• Real estate and property industry new kid invests Rs. 1.43 b to buy 51% stake held by Renuka Capital and 4 others
• Triggers SEC Takeovers Code to acquire balance minority shareholding at Rs. 30.20 per share or another Rs. 1.4 b; UDA owns near 45% stake
• Rs. 11.6 b-assets-rich LRI says move part of goal to become foremost property company
• To transform 11-storey building in Bambalapitiya which is popular for wholesale and retail of ICT products
• Post-acquisition share price of On’ally goes up 27.5% and LRI by over 15%
• Transaction and full deal is first major move amidst COVID pandemic in real estate sector and capital market
• Deal struck as CSE rang bell for 35th anniversary

New kid in the real estate industry, Lanka Realty Investments Plc (LRI) yesterday walked the talk of its optimism with a Rs. 2.8 billion takeover move of Colombo 4-located Unity Plaza owning company On’ally Holdings PLC.

It acquired a 51% stake amounting to 93 million shares at Rs. 30.20 each in a deal worth Rs. 1.4 billion from Renuka Capital Plc and related parties Dr. S.R. Rajiyah and I.R. Rajiyah (44.6%) and four other shareholders, Petro Energy Lanka and Kirimanjaro Investments Ltd. (2% each), Ashthi Holdings and Capital Alliance, which was the selling side broker (1% each). Renuka Capital had its 43.8% stake in On’ally valued at Rs. 944.8 million as at 30 March 2020.Yesterday’s deal, which accounted for 41% of turnover at the CSE, was structured by Steradian Capital Investments Ltd. (SCI), which is the manager of the assets held by LRI. Buy side broker was Acuity Stockbrokers.

The acquisition triggered the SEC Takeovers and Mergers Code and LRI will make a mandatory offer to acquire the minority stake at a further cost of Rs. 1.4 billion if accepted in full.

The transaction and the full deal are significant as it is the first major move post-COVID or amidst the COVID pandemic in the real estate sector as well as the capital market.

Incidentally the deal was struck as the CSE rang the bell ceremoniously yesterday its 35th anniversary. The net asset value per share of On’ally as at 30 September 2020 was Rs. 23.47. On Wednesday On’ally traded between a high of Rs. 27 and a low of Rs. 26.50 before closing at the latter level. Its 52-week highest price was Rs. 42 and lowest was Rs. 23.10.

Some market analysts opined LRI paid a premium whilst others viewed it as attractive given the strategic nature as well as if one factors in the deferred tax liability which was Rs. 626 million as at 30.9.2020. On’ally has Rs. 1.8 billion in retained earnings and zero debt as well.

Post-acquisition, On’ally Holdings share price closed at Rs. 33.80, up by Rs. 7.30 or 27.5% and LRI share price gained by Rs 5.30 or 15.4% to Rs. 39.70.

The largest minority shareholder of On’ally is the Urban Development Authority (UDA), holding 44.8%. The public float is 10.85% held by 888 shareholders.

In FY20, On’ally Holdings PLC was able to sustain a reasonable growth registering a profit, before tax, of Rs. 201.52 million excluding the gain on revaluation of investment property of Rs. 40 million. Compared to the previous year, this is a growth of 8.19%.

Turnover grew by 5.36% to Rs. 201.22 million. Revision of rentals of the existing tenants, maintaining a higher occupancy rate (average occupancy rate in 96.59% in 2018/2019 and 93.67% in 2019/2020) during the financial year and increased in short term investments (mainly from investing right issue proceedings) were the major reasons for this increase in turnover and the profitability.

In FY20, the company also made the largest payout of Rs. 61.4 million to shareholders since the inception. The total dividend declared was Rs. 61.38 Million.

LRI co-founder and Executive Director Hardy Jamaldeen said that the acquisition of On’ally fitted into the company’s portfolio.

“We are committed to become the foremost property company and On’ally, apart from adding a strong property from a popular location in the city, will support our income stream as well. To the Board, we will present our asset management strategy as part of transforming the building,” Jamaldeen told the Daily FT, keeping the rest of the plans close to his chest.

LRI, which as a group includes construction material business Amtrad Ltd., as well as leisure interests, has assets worth Rs. 11.6 billion as at end FY20.

The key highlight in FY20 was the acquisition of six companies in the real estate and leisure sector amounting to Rs. 5.6 billion. This acquisition was carried out via a share swap and was the largest carried out historically on the Colombo Stock Exchange.

The Group now has crucial land banks in Colombo, including commercial property on Darley Road, Maradana, assets under planning, development and fully operational.

In FY20 it reported a turnover of Rs. 204 million, up from Rs. 149 million in the previous year. Profit was Rs. 610 million after a Rs. 1 billion change in fair value of investment properties.

Acquisition of On’ally gives LRI a new growth opportunity, analysts said.

In 2Q despite the COVID-19 impact, On’ally turnover has remained resilient at Rs. 49.3 million, marginally down from Rs. 50 million a year ago. Pre-tax profit was Rs. 49.4 million as against Rs. 51 million in the 2Q of last financial year. Post-tax profit amounted to Rs. 37 million, up from Rs. 36.5 million.

In the first half of FY21, turnover was Rs. 85 million as against Rs. 99.6 million a year ago and pre-tax profit was Rs. 89 million, down from Rs. 98 million. Post-tax profit was Rs. 67 million as against Rs. 70 million in the first half of FY20.

Unity Plaza, with its first five retail floors being cash cows, is considered as an ICT products hub given the wide range of wholesale and retailers.

“Our focus is to provide quality commercial space mainly for the thriving information technology industry with occupants who will elevate the image of Unity Plaza as the centre for computers, computer accessories and IT-related businesses in Colombo,” the company said in its 2019/20 Annual Report. In May 2019, the company raised Rs. 105 million via a Rights Issue to refurbish the Unity Plaza.

Reference - Published by Daily FT