Friday, December 29, 2017

Why acquisition of IWCITY is a good move for Ekovest

As always in my investment philosophy, I have put importance onto what certain decision can bring towards the value addition of a company or whether it demerits the company as a whole.

We know that Ekovest has just decided to offer to purchase IWCITY for RM1.50 per share. One can read the detailed proposal from here and we can also digest the reason for the purchase in this well written announcement. The proposed purchase translates to valuing the assets of IWCITY at RM1.256 billion. We also know that the proposed purchase values IWCITY's assets at less than 50% of its market value, based on the announcement and valuations made by respected valuers. For that itself is a good beginning point to purchase a certain assets.

However, many investors are concerned over Ekovest's exposure to properties over the long run as unlike concession from toll business, property is cyclical especially is this down cycle. However, let me put into perspective what I see.

We know that Ekovest has 3 main line of business i.e. concession from highway tolls, construction and properties. Toll concession is its crown jewel as I see it, due to the sustainable growth as well as the location of its highway - right in the middle of the city. Last year alone, EPF has valued the DUKE 1 and 2 at RM2.825 billion through its 40% purchase of the highway. Besides the 2 highways, Ekovest has also another longer highway which is in its early completion stage called Setiawangsa-Pantai Expressway. If one looks at highways, technology cannot really replace the need to travel and move around. One real threat for these 3 highways is MRTs and I think we as a country does not build fast enough to cause real threat to Ekovest's assets.

Another business is its construction business. Unlike more established contractors like IJM and Gamuda, Ekovest usually complete its own projects but do not focus (as much) on getting external projects for obvious reasons. They are not in the mould of IJM and Gamuda in terms of construction, civil engineering but its own projects is enough for them to be kept busy. Hence, you do not see a Gadang, Advancecon (which focuses more on external projects constructions) as much in Ekovest. On the other hand, construction business has one major weakness, it has to continue to bid for projects and usually these projects are in a 2 - 5 years cycle. After one project, it has to obtain next projects to keep itself busy. Otherwise there could have idling manpower and machineries. This actually happens now to China, as this is the reason why Xi Jinping is helping its own state construction companies by pledging Belt and Road Initiatives in the name of helping neighbors, but in essence it is more to help its idling companies which have been building China at a furious pace years ago.

The third business for Ekovest naturally is the property business. As compared to toll and construction, this third business is the weakest among the three for Ekovest and in my opinion, it does not mean that Ekovest is in the mould of building like what Ecoworld is building. This is because Ekovest does not have the DNA of Ecoworld or SP Setia or even Sunway. In this respect, Ekovest is rather beginners. It has managed to secure prime land of 60 acres through acquisitions and exchanges from the Blue River project. Further to several other pieces such as the one in Cheras which is just opposite to Leisure Mall, Ekovest does not have much landbanks. To be a strong or prominent developer, first one must have land and these land must be in a place where one can sell properties. The ones in Cheras and Titiwangsa are good starts but they are not substantial.

Hence, they move to Johor. Happens to be, IWCITY another company controlled by Lim Kang Hoo has good landbank (1000 acres) in Johor and they are the most prime of landbanks. In this period of property slow growth, to be a successful property company - either one have to be Ecoworld which can still outsell others despite not in prime location or one must have the financial wherewithals to withstand slow growths. As an example, TA Global (a boutique developer) has that. It has I do not know postponed its projects in TA3 and 4 for I do not know how many times as it has the financial muscle to do that and wait for the right timing to launch. Ekovest, in times like this and with it being kept busy by so many projects at this moment has that as well. This, I think is the main reason the acquisition of IWCITY is an opportunist time as it can wait. And to top that of, it has signed a contract with Greenland group from Shanghai (one of the Top 5 largest developer in China - and when it comes to China it is really big) where that contract will bring strong cashflow for the next 3 years towards the Ekovest-IWCITY group. How is this deal not positive towards the acquisition for Ekovest?

I however fully agree that among the 3 more developed states - KL/Selangor, Penang and Johor, it does look like Johor is the worse off in this bad times for property. Why? Johor has large landbanks and it does not help that so many of the developers such as UEM, Sunway, SP Setia, Ecoworld, Forest City - all of them have massive landbanks in that area. The foreigners are not buying as what they would have wanted - and more so a country cannot be dependent on foreigners to purchase our properties for growth. In this respect, sustainability is the name of the game.

Come 2024, there is however one game changer. What I do not foresee will really happen is happening. What is that?

There is an MRT link between Johor and Singapore, and it is to be ready by then. Why is this important? It means Singapore is willing to open up more (slightly). For so long, the causeway is the clog point for Johor to develop fast. It is a joke if an affluent or white collar worker to say that they are ok with staying in Johor and work in Singapore as the commuting is so bad that it deters them from doing that. With the new MRT connecting Johor at the checkpoint towards Singapore, that unbearable commuting is made more bearable. With that, the real property buyers (to stay) will consider buying, as compared to those who are only investing and not stay as at now.

The game changer is especially important to the landbanks surrounding that area. Who in your guess has the most landbanks and one that overlooks Singapore as well? IWCITY.

As one can see, the landbank for IWCITY or reclaimation rights for land are very close to the causeway - the main connecting point for anybody between Johor and Singapore.

Hence, I am guessing the acquisition of IWCITY by early 2018 pace the planning made by Ekovest very well. Between 2017 to 2020, there are enough highway construction projects to sustain its growth and operating cashflow. Post 2020, they will be more busy with property projects down south. And with the collection from tolls continuing to grow, the planning made by Ekovest could be very sweet for investors.

As it is, now Ekovest is trading at RM2 billion valuation. The toll business alone is worth more that. It is buying landbanks at good value. How is that not good?

Happy New Year to all readers.


Anonymous said...

there is no MRT, all developers across Danga Bay got conned. They are building BRT instead. First route is from CIQ to HSR(Gelang Patah), second route is from CIQ to Senai Airport, Third Route is from CIQ to Bandar Dato Onn. So, no check-in into LRT and go direct to Singapore.

felicity said...

The MRT is Johor Singapore. This one is more important.

Malaysia Stock Talk said...

Majority of the land owned by IWCITY is in Plentong. Currently there is a bottleneck at the bridge connecting Permas Jaya (where majority of IWCITY's lands are located) and JB city centre. I don't see a major rerating catalyst until the connectivity is improved

felicity said...

Thanks, Malaysia Stock Talk. I do agree, but look at it if the MRT between Johor and Singapore can be solved, together with BRT, I think a wider bridge or even new link road should be the least of problem.

Remember, it goes from building scenic bridge - years ago- to even more and having that MRT link between Singapore and Johor is the start. Remember even the Sultan of Johor takes personal initiative into that project.