Innovalues Ltd - DBS Research 2016-10-27: Accept the offer and go for cash

Innovalues Ltd - DBS Vickers 2016-10-27: Accept the offer and go for cash INNOVALUES LIMITED 591.SI

Innovalues Ltd - Accept the offer and go for cash

  • Proposed acquisition of Innovalues by Northstar.
  • Present offer of S$1.01 not stellar, but current offer leaves room for higher competing bid to be made. 
  • In the absence of higher competing bid by date of scheme meeting, accept the offer and elect cash.



Accept the offer as current offer of S$1.01 per share is above our fair valuation of the company of 12x FY17 PE. 

  • Innovalues announced a proposed acquisition by a PE fund, Northstar Equity Partners IV, by way of a scheme of arrangement, which requires at least 75% shareholder approval, of which key shareholder undertakings already amount to 38.73%.
  • The offer of S$1.01 values the company at 3% above 12x FY17F PE – our target valuation multiple for the Group since we picked up coverage in February 2016. The offer price is also equal to a trailing 12-month PE of 15.9x.


Present offer not stellar, but leaves room for competing bids to be made. 

  • While the offer could have been more attractive, we believe it has come at an opportune time, allowing investors to capitalise on the Group’s recovery from 2Q16, while paring exposure to potential industry headwinds as global economic activity remains subdued.
  • Despite the lack of a clear M&A premium, the current offer could attract higher competing bids for Innovalues. The offeror has the right to launch a voluntary conditional cash offer (conditioned upon a > 50% acceptance level), which could provide upside to the base offer of S$1.01.


Option to elect cash or combination of cash and securities. 

  • For each Innovalues share, existing shareholders will be entitled to receive either: Option 1: S$1.01 in cash, or Option 2: S$0.61 in cash and one share in the Holding Company, Precision Solutions Group at an issue price of S$0.40. 


Cash is king – go for Option 1. 

  • Of the two options made available to existing shareholders, we prefer Option 1 since it is all cash as compared to Option 2, whose upside remains unclear at this point.


Valuation

  • Accept the offer; current offer of S$1.01 at slight premium to 12x FY17 PE; or 15.9x TTM PE. 
  • In the absence of a competing, higher offer by the date of the scheme meeting, investors should accept the offer.


Key Risks to Our View

  • Non-approval of proposed scheme. Failure to secure at least 75% shareholder approval for the scheme of arrangement could result in a share price decline.




Paul Yong CFA DBS Vickers | http://www.dbsvickers.com/ 2016-10-27
DBS Vickers SGX Stock Analyst Report ACCEPT OFFER Maintain BUY 1.01 Down 1.070



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