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HOCK LOCK SIEW

Why a delisting makes sense for Sim Lian

By Lynette Khoo

[email protected]

@LynetteKhooBT

Aug 23, 2016


THE proposed delisting of Sim Lian Group by its founders may serve as yet another reminder of the meandering state of the Singapore bourse, which has seen or is seeing the exit of household names such as healthy-lifestyle products group OSIM International and traditional Chinese medicine (TCM) group Eu Yan Sang.

What is poignant in the case of the long-listed property construction and development group is that it is seen as largely driven by a persistent undervaluation and poor trading liquidity of its stock, unlike its industry peers Popular Holdings and SC Global which had been taken private to avert paying hefty penalties on residential properties. None of Sim Lian's residential projects are subject to qualifying certificate (QC) conditions, which require extension charges to be paid for unsold residential units two years after the project's completion.

But one would argue that the merits of staying listed for companies such as Sim Lian have paled vis-a-vis the costs of listing, which could be anything between half a million and a million Singapore dollars annually.

Languid trading valuations have also made privatisation exercises less costly. As a ballpark estimate, it would only take the founders of Sim Lian around S$213 million to privatise the company based on the offer price of S$1.08 per share and the 19.64 per cent interest that is not already owned by the offeror and concerted parties.

Since news of its proposed privatisation broke, Sim Lian's thinly traded shares were finally revived and surged from S$0.94, an 18 per cent discount to net asset value, to a record high of S$1.07 on Aug 11 and have been hovering around S$1.065 since. Not that Sim Lian needs to make any cash call but, until this price surge, the undervaluation that has plagued the stock has made it unconducive for any equity fund-raising.

Announced privatisations to-date would see some S$8 billion in market capitalisation vanish from the Singapore bourse, outpacing the combined market cap of S$6.3 billion from new listings so far this year.

Sim Lian started out as a construction contractor in the 1980s before getting listed in 2000 and branching out into property development in 2001. Another critical milestone came in 2013 when the group accelerated its overseas venture, acquiring income-yielding property investments in Australia in particular.

But it has not carried out any exercise to raise equity capital on the Singapore Exchange since 2007. The group is also unlikely to require access to the equity capital markets to finance its operations in the foreseeable future.

Even without tapping equity for growth, Sim Lian's net profit saw a compounded annual growth rate of 32 per cent over the past 10 years while total assets grew a compounded 13 per cent to S$1.65 billion in fiscal 2015.

The need for equity raising is further diminished now that it has a recurring income stream from newly acquired retail properties in Australia as part of its diversification strategy.

Overseas properties now form the bulk of its investment portfolio, mainly two freehold office properties and nine shopping malls anchored by major supermarket tenants in Australia. In Singapore, it is keeping Hillion Mall, the retail component of its integrated project in Bukit Panjang that is currently 85 per cent leased, and some 200,000 sq ft of strata office space at Vision Exchange for rental.

Sim Lian group executive director Kuik Sing Beng had told BT in an interview this year that it was eyeing more overseas assets with the long-term view of generating half of its earnings from investment properties, up from 5 per cent in fiscal 2015. Any near-term expansion is likely backed by some S$380 million of cash as at March 31 and strong support from banks.

Less susceptible

Its earnings are also expected to become less susceptible to swings as the group aims to bring down lumpy contributions from property development and building construction to about 40 per cent (from 71 per cent in FY2015) and 10 per cent (from 25 per cent in FY2015) respectively over time.

Only two residential developments this year, Wandervale and Treasure Crest executive condominium (EC) projects, may face a potential clawback on additional buyer's stamp duty (ABSD) remission on land cost if they do not finish selling out by September 2019 and February 2020 respectively, five years after the date of award of the sites.

But this risk looks remote now that these projects are over 80 per cent sold since their launch this year; their conversion rates of buyers' interest from e-applications to sales were laudably higher than industry's average. Profits from these sales will be recognised only upon construction completion under EC rules. If it is successfully privatised, Sim Lian will no longer have to share the gains from these sales with minority shareholders when these projects are completed. Neither does it have to worry about sticking to a stringent timeline under the QC conditions should it decide to acquire private land for development in the future.

While there are bound to be some drawbacks in going private, these factors do not seem to figure in Sim Lian's case.

For one, it does not have to worry about having to offer a higher premium for bonds as a private company, since it has not issued any before and does not intend to.

Being a private company is also unlikely to stand in the way of securing large construction contracts, given Sim Lian's 35 years of track record in public-sector projects and its Class 1 general builder licence that allows it to take on projects with no tender limits.

As it stands, Sim Lian's exit from the bourse looks imminent even before approval from minority shareholders is obtained. It has no substantial shareholders other than the Kuik family members and related parties who collectively hold 80.36 per cent of the outstanding shares.

Sixteen years on since its IPO, the group has clearly morphed into a more resilient and diversified group. It's a pity that minority shareholders will soon have no share in its future upside.

All things considered, there is little impetus left for Sim Lian to stay listed. Sadly, this may ring true for some other property counters too.