After a long wait, HH announced this morning the dispatch of its circular on the takeover offer for Superbowl.
To recap, the offer is for SB shares at 75ct. If HH manages to garner 90% or more of SB shares, it will delist SB, and the benefit to HH will be an immediate boost in earnings and NAV, as HH is taking over SB at a sharp discount to its NAV.
In the circular to be sent out today, HH indicates that the EPS accruing to the company from the deal would be about 70ct per share. Initial estimates show HH’s RNAV will surge to about $1.90, inclusive of the surplus from its own 50% stake in ZP.
There is an undertaking from related parties for acceptance for about 71.5% of SB shares, just 18.5% point short of the 90% required for the delisting of SB.
First hurdle is for HH shareholders to approve the takeover offer, and this will take place on 6 Jan during an EGM. I do not expect much resistance here as the deal is good for HH shareholders, despite concerns about HH gearing up for the purpose of the deal.
As for SB shareholders, there is likely to be some unhappiness as it is clear that HH’s offer price is too low compared to SB’s revalued assets. Assuming no tax for ZP’s valuation and a $79.74m valuation (as indicated by HH) for SB’s shops (vs only $29.5m in its books), plus fair market value surplus mainly from Treasure at Balmoral, SB’s asset valuation is $421m vs its current book value of $244m. This means SB’s assets are now worth $1.29 per share, vs the takeover offer of 75ct, by itself already a valid point for SB shareholders to reject the offer.
Moreover, minority shareholders of SB are likely to argue that the $79.74m valuation put on SB’s shops is on the low side. The figures likely to be floated would then raise SB’s RNAV to $1.40-1.50. This, they will argue, means that HH is offering SB shares at about half of what its assets should be valued at.
It is in the family’s interest for the takeover to proceed, irrespective of whether the 90% level is achieved, if my earlier guess is correct - ie, money is needed by parent company HH Holdings to pay back loans taken to buy out the founder’s stake in that company. Hence, perhaps there should not be any worry that the offer will be cancelled due to non-achievement of the 90% level.
However, it will still be in the family’s interest to delist SB so that they just need to run one company, and also because they will then maintain their existing stake in the assets of SB. For these reasons, perhaps a slightly higher offer may be needed to tempt SB shareholders to bid farewell to SB, and switch over to owning HH shares so that they can continue being exposed to SB’s assets.
What you do depends on your own portfolio of stocks, whether you are still comfortable with property stocks in general, what other alternative stocks you can invest in, etc.
For me personally, should I accept the offer (on higher offer price) or am forced to exit (ie, over 90% acceptance) I am likely to add to my holding in HH as well as put some money in other undervalued prop stocks like CES.
I am also likely to add to Oxley, a recent addition in my prop portfolio. Oxley is not quite a value stock but it’s becoming a rather exciting company, with its huge UK project and a good dividend payout.
Yes, for SB shareholders who still want to be exposed to the company’s undervalued assets, they can switch to owning HH as HH’s RNAV is clearly above $2 post the takeover. However, HH has new risks (and rewards if they are right) with its recent major buys in Melbourne. And rewarding shareholders is still not in HH’s blood.
I may also put some money in non-prop stocks but at the moment, I don’t have a strong stock pick in this basket.
As for buying more SB right now, it’s for those who strongly believe that the offer price is raised later. I am only guessing about this possibility, and am not putting more money into SB for this purpose.
The circular states the value for the SB's properties at Parklane (28,966 sq ft), Balestier Pt (5,606), Orchard Towers (7,866) & Plaza (15,322) and Bukit Timah Plaza (6,133) at $79.7m. (Area figures came from Mr Goh's report)
The circular states these investment properties have a revaluation surplus of $50.24m at 31 Dec 2012.
OSK|DMG analyst Mr Goh who covers HH, puts them at $111.4m vs book cost of $29.5m in his 9 Oct 2013 Retail Research Report. This $81.9 difference compared to the above $50.24m is = to ard $0.097 more per SB share based on extra $31.6m valuation.
So, in this 10 months period, the RNAV has increased by another 9.7cents for each SB share?
Any explanation for this difference or it is just purely how one values such properties?