FCW/GBH ... Apr10

Tan Sri Robert Tan owns a direct and deemed interest of 25.01% in FCW with a market value of RM117 million and 73.5% of GBH that is worth Rm167 million. Both FCW and GBH have similar core assets – a parcel of land measuring 30.6 acres in Segambut which currently houses GBH’s warehouse. FCW’s portion of the land is 15.73 acres while GBH’s plot is 14.86 acres.

FCW bought the 15.73 acres in 2007 from GBH for rm86 million cash and subsequently leased it back to GBH for its warehousing needs. The book value of FCW’s plot is rm88.3 million as of June 30, 2009. Meanwhile, GBH’s 14.86 acres are valued at RM119 million after a recent revaluation exercise.

The entire 30.59 acre parcel owned by FCW and GBH together has immediate potential for development because Mon’t Kiara is just a stone thro away. Also nearby is a 47 acre parcel owned by Tan Chong Motor Holdings Bhd. Tan Chong group currently utilizes the land for its vehicle assembly operations. However, the group has plans to build a major property development project on the parcel.

Considering the circumstances, would Tan integrated and coordinate the operations of FCW and GBH? The fact that both companies do not have strong core businesses may be an incentive for Tan to hasten his plans for the two companies to generate better returns.

FCW had revenue of rm4.53 million for six months ended Dec 2009 with 58.4% actually coming from the lease of its Segambut land and the warehouses to GBH. Its telecommunications division which essentially is the trading of equipment and contract manufacturing businesses, brought in only RM1.89 million in revenue and posted losses RM109000. In all FCW, posted a net profit of only rm402000 during the period, primarily due to its leasing income from the land.

Besides the sustainability of FCW’s main revenue and income stream in the form of rentals form GBH is also in question because the latter is loss making. GBH’s core business in the manufacturing of clay pipes and sanitary ware is bleeding millions.

So unless Tan can turn around GBH’s current core business, whether of not the company can continue to pay its rent to FCW – about rm5.3 million a year – remain a big question.

Observers say the answer lies in both companies chaning their core business to property development, using the Segambut land as the platform.
It makes sense to consolidate the land and property development business into one of the two listed companies, with the other focusing on current businesses such as clay pipes and sanitary ware and telecommunications equipment trading or other new businesses. By doing that, it has scale and a better story to sell to investors.

This can be done by GBH issuing new shares to FCW to acquire the latter’s 15.73 acres of the Segambut land, and FCW then distributing all the GBH shares it received from the deal to its shareholders, which include Tan. The benefit of such a deal is that while it does not require GBH to fork out more cash, it could increase the shares float in GBH and looses the current tight shareholdings in the company, in which Tan holds a 73.5% stake.

GBH is wrapping up its rights issue, into which Tan has pumped in another RM54.6 million (after paying more than RM35 million in a general offer in 2008) for his portion of the two for one rights issue of up to 123 million new GBH shares, which comes with 61.92 million free warrants.

The bulk of the rights issue proceeds of about RM50 million will be utilized to repay bank borrowings. This is crucial to release the land from the charge to financial institutions before GBH can think of developing the land.

GBH’s pro forma NTA per share is rm1.24 after rights issue but before the full conversion of warrants. FCW’s NTA per share is at RM0.63 as at Dec 2009. Worth noting that its 15.73 aces of land in Segambut has not been revalued.