Singapore Land

DMG & Partners Research, March 6

IN a long-anticipated move, United Industrial Corporation (UIC) recently announced an unconditional cash offer for its 80.4 per cent-owned subsidiary Singapore Land (SingLand).

The latter owns a sizeable portfolio of prime office properties with NLA totalling 2.1 million sq ft, including Singapore Land Tower, Clifford Centre, The Gateway and SGX Centre 2. In addition, it owns stakes in shopping malls and, through Marina Centre Holdings (MCH), controls Marina Square and the hotels in the Marina belt. SingLand is arguably the crown jewel within the UOL Group given its asset-rich portfolio and a successful privatisation would pave the way for further consolidation of UIC into UOL Group. This, we think, is the end game-plan for the Wee family.

We think UIC's offer price is unattractive against our estimate of Singland's RNAV of S$14.50/share, implying a steep discount of 35 per cent. While the offer is in-line with the trading discount of real estate developers, SingLand deserves a premium over its peers in the real estate sector as:

1) Substantially all of its assets are in the office, retail and hotel sectors, which tend to generate steady recurring income as compared to the more lumpy property development segment, which currently makes up a small part of SingLand's RNAV. Operating risk is much lower as a landlord.

2) SingLand's large portfolio of prime real estate properties include Singapore Land Tower, Clifford Centre, The Gateway, SGX Centre 2 and the Marina Square hotels and retail complex. Investment properties with good rental streams, such as SingLand's, are highly marketable assets as they can be packaged into Reits and sold at close to market value.

3) SingLand's hotels, held via MCH, are carried at book cost of around S$300,000 per key, against our conservative estimate of S$900,000 per key. Marked to market, this would generate a surplus of S$391 million, or S$0.95/share.

4) UOL Group has been streamlining its operating units, and last year privatised its 82 per cent-held hotel arm, Pan Pacific Hotels Group, at near RNAV. The offer for SingLand, at 35 per cent discount to RNAV, is deeply discounted when its asset backing, balance sheet strength and a strengthening office cycle are taken into consideration.

We think the eventual consolidation of SingLand within UOL Group is a strategic imperative for UOL Group, as it would bolster its investment property portfolio, modest currently, to a significant size.

There are also numerous common holdings among UOL/UIC and SingLand in various property interests, which make consolidation compelling from an operational consideration. For instance, MCH is currently 22.7-per cent owned by UOL, while SingLand owns a 53-per cent stake. In the same vein, West Mall is 50 per cent held by SingLand while the other 50 per cent is held by UIC.

SingLand has persistently traded above the offer price since the announcement of the offer. We recommend investors to reject UIC's low-ball offer. We also believe there is a good likelihood of the offer price being raised by UIC.

The wild card is Silchester International Investor LLC's intention, which currently owns a 8.2 per cent stake in SingLand.

We think it would seek a higher exit price for its SingLand's stake, having held it for close to a decade and in all likelihood recognisant of the deep value in SingLand. We recommend a "trading buy" on SingLand, paying a small option fee for the prospects of a raised offer. Our target price of S$10.85 is pegged to a 25 per cent discount to RNAV.

TRADING BUY