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A mega merger of Permodalan Nasional Bhd’s property interests, which of course includes Sime Darby’s property division besides SP Setia and the I & P Group, will have interesting and intoxicating consequences. For such a property behemoth, the likes of which have never been seen in Malaysia, the world is its oyster.
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In its 2008 annual report, Sime Darby quoted English poet Robert Browning’s immortal line: “Ah, but a man’s reach should exceed his grasp.”
But Sime Darby Property does not seem to have gone above and beyond in maximising returns from its vast land bank — 19,000 acres with another 18,800 acres identified for future development — the largest in the country.
Settling for less?
One point of criticism on Sime Darby’s Property division has revolved around the sale of prime land banks to other parties, which inevitably deprives the group of a higher quantum of profit from self-development in exchange for faster cash.
The latest such example was in September 2013 when the property arm agreed to sell 135 acres of its 843-acre City of Elmina township development to lifestyle property developer Eastern & Oriental Bhd (E&O), in which Sime Darby has a 30% stake.
This deal raises multiple questions. For one, why would Sime Darby Property sell part of its township development to another developer and essentially forgo the profit from on-selling the property it could have built on that land, very likely higher than the land sale price?
The other question arises from the rationale put forward for the sale: having E&O’s development in Elmina would enhance the combined branding and value of the larger Elmina township.
Underlying that reasoning, unfortunately, is that Sime Darby Property’s own branding is not up to par. This is somewhat strange as Sime Darby Property, having a long and established standing over the decades even prior to the group’s rebirth via Synergy Drive, was once considered the industry leader and is still winning awards for its projects today.
Lacking entrepreneurial drive?
Industry players think this is mainly due to a lack of entrepreneurial drive within Sime Darby Property.
“They do joint ventures with these smaller developers — for what?” said one developer to KiniBiz. “Who is, say, Brunsfeld next to Sime Darby?”
The remark refers to Sime Darby’s joint venture with the Brunsfeld group, established in 2006 in the form of a 60:40 JV company called Sime Brunsfeld. Among the projects that Sime Brunsfeld had undertaken are Subang Avenue worth RM250 million, Oasis Damansara worth RM550 million and the redevelopment of Oyster Cove in Australia.
Another joint venture that has raised eyebrows is Sime Darby Property’s 50:50 partnership with CapitaMalls Asia Limited to develop a RM500 million shopping mall in Taman Melawati.
It is worth noting however that some of Sime Darby’s joint ventures has been with leading names — for instance its partnership with UEM Sunrise to develop the RM1.6 billion Radia in Bukit Jelutong.
Additionally Sime Darby Property is also exploring further partnerships with E&O, it said previously.
According to an industry observer who has dealt with Sime Darby Property, the mentality in the property division is akin to that of a government office — more laidback and not setting too high standards so as to maintain a more steady rate of improvement.
‘Delivering sustainable value’
In response to these concerns, Sime Darby president and group chief executive Mohd Bakke Salleh said that the traditional school of thought involving maximising returns by doing projects on its own may not enhance the value of Sime Darby property to the optimal level.
“There are also new ways in which collaborations would offer superior benefits in terms of returns, capacity development, risk mitigation and even expansion opportunities,” said Mohd Bakke in his emailed response to KiniBiz.
As an integrated property group with vast landbank, the property division aims to deliver sustainable value to its shareholders by either undertaking its own projects or strategically partnering reputable companies to further increase the value of its development, said the Sime Darby chief.
“Sime Darby Property recognises that it needs to be aware of the different models of development based on whether the goals are short-, medium- or long-term,” said Mohd Bakke.
If the division does lack entrepreneurial drive, would listing the property division separately improve its performance by adding drive into management via direct shareholder scrutiny?
“There are benefits to a stock market listing and we will always explore all opportunities to improve shareholder value,” said Mohd Bakke in response. “It is not the only way to drive performance and in fact, Sime Darby Property recorded its best ever pre-tax profit of RM571.5 million in FY2013.”
However, Bakke did not say how much of this came as gain from the sale of land and how much from the sale of completed property. It was not possible to immediately establish this. This represents about 12% of group pre-tax earnings.
Notably, a comparison of Sime Darby’s pre-tax profit growth over the six full financial years following the Synergy Drive merger shows that while the profit levels are high around RM450 million and breaking RM500 million last year, the growth rate was not as strong as some other developers (see chart).
For instance, SP Setia recorded double-digit percentage growth in terms of pre-tax profits between FY10 and FY12, while Mah Sing also grew its pre-tax earnings by double digit percentages from FY10 up to last year.
Similarly, UEM Sunrise had also seen strong pre-tax earnings growth over a similar period, recording double-digit improvements in terms of percentage.
Restructuring PNB’s property holdings
Any restructuring of Sime Darby’s property division must be seen as part of of an overall juggling and rearrangement of the property assets of its parent company Permodalan Nasional Bhd or PNB.
