Simon Cheong’s bid to take SC Global Developments private has just become a bit more interesting. Wheelock Properties (Singapore) announced last night that it has purchased 1.1 million SC Global shares on the open market at $1.81 apiece. The company now has a 16.1% stake in SC Global.
What does this mean for Cheong’s privatisation attempt? On Dec 5, the SC Global chairman and CEO launched a cash offer for SC Global at $1.80 a share. That represented a premium of 49.4% to its last traded price, a 57.2% premium to its 1-month volume weighted average price (VWAP), a 71.1% premium to its 12-month VWAP and a 39.5% premium to the highest closing price for the shares in the last 12 months.
Cheong, who owned 55.1% of the company prior to the offer, says he is seeking to de-list and privatise SC Global in part because of its low trading liquidity. His offer document claims that this is the highest premium offered for a real estate company in Singapore in the past five years.
Since the offer was made, however, interest in SC Global has rocketed. Trading volumes are up and the stock touched a 52-week intra-day high of $2.06 a share today. Suddenly, Cheong appears to be offering too little.
In a press release, senior executive director at Wheelock Tan Bee Kim is quoted saying: “In our assessment, the current share price represents a discount of some 40% to 50% of revalued net asset value (RNAV), and we would be unable to buy property assets directly at anything like these prices.” Based on Wheelock’s estimate, that puts SC Global’s RNAV at $3.02 to $3.62.
That seems high by some standards. AmFraser, in a Dec 6 note, estimates SC Global’s RNAV to be $1.98. SC Global has five residential properties in Singapore: The Marq on Paterson Hill, Hilltops, Martin No. 38, The Ardmore and Seven Palms Sentosa Cove. In China, it has a residential/retail property called Kairong International Gardens. Together, these six projects are estimated to have a net present value (NPV) of $190.5 million on development profits. AmFraser values the company’s commercial development Newton 200 at $23 million. Its 50% stake in Australian-listed subsidiary AVJennings is valued at a negative $46 million. Then there are $655 million in shareholders’ funds.
But Maybank Kim Eng Research has an even higher RNAV of $4 a share. Its value on Newton 200 is significantly higher, at $52.7 million. It also has a much higher estimate on NPV for the five local residential properties of $1 billion.
The differentials may come from how SC Global’s residential properties are valued. In a study by real estate advisory firm Savills, The Marq on Paterson Hill was ranked sixth in a global comparison of record transactions in 10 “world class” cities. Its units have continued to set price records with the latest being $6,850 psf. But AmFraser’s conservative valuations are based on an expected price of $3,690 psf.
AmFraser analyst Sarah Wong points out in her report that SC Global’s sales have been slow moving and that inventory hangovers of its high-end properties are a concern. “Projects such as Hilltops in Cairnhill Circle and The Marq on Paterson Hill have clocked low take-up rates of only 18.7% and 50% as at end Oct 2012, despite having been completed for more than a year. The slow moving sales have been weighing down on net cash flows, which were negative for the year so far.”
Meanwhile, Maybank points out that one motivator behind the privatisation may be to avoid paying penalties for not selling off all the units in projects within two years after receiving the Temporary Occupation Permit. “The first forfeit 10% involves the security deposit paid for the land. Subsequently, it will have to pay a penalty of 8% of the land cost pro-rated for the proportion of unsold units in the first year. This penalty escalates to 16% in the second year and reaches 24% in the third and subsequent years. By our estimates, SC Global will lose $71.7 million in 2013 for Hilltops, The Marq on Paterson Hill and Martin No. 38 if they do not receive a waiver or extension from the government.”
Wong of AmFraser advises shareholders to accept Cheong’s offer saying it “represents a rare opportunity to unlock value. SC Global lacks catalysts to unlock share value otherwise.” While units at SC Global’s high end properties may fetch a great deal in optimum market conditions, the company may soon begin to incur penalties for not selling these properties in less-than-optimum conditions. That should change the stock’s RNAV.
Some shareholders may now be holding out for some kind of bidding war between Cheong and Wheelock. But any move by Wheelock to buy more shares merely gets the counter’s free float closer to the 10% threshold. As of Dec 13, Cheong’s stake is 60.7%.
Maybank notes that Wheelock’s end-2011 written-down cost of investment in SC Global shares, which it first bought in 2007, was $64.8 million. That works out to about $1 a share, the bank says.
