More corporate demergers to come, spearheaded by construction and property players

PETALING JAYA: The local corporate scene could see more deconsolidation exercises, with construction and property companies in the front line, in the midst of the tough economic environment.
“There could be a trend to do so (demerge). If the prospects of the economy may not be that robust, then it will better to have a separate business. Those days when the economy was rosy, you had enough jobs within the group, but now could be the time to look at demergers,” Areca Capital Sdn Bhd CEO Danny Wong Teck Meng told SunBiz.
Inter-Pacific Research Sdn Bhd head of research Pong Teng Siew also sees demerger exercises positively.
“I never like conglomerates. Demerger is better for the stock market. No management team can claim to be expert in every field, so it is very advisable for a company to focus on what it does,” he said.
“The pressure is on (for demergers). As the pace of economic growth is slowing, and there will be fewer opportunities of growth, then the emphasis will be on running the company more efficiently,” he added.
This comes on the heels of Sime Darby announcing the spin-off of its plantation and property businesses last month, despite rating agency Moody’s Investors Service seeing it negatively in anticipation of a weaker credit profile arising from reduced diversification, scale and cash flows.
The trading and logistics segments, however, will remain under Sime Darby, whose listing status will be retained.
Earlier, UMW revealed plans to exit the oil and gas business. This will see the demerger of UMW Oil & Gas Corp Bhd through the distribution-in-specie of UMW Holdings’ 55.72% stake in the oil and gas firm in the form of a bonus issue.
Wong noted that the demerger among construction cum property players has been underway as early as July 2015 when Sunway Bhd listed its construction arm Sunway Construction Group Bhd to leverage on the booming construction industry.
He said when construction and property businesses come under one roof, it could be difficult for the construction arm to be awarded projects by “outsiders”.
“The construction segment will not do other business even though they have excess capacity because competitors may not see you as friendly. But if it is listed separately, even there are common shareholders, the market will see it as a pure construction player as you will not favour the other side,” he said.
“For the next two to three years, the construction sector may have a lot of incoming jobs, but the property sector is still lacklustre. So I think it is good to split these two businesses,” he added.
Some of the prominent construction cum property players are Malaysian Resources Corp Bhd (MRCB) and Gamuda Bhd. Ekovest has also revealed plans to float its property and infrastructure businesses.
Wong said demerger will also be taken into consideration when different businesses under a listed entity no longer reflect its valuations. “The market may demand a higher risk premium for a certain business, so the price-to-earnings ratio would be higher, then you can unlock the whole value. That’s why we need separate listings for different businesses.”
Citing Sime Darby as an example, Wong said the deconsolidation will lead to better cash management as it is easier to determine the amount of borrowings and capital reserved for each segment.