SINGAPORE (Sept 3): PrimePartners Group, the independent financial adviser (IFA) to minority shareholders of Wheelock Properties (S), recommended in its offer document on Aug 24 that shareholders accept the $2.10 offer from Wheelock and Co unless they are able to obtain a higher price on the market. Wheelock and Co own 911.92 million shares, or 76.21%, of Wheelock Properties. It is likely to cost Wheelock and Co $597.7 million to acquire the 284.63 million shares in Wheelock Properties it does not already own. As at June 30, Wheelock Properties had $853 million in cash, and its net asset value (NAV) stood at $2.60.
In the offer document, PrimePartners used certain assumptions to lower the revalued NAV of Wheelock Properties from $2.60 to $2.50. That translates into a 16% discount to RNAV of the offer price (see Table 1), the IFA says. Is that a fair valuation? In general, property stocks trade at discounts to RNAV of 15% to 30%. The RNAV calculation by the IFA implies that the offer is reasonable. But property companies have been privatised at higher price-to-book ratios than the 0.8 times Wheelock and Co is offering (see Table 2).
In our story titled “Hunting for value in property sector” (Issue 839, July 16), published after the government announced further cooling measures on residential property and before the privatisation offer, we pointed out that Wheelock Properties had virtually no landbank in Singapore, plenty of cash and that it would start to book revenue and profit from its project in China as units are handed over to buyers.
The developer’s 1HFY2018 financial statement and the offer document by PrimePartners provided precious few updates and details. Two development properties, The Panorama and Ardmore Three, were completely sold last year, but not all the profit from Ardmore Three has been booked, according to the offer document. Scotts Square is 90% sold (303 out of 338 units). Of the remaining unsold inventory, 96% of the 25 units earmarked for lease are tenanted.
Now, a number of analysts are recommending that minority shareholders reject the $2.10 offer. OCBC Investment Research, UOB Kay Hian, JPMorgan and Lim & Tan have all articulated to their clients that they should hold on to their Wheelock Properties shares.
What are the assets?
As at June 30, Wheelock Properties had total assets of $3.25 billion, which comprised mainly investment properties (33.6%), cash equivalents (26.2%), interest in Hotel Properties or HPL (18.7%), investments (11.7%) and development properties (7.5%).
In 2014, Wheelock Properties and Ong Beng Seng, a shareholder of HPL, formed a joint venture called 68 Holdings, which acquired a 56% stake in HPL. Wheelock Properties’ stake in 68 Holdings is 40%, and its effective stake in HPL is 22.4%. At HPL’s current price of $3.70, this stake is worth around $431.6 million. Wheelock’s acquisition price was $4.05 per share. Its accounting treatment of the HPL investment is to add the share of profits over the years, less dividends received, to the cumulative cost of the investment. The HPL stake was carried at $606.3 million as at June 30, or the equivalent of $5.19 per share. The IFA’s RNAV calculation assumes a decrease in valuation of $177 million for the HPL investment.
Wheelock Properties owns two investment properties, Scotts Square Retail and Wheelock Place. As at Dec 31, Wheelock Place was valued at $876 million and Scotts Square Retail at $216 million. Their respective occupancy rates were 96% and 97% as at June 30. Around 35 of 338 units at Scotts Square were unsold as at June 30, but these have mainly been leased out.
Biggest potential could be in China
In 2011, Wheelock Properties acquired a site comprising five plots of land in Fuyang City near Hangzhou for RMB1.44 billion ($279 million). The site area of 3.2 million sq ft can be built up to 2,689 units with a saleable gross floor area of 346,759 sq m.
The project was subsequently named Yong Jing Shan and marketed as a high-end residential project comprising three phases, with only Phase 2A featuring high-rise units.
The acquisition cost works out to around RMB4,100 psm. A recent advertisement priced the units at RMB22,500 psm. Wheelock Properties has not announced the average selling price of the development. In a report dated Aug 28, UOB Kay Hian notes that average selling prices in the Fuyang district are around RMB23,000 to RMB26,000 psm, and prices at Yong Jin Shan are being transacted at about RMB25,500 psm.
However, the IFA’s document to shareholders says tax liabilities of about $17.9 million may be incurred, arising from the 17% tax rate in Singapore, and 25% tax rate and land appreciation tax in China.
Even taking into account the land appreciation tax, and construction and marketing costs (Wheelock Properties is in a net cash position, so interest cost is likely to be minimal), the Fuyang site could still provide Wheelock Properties with a hefty RMB5,000 psm margin, or the equivalent of $226 million, if the unsold GFA of the 232,540 sq m project is sold and handed over. That could add as much as 19 cents per share to Wheelock Properties’ NAV.
In its latest financial statement, Wheelock Properties says 99.5% or 877 of the 881 units launched in Phase 1, 2A and 3 of the project have been sold. Of these, Phases 1 and 2A have been fully sold. Construction of Phase 2A’s high-rise units and Phase 3 of the development is in progress, and expected to be completed in 2018 and 2020 respectively.
Lim & Tan points out that the latest NAV of $2.60 “has not taken into account another $53 million of deferred revenues of its China development property that has been sold but not handed over to the buyers and thus not recognised in its NAV”. According to its report, the first 784 units were sold at around RMB9,900 psm. “At a cost of RMB6,000 psm and the latest selling price on Aug 20 disclosed at RMB25,500 psm, we estimate NAV accretion of another 25 cents to 30 cents, bringing its revalued NAV closer to $2.90 if the whole project is sold and recognised in its NAV by 2020,” Lim & Tan says.
Additionally, the IFA says that profit for units sold in Ardmore Three were not recognised in the group’s financial statements as at June 30. This could be because the options were not fully exercised, as the sales were done under the deferred payment scheme. The IFA values the surplus from Ardmore Three at $13.2 million.
Advantage Wheelock and Co
If Wheelock Properties’ NAV is expected to be $2.90, the offer price is just 0.72 times forward book value. This makes it an undervalued buy for Wheelock and Co, analysts imply.
JPMorgan says the privatisation implies “huge value accretion for Wheelock and Co”. For just $2.10, or $597.7 million, it would gain the cash ($255 million) and around $1.33 billion in assets. “This would represent about HK$4.60 per share of value enhancement to Wheelock and Co,” JPMorgan says, but warns that privatisation may not go through at $2.10 per share.
Elsewhere, UOB Kay Hian zeroes in on the undervaluation of Wheelock Properties’ investment properties. According to the offer document, valuers have used capitalisation rates of 4.25% to 5.25% to value the properties while the direct comparison method uses valuations of $2,050 psf to $3,300 psf for the two properties.
Wheelock Properties’ cap rates have been unchanged since FY2016 despite the upturn in the commercial property market, with recent commercial transactions completed at very low cap rates, UOB Kay Hian observes. Moreover, with the additional cooling measures implemented on July 6 on the residential market, investor interest could be diverted to the commercial property market, it reckons.
In addition, UOB Kay Hian believes Wheelock Properties deserves a lower discount to its book value. “Our analysis of past successful general offers of property-related companies over the past decade yielded several interesting observations,” the report says. The range of price-to-book valuation for the previous general offers was 0.53 to 2.51 times. If the outliers such as The Ascott Group and Global Premium Hotels are excluded, the average price-to-book valuation for successful general offers is 0.94 times (see Table 2). This is higher than the offer of 0.8 times for Wheelock Properties. “Assuming a comparable valuation of 0.94 times for the voluntary general offer of Wheelock Properties would imply a fair value of $2.45 per share,” UOB Kay Hian says.
