?? that is why both counter also drop...Even the company may make tons of money but not share with minority shareholders...may privatise and give small sweet deficit on the Director!!!

Anonymous said...

Hi Felicity, for the Greenland deal, I notice that the 2nd payment of 46.3M was due on 15 Oct 2017. But there is no announcement made by IWCITY regarding the payment.

For the 1st payment which was due on 15 Jul 2017, there was an announcement made just 4 days later on 19 Jul 2017.

Do you think there is a high possibility that the payment is delayed, or may not even be coming?

felicity said...

Head you win, tail we lose..who want to play with you??


At this planning stage, not yet even proposed. However, the announcement did propose for either cash or share. From that, the minority can still opt for the enlarge Ekovest or stay out altogether - which is cash. Hence, I think the deal is giving some fairness to minorities in IWCITY.

felicity said...

For the 1st payment which was due on 15 Jul 2017, there was an announcement made just 4 days later on 19 Jul 2017.

Do you think there is a high possibility that the payment is delayed, or may not even be coming?

If you read further, there is a 7 days term for Greenland to pay and it follows (the delay) from the date the 433B approval (whatever it is) and Surveyor Certificate. There was a delay for the 1st payment to be made, hence 2nd payment is delayed.

Also, there is a possiblity they may not announce every payment - as the Initial Payment 1 is usually the trigger but subsequent may not need to be announced - until last payment for Lot 1A is completed.
Anyway, there is some way where IWCITY is protected (read below):

For Lot 1A and Lot 3A, upon payment of the Initial Payment 1 and Initial
Payment 2 (as the case may be), TBSB’s solicitors shall release the
Transfer of Lot 1A and Transfer of Lot 3A to Greenland Tebrau’s
solicitors for the purpose of Land Transfer Arrangement for Lot 1A and
Lot 3A. The transferred title for Lot 1A and Lot 3A will be held by TBSB’s
solicitors and will only be released to Greenland Tebrau’s solicitors upon
payment of the last instalment for Lot 1A and Lot 3A respectively.

felicity said...

Valuations wise, using LITRAK, the toll division can be valued at say 1.3bil (13 times EV/EBIT) (this is not conservative)


Usually highway is using DCF valuation. LITRAK has 10 more years while Duke has 40 more years. SPE has the full length of concession of 53 years.

Big Sea said...

I believe IWCITY is deeply undervalued. However, releasing the value of IWCITY is not easy as there is always limited demand for property.

After acquiring IWCITY(regardless of cash of stock option), EKOVEST will be even more undervalued[not to mention the 20 cent drop that took 20% market value off]. However, with a larger property division, cash flow may not be so straight forward in future.

The other potential risk for EKOVEST will be the termination of the land sales.

felicity said...

Big Sea, You are correct. The profile of Ekovest may change. For those that want to invest into toll business will have to wait for its listing - in not too long future, perhaps.

I am those who do not like property counters which does not have direction rather than become land owner. IWCITY is close to that, not fully but close. I am not sure Ekovest will be able to change that.

However, in doing this deal, there is calculative thought and arrangement that LKH has done. I think rather than having 2 units, it is better to consolidate the 2, which I tend to agree.

One must know that LKH is one that has come a long way - his holdings was barely 1/2 billion combined. DUKE was only partially built by Ekovest - the other being MRCB. Before the craze over Johor land, IWCITY was barely a RM200 million cap company.

As a businessman, I would go for consolidation rather than spread out thin. And having multiple counters. One should look at Tan Sri Robert Tan - the small cap king as an example. He built wealth for himself but no strength among his group.

As a businessman, I would rather build core strength within my businesses rather than wealth alone.

This is also to consolidate the Ekovest brand.

That's my prophesy.

reyes430 said...

to clear some doubt towards payment cancellation of capital control, maybe this could clear some doubts

“IWC will be turning around. There are also cashflows coming in from IWC’s existing property business and the payment from the land we sold to the Greenland Group. The first payment for Lot 1A has come in on July 15. That will be reflected in our September results,” says Lim.

“The vendor is the Shanghai government, so these are solid paymasters. They will be paying us in tranches from now until May 2020,” he adds.


tan said...

Hi felicity,

What's the asset owned by IWH other than 30%+ share in IWC ?

felicity said...

Hi Boonyang

you can take a look at this announcement. The details is all here..