Brokers' take: Offer price for Apac Realty low, takeover likely to fail

MORGAN Stanley Private Equity Asia's takeover offer price of S$0.57 per share for Apac Realty, which is at a 30.1 per cent discount from its last traded share price, is too low and that the takeover bid is unlikely to succeed, said some analysts.

Calling the offer "opportunistic" and one that significantly undervalues the long-term potential of Apac Realty, RHB group research analyst Vijay Natarajan said in a research note on Tuesday (Apr 26) that unit holders are recommended to not accept the mandatory general offer by a fund managed by Morgan Stanley Private Equity Asia as it is "significantly below" its target price and long-term value.

RHB maintains its neutral rating of the real estate services provider, which holds the franchise rights for property agency ERA in Asia-Pacific, with an unchanged target price of S$0.75. This represents a potential downside of 7.3 per cent from its last traded price of S$0.805 on Monday.

Based on RHB's methodology, an offer price of S$0.57 per share would mean that Apac Realty is valued at 9 times the company's estimated earnings per share for FY2022, otherwise known as its price-to-earnings ratio, a common measurement used for valuing companies.

CGS-CIMB, which maintains its "add" rating for Apac Realty, has the highest target price of S$0.93, unchanged from before. This represents a potential upside of 15.5 per cent from its last closing price.

Based on its estimates, the offered deal values the company at 7 times its price-to-earnings ratio for FY2022.

"This is much lower than the 10 times ex-cash price-to-earnings ratio of its nearest comparable peer PropNex, and also lower when compared to the 10 to 12 times price-to-earnings ratio of other small-cap companies," said CGS-CIMB analyst Lock Mun Yee in a Monday report.

Given that the offer price is at a "steep discount" to the last traded price, DBS Group Research analyst Ling Lee Keng said in a research note late on Monday that the mandatory general offer is unlikely to be successful and that the research team expects some weakness in share price in the near term.

Ling had previously lowered Apac Realty's target price to S$0.67 from S$0.88, and kept to a "hold" rating in February this year.

In a bourse filing after market closed on Monday, the real estate service provider announced that it will soon have a new majority shareholder, with the Morgan Stanley Private Equity Asia-controlled NHPEA Ace Realty agreeing to acquire a 59.8 per cent stake in the company from an entity controlled by private equity firm Northstar Group.

NHPEA Ace Realty has agreed to buy the stake at around S$129.5 million – or S$0.61 per share – and also intends to make an unconditional mandatory general offer for all the outstanding shares in Apac Realty, other than those it already owns, controls or will acquire.

The offer price of S$0.57 in cash is a 30.1 per cent discount to its Friday closing price of S$0.815. The company requested for a trading halt after market close on Monday.

"The move comes amidst the latest round of cooling measures that is impacting sales volumes with an expected 20 to 30 per cent decline in overall transaction volumes this year. However, we note that the underlying Singapore property market fundamentals remain robust and well-supported by healthy GDP (gross domestic product) growth and strong household balance sheets," said RHB's Natarajan.

He also added that Apac Realty's share price would likely see a "kneejerk reaction", and S$0.65 is a good entry price for investors over the long-term.

CGS-CIMB's Lock noted that Apac Realty's near-term share price could be affected by this proposed offer price, but it would also set a support level for its share price.

Despite the low offer price, Lock said that Morgan Stanley Private Equity Asia's investment in Apac Realty could potentially further build and support its growth by leveraging on the fund's global network and experience in growing businesses across Asia.

"Upon the completion of the deal, the offeror may undertake a strategic and operational review of the company with a view to realising synergies, economies of scale and cost efficiencies and growth potential," said Lock.

Natajaran also said that the fund, which is one of the world’s largest investment managers, is likely to bring in more merger and acquisition opportunities for the company and will help further in its Asia-Pacific expansion plans.