Small Mid Cap Monthly - DBS Research 2017-03-15: Episode Two ~ More Takeover Plays

Small Mid Cap Monthly - DBS Vickers 2017-03-15: Episode Two: More Takeover Plays Singapore Small Mid Caps Stocks Takeover Plays SUNNINGDALE TECH LTD BHQ.SI BUKIT SEMBAWANG ESTATES LTD B61.SI OKP HOLDINGS LIMITED 5CF.SI PEC LTD. IX2.SI FU YU CORPORATION LTD F13.SI

Small Mid Cap Monthly - Episode Two: More Takeover Plays

  • Sticking with our privatisation and/or takeover theme; We highlight five new candidates with potential upside: Sunningdale Tech, Bukit Sembawang, OKP Holdings, PEC and Fu Yu.

More M&A plays

  • Continuing with last month’s theme of potential M&A plays, we believe investors continue to keenly look at potential privatisation or takeover plays. This can be evidenced by the fact that some of the names we highlighted in the last month have posted double-digit gains in recent weeks: 

Privatisation premiums offered have been attractive. 

  • 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.
  • Utilising the same metrics before, we highlight another five names that could benefit as part of this theme.

Metrics used. 

  • Staying on this theme, we screen for small-mid cap (market cap between S$50m and S$2bn) companies outside our coverage that fit the following criteria: 
    1. Current net cash position, 
    2. Profitable over the last 12 months, 
    3. Majority shareholders with > 30% stake in the company.

Bukit Sembawang, the landlord king of Singapore. 

  • The property developer owns more than 2.8m sqft of substantially freehold/999-year leasehold land in Singapore and has close to a quarter of its market cap backed by net cash (S$1.48/share).
  • Its major shareholder, Lee family of Lee Rubber/OCBC, owns a 44% stake which could be for sale as the family has been in a ‘divestment’ mode in the past few years. Given ample liquidity and recent M&A activity, we believe that Bukit Sembawang is an attractive prospect for any investor/developer who wants access to land bank in Singapore.

Stable road ahead for OKP Holdings. 

  • OKP specialises in the construction of roads, bridges and other infrastructure, mainly from the public sector, with current order book of about S$330m and project pipeline extending till 2019.
  • Mr Or Kim Peow and family own about 60% stake in OKP.
  • Given 60% of its current market capitalisation is backed by net cash, which works out to be 23 Scts per share, there is no necessity to tap the equity market to raise funds. We would not rule out the possibility of the founding family privatising the group.

PEC Ltd sitting on cash hoard. 

  • PEC, a specialist engineering group mainly servicing oil and gas-related industries, is deemed an appealing privatisation candidate, sitting on a net cash hoard of S$148m, close to its current market cap.
  • It is tightly held by the founding Ko family, which collectively owns c.65% of PEC, based on our estimate. Though, we understand that the listing status is beneficial in corporate profiling when tendering for jobs in the global marketplace.

Fu Yu trades at just 4.5x ex-cash PE. 

  • While current valuations of 0.9x P/BV and 13x PE seem fair, Fu Yu looks attractive for its 7% yield and ex-cash PE of only 4.5x for FY17F (which is the lowest among its peer group), leading to potential for a privatisation/takeover offer. 
  • At current prices, a privatisation offer at a 20% premium would require only c.85% of its net cash, while a takeout offer at premium of 20% would present an excash acquisition PE of just 7.1x.

Sunningdale ripe for harvest. 

  • Backed by strong cash flow generation, healthy balance sheet and attractive valuations of 0.8x P/BV and 9x FY17F PE (vs peers’ average of 1.1x and 10x respectively), Sunningdale – a leading manufacturer of precision plastic components, could be an attractive takeover target for PE funds or larger players seeking to acquire advanced manufacturing capabilities and global manufacturing facilities, or to gain immediate access to a diversified MNC customer base.

Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-03-15
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