Perennial Real Estate Holdings (PREH SP) - DBS Research 2017-07-14: United We Stand

PERENNIAL REAL ESTATE HLDGSLTD 40S.SI

Perennial Real Estate Holdings (PREH SP) - United We Stand

Perennial Real Estate Holdings (PREH) /Yanlord consortium acquires 33.5% stake in United Engineers (UE) and up to 100% stakes in WBL, triggering Mandatory General Offer for UE.
S$2.60 offer price below historical average take-out premium however; more capex needed.
Period where offer remains conditional leaves room for potential counter-bid, though risk mitigated in our view.

PREH and Yanlord Land, lead a consortium to acquire all stakes in UE and WBL owned by OCBC, Great Eastern Holdings (GEH), and other UE vendors (together UE vendors) at S$2.60 per UE share and S$2.07 per WBL Corporation (WBL) share for a total consideration of S$729.7mn.
UE vendors owned 33.4% of ordinary shares in UE, 70.2% stake in UE preference shares, and 29.9% stake in WBL. The prices imply P/NAV of 0.88x for UE and 0.78x for WBL.
The PREH consortium comprises Perennial SPV, which is 45%, Yanlord 49% and Heng Yue (wholly-owned by Mr Kung Chun Lung) 6%. Perennial SPV comprises PREH (72.22%), Mr Kuok Khoon Hong (16.67%), and Wilmar (11.11%). PREH will effectively own a 32.5% stake in the PREH consortium.
The above acquisition will trigger a mandatory general offer (MGO) for UE shares, conditional upon achieving more than 50% in UE at close of offer. However, the PREH consortium intends to keep UE listed and will reevaluate its position should UE not meet the minimum public float requirement on the closing date of the offers. The details of the offer are as follows:

As at the date of announcement (13 July 2017), the PREH consortium had acquired from UE vendors:
- 33.4% ordinary shares in UE and 70.2% preference shares in UE at S$2.60 per share (in total form 33.5% stake in UE). Total consideration is S$555.7mn.
- 10% stake in WBL at S$2.07 per share. (S$58.0mn) – tranche 1 WBL shares acquisition.
Undertake to acquire the remaining 19.9% stake in WBL owned by UE vendors at S$2.07 / share (S$116.0mn) at a later date (90 days after the earlier of
1. the close of the cash offer for UE shares or
2. the cash offer of UE shares becomes unconditional) – tranche 2 WBL shares acquisition.

Following from the acquisition above, the PREH consortium has triggered:
A mandatory conditional cash offer for UE ordinary shares at S$2.60 per share
A mandatory unconditional cash offer for UE preference shares at S$2.60 per share

In the event that the mandatory conditional cash offer for UE ordinary shares becomes unconditional (ie > 50% acceptance), the PREH consortium will trigger a chain offer to make a mandatory unconditional cash offer for the remaining 2.5% stake in WBL (S$14.6mn) not already owned by the PREH consortium (10% acquired from UE vendors), UE (owns 67.6% stakes in WBL) and the undertaking by PREH to acquire the remaining 19.9% stakes in WBL owned by UE vendors.

The funding required from PREH is estimated to be S$237.2mn. We understand that this will be funded partly by internal cash and existing debt lines.
Based on a 50% gearing, this increases PREH’s net debt-to-equity from 0.51x as at 1Q17 to 0.58x.

The funding required by PREH is estimated to be S$337.0mn. Based on 50% gearing, this increases PREH’s net debt-to-equity from 0.51x as at 1Q17 to 0.60x.

The funding required by PREH is estimated to be S$592.2mn. Based on 50% gearing, this increases PREH’s net debt-to-equity from 0.51x as at 1Q17 to 0.67x.

PREH Consortium involves investors with extensive experience in the real estate sectors within Singapore and China, allowing the partners to tap on each other’s knowledge in the respective real estate markets in order to optimise returns in the medium term.
PREH has been making waves as a “turn-around specialist”, given Mr Pua Seck Guan’s and his team’s extensive experience in executing on real estate deals in Singapore and China.
Following the acquisition and subsequent turnaround of CHIJMES, TripleOne Somerset, and AXA Towers in Singapore, we believe that UEM offers PREH the opportunity to do the same on a grander scale as we see a potential value-add opportunity for the portfolio of properties.
In our previous report on UEM dated 3 Mar 2017, we see potential for a buyer of UEM to raise the performance of its key assets – UE Bizhub City and UE Bizhub Central, which are well located close to the Central Business District, through active management and reposition the assets to tenants. In order to achieve this, we believe that a fair amount of asset refurbishment might have to be done.

At S$2.60 per share for UEM, the PREH consortium prices the company at a P/NAV of 0.88, which is below the historical average take-out premium of close to 1x P/NAV.
While the pricing appears attractive for the PREH consortium at first glance, we believe that given the further capital expenditure needed to spruce up UEM’s portfolio of properties could mean that the told capital outlook could take the pricing closer to 1.0x P/NAV.
While we acknowledge that a counter-bid for UEM could still materialise prior to the offer by the PREH consortium turning unconditional, we believe that that risk is somewhat mitigated by the fact that the vendors had decided to award the PREH consortium the deal post a comprehensive formal sale process which saw proposals from a wide range of potentially suitable investors.
Post this auction and due diligence process, we understand that PREH has emerged as the highest bidder for both UEM and WBL stakes. In this scenario, this narrows the universe of potential further interested parties that might emerge going forward.

Rachel TAN DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-07-14

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.050 Same 1.050