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Property Stocks Reshuffle In The Wake Of Market Turbulence
Malaysia Perspective | 09 November 2011


The Malaysian government’s investment arm Permodalan Nasional (PN) announced earlier that it will take over Malaysia’s second largest property developer by market value, SP Setia, at RM3.90 ringgit per share. On 28 September, PN and its partner Public Accounts Committee bought a total of 0.173% stake in SP Setia for RM10.58 million, raising its shareholding from 32.993% to 33.166% and triggering the full-scale takeover offer clause, in which it must buy over all stocks and warrants of SP Setia that it did not own at RM3.90 per share and 91 sen per warrant.

While SP Setia’s board of directors was looking for a higher bidder in the meantime, PN was actively buying up SP Setia’s shares and warrants from the open market. According to a statement released by SP Setia, the Securities Commission has approved PN’s acquisition application for SP Setia in a letter dated 13 Oct-11.
PN currently holds a significant stake in many prominent Malaysian listed companies, including two of the three market heavyweights – Malayan Banking and Sime Darby. Analysts believe that the recent collapse in property shares was more catastrophic than the market on the whole (27% plunge since early July, compared to the FTSE KLCI retreat of 15.9% over the same period), and SP Setia was one of the main laggers in the market.

PN’s acquisition of SP Setia was just one instance of the takeover exercises of major local developers following the earlier mergers and acquisitions of other property developers. Prior to this, Sime Darby acquired a 30% stake in Eastern and Oriental in 29 Aug-11 for RM766 million; state-owned UEM Land Holdings bought Sunrise for RM1.4 billion; entrepreneur Tan Sri Jeffrey Cheah merged the two property companies under his control – Sunway Holdings and Sunway City – into a single entity, Sunway. All these manoeuvres served primarily to enlarge the controlling companies’ scale. By acquiring SP Setia, PN, which manages about RM150 billion worth of assets, can further restructure the properties it owns and become a behemoth property group that boasts the combined assets of SP Setia, Sime Darby, I&P, Pelangi and Petaling Garden.

Malaysia’s property market is beginning to show softness as a result of domestic and international economic factors. Private property developers cannot help but worry about these large-scale integrations squeezing out their space for development. Responding to PN’s acquisition of SP Setia, Prime Minister cum Finance Minister Najib Tun Razak said that he does not wish to see government-linked companies being accused of being “the culprit behind private developers being squeezed out of the market”. Najib explained that the number of recent acquisitions in Malaysia does not mean that the government has lost confidence in the economy; rather it was motivated by “market forces” – since state-owned companies come in with their own strengths, and both buyers and sellers concerned have reached a consensus. “When the market presents an opportunity, they will seize it,” Najib remarked.

Najib offered some consolation at the Khazanah Forum 2011 when he mentioned his desire to abolish the Bumiputera shareholding system. That may help relieve the downward pressure that Malaysia’s property market faces. As a result of the Bumiputera shareholding and preferential issue, developers have to pay a 7% tax over their property sale prices to certain state governments before the reserved Bumiputera units could be released for sale. Poor sales of these Bumiputera units have caused cash flow problems for developers, which directly impacts housing development plans and sales volume. Nevertheless, there is a myriad of reasons behind Malaysian property developers revising their outlook of the property market from “optimistic” at the end of this year to “cautiously optimistic” over the first half of next year.
Firstly, after a double hit by high land prices and construction materials, Malaysia’s property prices over the next six months are expected to surge by 20%. At the same time, with the global economy being spooked by a double recession, this will definitely impact our GDP growth, which is tightly linked to property prices and transactions.

Secondly, the Ringgit has been weakening against other Asian currencies lately. With the stock market being rocked by political uncertainties triggered by the recent Sarawak election results and the on-going bet on the timing of the next general election, the property market is in for a rough ride. Even when we exclude these external factors, property developers have had two good years already. As we all know, what goes up must come down, so it is inevitable that the property sales target will be heading downhill soon.

In summary, as the flurry of merger and acquisition activities will have a short-term stimulating effect, it is not alarming to see a 10% drop in Malaysia’s overall property development. However, the industrial reshuffle has brought about the heavy selling of property stocks which resulted in their undervaluation. This presents a good opportunity for developers seeking to buy-over their competitors.

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