This article first appeared in The Edge Malaysia Weekly on January 8, 2024 - January 14, 2024
ROUGHLY 15 months after Kuchai Development Bhd (KDB) completed distributing its 26.51% stake in Sungei Bagan Rubber Company (M) Bhd (Sg Bagan) to shareholders, the company ended the year with an announcement of a bigger deal.
This time around, KDB is selling its assets and liabilities valued at RM275.47 million to its sister company Sg Bagan in return for shares. Again, KDB will distribute Sg Bagan shares to its shareholders. For every 1,000 KDB shares, shareholders will be entitled to 222 Sg Bagan shares under the proposal.
The controlling shareholder Kluang Rubber Company (M) Bhd will get the lion’s share of the block of Sg Bagan shares being distributed.
Kluang Rubber holds a 42.21% stake in KDB and a 43.5% stake in Sg Bagan. It is, in turn, controlled by low-profile Singaporean businessman Lee Thor Seng and his sons — Justin Lee Chung-Shih and Colin Lee Yung-Shih — via their family vehicle The Nyalas Rubber Estates Ltd. Justin is the executive deputy chairman of KDB and Sg Bagan.
It is worth noting that the divestment consideration of RM275.47 million was RM120 million more than its market cap of RM154.68 million prior to the announcement.
The divestment, which unlocks the asset value of KDB, gave a strong boost to the share prices of the three companies, lifiting them to all-time peaks on the first trading day of 2024.
The move is seen by market observers as the nonagenarian Thor Seng’s attempts to further streamline his interest in the Bursa Malaysia-listed companies, apart from unlocking asset values. This has left many wondering about his next move with KDB, which will soon be a cash-rich listed shell company.
“Would he privatise Sg Bagan since most of the assets will be parked there?” muses a market observer.
To recap, Kluang Rubber’s stake in Sg Bagan increased to 43.5% current from 32.21% after the distribution of Sg Bagan stake by KDB in 2022. Lee family will hold a 4.54% direct stake in Sg Bagan after the latest exercise.
The jewel in the crown of KDB and Sg Bagan is the shares they own in Singapore-listed insurer Great Eastern Holdings Ltd — an investment the two companies made many years ago.
Today, KDB holds 3.03 million shares in Great Eastern while Sg Bagan has 1.733 million shares. Great Eastern’s share price has fallen 31% over the past five years to close at S$17.78 last Thursday. The combined stake was valued at S$84.68 million.
The three companies, which are usually quiet on the corporate exercise front, first excited the market in 2021, when Sg Bagan announced an asset swap deal that gave Nyalas a 9.44% direct stake in KDB.
Under the latest proposal, KDB will dispose of almost all its assets and liabilities to Sg Bagan, which would include the prized asset of 3.03 million shares in Great Eastern, a commercial property located at 9 Emerald Hill Road in Singapore and a freehold agriculture land in Ulu Semenyih, Selangor.
KDB will also dispose of bonds denominated in Singapore dollars and redeemable preference shares denominated in US dollars and other receivables. The corporate exercise is subject to the approval of KDB’s shareholders.
There will be no cash involved in this corporate exercise. Instead, the RM275.47 million disposal consideration will be satisfied through the issuance of 27.51 million new Sg Bagan shares, placing the issue price at RM10.01 per Sg Bagan share. The issue price is 2.5% or 24 sen higher than Sg Bagan’s net book value of RM9.77 per share as at its audited financial statement for the year ended June 30, 2023, and a premium of 139% over the closing price of RM4.18 last Thursday.
It is worth noting that Sg Bagan’s shares are trading well below their book value, suggesting an undervalued stock. Its share price has been hovering in the range of RM3.10 to RM3.62 in the last two years prior to the announcement of the recent proposed corporate exercise. On Dec 28, 2023, a day prior to the announcement, Sg Bagan shares closed at RM3.25.
A similar situation can be seen in KDB where its stock is trading below its book value. On Dec 28, 2023, the counter closed at RM1.26, 55% lower than its net asset value of RM2.79 per share as at June 30, 2023.
Following the proposed disposal, KDB intends to distribute all the Sg Bagan shares it receives as disposal consideration to KDB shareholders, which will give KDB shareholders an opportunity to participate in the future growth of the enlarged Sg Bagan asset portfolio, said KDB’s circular to shareholders.
This would mean KDB shareholders entitled to Sg Bagan shares and existing Sg Bagan shareholders will now have exposure to a total of 4.76 million Great Eastern shares, which is roughly worth RM290 million based on Great Eastern’s closing price of S$17.78 last Thursday and exchange rate of 3.40 against the Singapore dollar.
At RM290 million, the value of the Great Eastern shares alone exceeds Sg Bagan’s market capitalisation of RM271.96 million.
Putting capital appreciation aside, Great Eastern also provides a consistent stream of dividend income to its shareholders. In the last three financial years, the insurer has doled out dividends per share of 60 to 65 Singapore cents.
Apart from Great Eastern, KDB shareholders would also gain exposure to Sg Bagan’s other investments, being two units of residential flats located in Mayfair, London valued at a total of RM73 million and Sg Bagan’s core business in the oil palm plantations that spans over 4,000 acres.
It is interesting to note that more may be in store for KDB shareholders in the future.
KDB is selling almost all of its assets to Sg Bagan, but the cash pile amounting to RM83.81 million is not part of the deal.
“This is a good opportunity for asset injection,” notes a market observer.
In KDB’s circular to shareholders, it mentions that the company may be designated as a “cash company” according to the listing requirements where it would be required to place 90% of the amount in a custodian account where it can only be utilised to implement a proposal for the acquisition of a new core business approved by the Securities Commission Malaysia or for distribution to shareholders of KDB in the event it is unsuccessful in regularising its condition.
As KDB is seeking to maintain its listing status, it said in the circular that it will use its “best endeavours to identify potential new businesses and/or assets to be acquired”.
If the proposed exercise goes through, it would be safe to say that the biggest beneficiary would be Thor Seng and his sons.
The family’s stake in Sg Bagan through Nyalas, Kluang Rubber and another private vehicle Estate & Trust Agencies Ltd would increase to 47.76% from 46.06% previously, while their collective direct stake would increase to 0.45% from 0.39% previously.
What’s more, the cash pile sitting in KDB would provide opportunities for new investments or a payout to shareholders if all else fails.
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