Here are four property developers that could face privatisation soon

9 property privatisations recorded in last four years.

Including the most recent general offer of SingLand, CIMB counted nine privatisations/partial offers within the property space in the past four years, with offer prices offering >20% upside on average. CIMB explores potential privatisation candidates which include Wheelock, Ho Bee, Wingtai and Bukit Sembawang .

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With developers trading at historically steep discounts, high-end market void of buyers and potential extension charges on unsold developments, we asked ourselves what will happen if this continues.

We come to two conclusions 1) more reasons for privatisations of small-mid cap developers and 2) further weakness for high-end residential properties.

We compared potential privatisation candidates based on 1) current valuation against historical mean; 2) whether there are major shareholders with more than 50% stake in the company; 3) lack of the need for equity fund raising (EFR) based on balance sheet strength and when they last tapped the market; 4) trading liquidity as percentage of free float and; 5) whether there is any incentive to avoid extension charge by going private.

We have selected four companies, all of which are trading at significant discount to historical P/BV and RNAV, with limited need for equity fundraising given their strong balance sheets. Out of the four, we believe Wheelock and Ho Bee have higher potential of being taken private.

Wheelock fits most of the criteria that we looked at, despite lacking the push factor of extension charge. It is 75.8% owned by Hong Kong-listed Wheelock and Company Ltd (20 HK), which owns The Wharf (4 HK) and Wheelock Properties Limited (private). 

The majority shareholder is financially strong with HK$29.3bn (S$4.8bb) cash and equivalents and 0.3x net gearing. On top of that, Wheelock’s valuation is attractive at 0.7x FY13 P/BV, 0.6x FY14 P/BV and 34% discount to RNAV. Coupled with its strong balance sheet and low liquidity, we believe it is the most likely candidate for privatisation. 

Ho Bee is another candidate at the top of our list, given its attractive valuation, majority shareholder and strong balance sheet with limited need for equity fundraising. On top of that, we noticed that Ho Bee Holdings (owned by Mr Chua Thian Poh, Mdm Ng Noi Hinoy and Mr Chua Kong Chian) has been increasing its stake since 70.8% in Apr 2013 to 72.6%. 

Ho Bee is our top pick within the small-mid cap developer space and its book is undervalued in our opinion, largely on the basis that Metropolis’s book value of S$1,151 psf NLA is conservative relative to our estimation of S$1,550 psf NLA (based on 4.2% cap rate and recent office transactions). While its unsold Sentosa developments remain a drag on earnings and share price, they are not subjected to QC and are currently being rented out. 

Wing Tai has a healthy balance sheet and is trading at a historically low FY13 and FY14 P/BV of ~0.5x. While its majority shareholder owns a smaller stake of ~50% than the majority shareholders of other privatisation candidates, it has the additional push factor of extension charge. 

Bukit Sembawang fits the criteria of cheap valuation, low liquidity and limited need for equity fundraising. However, privatisation may not be a near-term theme for the stock as the largest shareholder owns only ~41% of the company and does not face a push factor such as the extension charge.