Much of PNB’s property holdings are held within three companies — wholly-owned I &P Group Sdn Bhd, 69%-owned listed company SP Setia and 52.5% Sime Darby Bhd (see chart). In addition PNB also has private development companies such as PNB Devt Sdn Bhd, but these are much smaller.
Of the three, the most well-known property brand — following Sime Darby’s own abdication from a leading position in the property sector over the years — is SP Setia, probably the most widely known and well-regarded property group in Malaysia, especially for residential property.
I&P Group was formed in May 2009 after the merger of three companies: Island & Peninsular Sdn Bhd, Pelangi Sdn Bhd and Petaling Garden Sdn Bhd. This brought together a diversity of a few leading developers with vast experience in the property business.
Notably there has been market speculation of a merger involving I&P Group with SP Setia to create a mega developer, but this is unfounded. Another talk that surfaced in the market recently was that I&P boss Jamaludin Osman will take the helm of SP Setia after long-time chief Liew Kee Sin leaves, but Jamaludin and SP Setia have denied any knowledge of any such plan by PNB to KiniBiz.
SP Setia and Sime Darby each own a 40% stake in what is often called the iconic development of Battersea in London, the other 20% being held by the Employees Provident Fund.
Battersea is spearheaded by SP Setia whose CEO Liew Kee Sin is also the president of the Battersea development. But Liew is already exiting SP Setia at the end of this month but strangely will continue at Battersea.
If as is reasonable, SP Setia becomes PNB’s property flagship, then the first step is for Sime Darby to inject its 40% stake in Battersea, its current property division and the 30% stake in E&O into SP Setia. This can be done through an exchange of shares which is likely to give Sime Darby a substantial stake in SP Setia although probably not a controlling stake.
Meantime, PNB can inject its entire stake in I & P into SP Setia as well getting in return shares in SP Setia.
While the exact number of shares to be issued for both the PNB and Sime Darby property injections will depend on valuations at the time, it is likely that PNB will still have a majority of shares while Sime Darby may have more than a 20% stake.
If there is a possibility of too little float left in the market after the deals take place, it is always possible to increase the float by shareholders – PNB and Sime Darby – selling shares to the public and other institutions.
Also, it will be possible to increase Sime Darby’s ownership of SP Setia to make it a subsidiary via the transfer of part or all of PNB’s stake in SP Setia to Sime Darby, with Sime Darby issuing its own shares to PNB in exchange.
As SP Setia has probably the best name in the industry, it should be the name that is retained for the new property behemoth.
A super-developer
If benefits and incentives are right and a corporate culture of rewarding performance is cultivated, there is no reason why the new SP Setia cannot be a major property name locally and internationally.
“(The merger) is a good idea because then you can consolidate and have a larger balance sheet, which is a platform for overseas expansion,” said an analyst KiniBiz spoke to about the idea. “Even SP Setia, the biggest (name) in Malaysia, is still much smaller than the big boys of China and Hong Kong, but with a much bigger balance sheet (from the merger) it can go so many places and can compete more effectively.”
Additionally, SP Setia will have a constant supply of land from Sime Darby Plantations which will no longer have to go into joint venture with any other company due to lack of in-house property expertise.
Besides Battersea, SP Setia also has international developments in Australia, Vietnam and Singapore, which led to some observers calling it Malaysia’s first real multinational developer.
With such experience married to vast land banks and a stronger balance sheet, a number of positives emerge. The behemoth would be an improvement over the current structure of the property division.
First, as mentioned above, Sime Darby no longer needs to sell land cheaply to others and instead can focus on maximising returns from their own land for the benefit of shareholders. With a stronger balance sheet, there would presumably be less instances where cash flow requirements necessitate such sales, for example.
Tied into that benefit is the capacity to undertake its own development. With SP Setia as the brand, there is no excuse to continue leveraging on other developers’ brand — SP Setia is already the top name in the country.
And that top brand will be leading land development within the behemoth, capitalising on the biggest land banks within any single developer in the country. The possibilities are intoxicating with the right people in charge.
A great car needs a great driver
But therein lies the big question — putting the right people in the driving seat to maximise performance.
“I can’t think of anyone who can lead such a behemoth,” admitted an analyst on the question. “You need somebody who can lead such a large group — someone (entrepreneurial) like Liew.”
However Liew, who is leaving SP Setia after the end of this month, has conflict of interest issues arising from Eco World Development Holdings Bhd, in which his son has a major stake and is a director. Notably Liew and his wife paid for their son’s buy-in into the company.
KiniBiz previously examined the rise of Eco World and the issues that arise in respect of SP Setia and Liew in three parts here, here and here.
Accordingly the new behemoth should also consider who should be leading Battersea as having Liew continue as Battersea chief after his retirement this month is an awkward situation for the same reason as above.
Given all these possibilities it will be a pity if PNB’s diverse property assets continue to be spread too thin and resources diluted via three separate companies when it is so easy to merge the three for the benefit of the ultimate shareholders of all the entities.
Yesterday: Sime Darby Plantation, the big brother
Next week: Revving up the marques
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