Small Mid Cap Monthly - DBS Research 2017-02-21: Revisting potential privatisation plays


Small Mid Cap Monthly - Revisting potential privatisation plays

  • Three privatisation offers have been made in 2017, putting the privatisation theme back under the spotlight; We highlight 5 potential candidates: Courts Asia, PACC Offshore, Mermaid Maritime, CSE Global and Sinostar PEC.

Revisting potential privatisation plays 

  • Recent buyout offers put privatisation theme back under the spotlight. Barely two months into the new year, we have already seen buyout offers for three companies, including Healthway Medical and Auric Pacific, offering premiums between 5% to 21% over their last transaction price and 14% to 21% over one-month VWAP.

Privatisation premium offered. 

  • We estimate that the 20 small-mid companies (of which 14 have been delisted and privatised) that have announced potential privatisations over the last 12 months offered average premiums of 24% and 31% over their last transaction price and one-month VWAP, respectively.
  • At least two-thirds of privatisation candidates were trading below book, while a further two companies were trading at low P/BV of under 1.1x just before their respective offer announcements. A quarter of the privatisation candidates were S-Chips.
  • Of the 20 offers, 75% were made by majority shareholders (nearly half of which were by founding families). At least 15% were led by management or the executive team, while third-party offers only represented 10%.

Privatisations help unlock value and offer exit for shareholders. 

  • For majority-owned companies trading at persistently low valuations and with less incentive to maintain their listing - especially cash-rich companies with low capex needs, privatisations can often serve as a means of unlocking value for shareholders, while freeing up company resources towards longer-term objectives and growth.

What have been the premiums offered? 

  • Premiums can vary pretty widely across deals, looking at small mid-cap privatisations (deal size under S$2 bn and excludes third-party offers) that have gone through successfully over the last 12 months, we found that:- 
    1. Low P/BV companies were more likely to receive privatisation offers (70% were trading below book value) and saw higher premiums on average, 
    2. Higher premiums (>38% over 1mth VWAP) were often required to entice shareholders of companies trading at prices that were much lower compared to their historical peak, 
    3. Conversely, premiums for companies trading close to the upper end of their historical range (i.e. Sim Lian) were more modest, at about 15-20%.
  • Unsurprisingly, prior to the offer, these companies were at least 50% majority owned. While offerors in our sample year did not appear to show bias for net cash companies, we opine that in a rising rate environment, companies with net cash could potentially be more attractive targets, particularly for third-party buyers.

These companies could be next. 

  • Staying on this theme, we screen for small-mid cap (market cap between S$50m to S$2 bn) companies outside our coverage that fit the following critera: 
    1. Low P/BV (Under 1.1x P/BV), 
    2. Profitable over the last 12 months, 
    3. Majority shareholders with > 50% stake in the company, 
    4. More than 40% of current share price backed by net cash.

Trading below net cash per share. 

  • Of the 19 names that showed up on our screen, two were trading below their net cash per share levels, namely CDW Holding and Nobel Design. Their net cash per share represented 113% and 107% of their share prices respectively. 
  • Other names trading very close to their net cash per share include Sinostar PEC, Asia Enterprises, PEC Ltd and Hanwell Holdings – all of which are trading above 90% of their net cash per share levels.

Deep discounts to book value. 

Undemanding PE valuations. 

Majority shareholders have stakes of over 80%. 

Interestingly, some companies require less cash than on their balance sheet to privatise. 

  • With the founding Cheng family and related parties collectively owning about 83.4% of outstanding shares, we believe that Hai Leck Holdings will be a counter to watch as the estimated cash outlay required to acquire remaining shares of under S$25.8m (assuming a 40% offer premium), represents just 1.8x of TTM earnings.
  • This is also less than the current cash (of S$69.9m as at end- 4Q16) that the company has on its balance sheet.
  • Assuming a 40% privatisation premium, OKP Holdings, among others, could also require less cash than available on their balance sheet to successfully privatise.

Our Top 5 Privatisation Candidates

  • With our stock screen in mind, we highlight 5 companies that could potentially see privatisation or take-over offers:

1 - Courts Asia (BUY, TP S$0.51) 

  1. Compelling valuations of 8x FY18F PE and 0.8x P/BV.
  2. 74.3% owned by Singapore Retail Group, the outlay required to acquire remaining shares does not seem excessive in our view (c.S$58m, and approximately 2.3x FY18F net profit level based on current share price).

2 - PACC Offshore (BUY, TP S$0.41) 

  1. Share price has recovered off 2016 lows but at current prices, trades at >50% discount to book value 
  2. Approximately 81.9% owned by Kuok group 
  3. POSH is a more stable long-term bet versus peers with no immediate debt concerns, and has also demonstrated ability to secure work for its vessels amid an anaemic market 

3  - Mermaid Maritime (BUY, TP S$0.24) 

  1. Mermaid is c.87.3% held by the Thoresen group and its related management. With c. S$270m in cash on hand, the Thoresen group has the necessary ammunition to take Mermaid private.
  2. Very low debt levels versus peers, and net gearing of only 0.11x as of 3Q16, which adds to Mermaid’s attractiveness as a privatisation candidate.

4 - CSE Global (HOLD, TP S$0.41) 

  1. Net cash 20% of market cap, 0.9x P/B and 6.5% dividend yield. Reasonable PE of 11x.
  2. Free float of over 50% and with no single shareholder holding more than 15%, CSE is a potential take-over target.

5 - Sinostar PEC (NON-RATED) 

  1. Based in Shandong, China, Sinostar produces petrochemical products in two locations.
  2. Company is trading below book at 0.8x, and under 7x PE, while trading nearly at net cash per share.
  3. Single largest shareholder, the chairmain, owns over 50% of the company.

Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-02-21
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.510 Same 0.510
BUY Maintain BUY 0.410 Same 0.410
BUY Maintain BUY 0.240 Same 0.240
HOLD Maintain HOLD 0.410 Same 0.410
NOT RATED Maintain NOT RATED 99998 Same 99998