IJM Land privatisation in the wind?

IJM Land Bhd is looking ripe for possible privatisation, according to analysts. In a research note, RHB Research reported market talk on IJM Land being a target for privatisation by parent IJM Corp Bhd.

IJM Corp currently holds 62.8% in IJM Land, which is equivalent to 695 million shares. Although the company has not come out to comment about whether privatisation is on the cards, there are a number of reasons for doing so, said industry insiders.

However, privatising IJM Land at its current levels could prove a costly exercise for IJM Corp. Yesterday the stock closed at RM2.61, just one sen shy of its six-month high of RM2.62 on Wednesday. Its highest close in the past 52-weeks was on Oct 20, 2009 at RM2.68.

At its current price level, IJM Corp would have to fork out RM1.08 billion for the remaining 412 million shares it does not own in IJM Land, should the former want to privatise its property unit.

“Currently the property segment and the infrastructure segment are parked under IJM Land and IJM Corp respectively. Given the synergies between the two segments, it would make more sense for property and construction to be under the same umbrella,” said an industry observer.

In addition, IJM Land’s earnings are due to see an upward trajectory following the upcoming launch of The Light Collection II, boasting a gross development value of RM250 million in Penang, due next month.

“Earnings from the construction sector are traditionally lumpy. In addition, although there is some upside from the government’s recently announced economic transformation programme, the outlook is still uncertain.

“As such, IJM could look to its property segment to help buffer the group from any possible downturns in the construction sector,” said the industry observer.

RHB opined that by privatising IJM Land, it might enable the parent to be the component stock of the benchmark FBM KLCI.

“We think the most possible reason for IJM Land to be taken private is the potential addition of IJM Corp into the benchmark index, the FBM KLCI top 30 stocks, following the inclusion of Gamuda Bhd this past September.

“Note that IJM Corp is currently one of the FBM Mid-70 stocks and in the reserve list for the FBM KLCI. The inclusion may benefit IJM Corp as it could lead to a re-rating going forward.  While it is still premature to confirm the deal, we believe the privatisation angle is nevertheless a strong catalyst for IJM Land,” said RHB.

According to the research house, privatising IJM Land would increase its parent’s market capitalisation to RM8.2 billion from RM7.1 billion.

Most research houses covering IJM Land are bullish on the company’s prospects, with the majority calling buy or outperform on the stock, with target prices ranging between RM2.80 and RM3.18.

According to its latest second quarter earnings announcement, IJM Corp’s deposits, cash and bank balances stood at some RM1.4 billion. Its total debts for the period, comprising overdrafts, term loans, commercial papers and medium term notes, bonds, government support loans and others came to RM3.9 billion.

“Hence, it is unlikely that if it were to privatise IJM Land, that IJM Corp would do it by way of a straight cash offer given that its balance sheet is stretched. A more likely scenario would be a share swap, or a share swap with a cash option,” said an industry observer.

RHB concurred on this point stating that assuming IJM Corp raised RM1.1 billion in borrowings to fund the deal, it would increase the company’s gearing to 0.7 times from 0.48 times. 

Regardless, IJM Land remains one of RHB’s top picks for the property sector, having revised its earning estimates on the company for FY2011 to FY2013 by 5% to 12%.

“Given its strategic landbank exposure spreading across the key regions in Malaysia, we believe IJM Land is still the best proxy to ride on the continued upcycle in the property sector,” stated RHB.

This article appeared in The Edge Financial Daily, October 8, 2010.