Spotlight on M&A - DBS Research 2017-03-08: Stars align to strike

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Singapore Stocks Merger & Acquisition Singapore Stocks Privatisation

Spotlight on M&A - Stars align to strike

• Riding on wave of privatisation and takeovers.
• Cash rich, undervalued and illiquid stocks – Sunningdale Tech, Fu Yu Corp, UMS, Venture Corp, SIA Engineering, PEC.
• Asset plays – Bukit Sembawang, Global Logistic Properties, United Engineers, PACC Offshore, Mermaid Maritime.
• Premium in brand equity – Delfi, Courts Asia.

Takeover and privatisation deals on the rise 

Sniffing out good deals.

• M&A / privatisation activities have gained momentum since last year, with more than 20 companies taken private or bought out since 2013. We expect this trend to continue in 2017. 
• Cheap valuations, low liquidity, dominant shareholder control, strong asset backing and strong brand names are some of the factors propelling this trend, as private equity funds scout for undervalued gems while rich shareholders and owners put up offers to privatise companies to extract value.

Counter takeover off for Spindex spices up the M&A playground.

• Just two months into 2017, we have already seen buyout offers for five companies, offering premiums of between 2% to 21% over their last transaction price. 
• Kingboard Chemical group has also announced a voluntary privatisation offer for Kingboard Copper Foil at S$0.40 cash per share, representing a 18% premium to the last closing price prior to the offer.

Who’s next? 

• Singapore equities have been de-rated over the past ten years, as both GDP and corporate earnings growth slowed in an economy facing both structural and cyclical challenges.
• Despite STI’s recent outperformance, valuation remains inexpensive vs regional peers. This, coupled with green shoots of recovery, have revived interests in Singapore equities, adding further fuel to the M&A momentum.
• We attempt to sift potential candidates by sector, as each sector offers different criteria and value that vulture funds or PE funds are seeking in order to unlock value in these companies. Based on our screen, our M&A picks are: 
  • Technology – Venture Corp, UMS Holdings, Fu Yu Corp, Sunningdale Tech 
  • F&B, consumer – Delfi, Courts Asia 
  • Property – Bukit Sembawang, Global Logistics Properties, United Engineers 
  • Oil and Gas – POSH, Mermaid, PEC 
  • Industrial – SIA Engineering 

Gems in technology sector– Flushed with cash 

• The Technology sector has seen numerous M&A / privatisation activities, especially post dot.com fever.
• In the last six months, at least two SGX-listed technology stocks, Aztech and Spindex, were privatised or announced privatization plan by their founders at a premium to the last stocks was also low. Other potential M&A / privatisation targets in this segment that we cover include UMS Holdings, Fu Yu Corp, Venture Corp and Sunningdale Tech.
• UMS Holdings has only one large shareholder with a 20% stake. With the renewal of the key Endura contract providing good earnings visibility, strong cash flow and net cash of S$42.4m (c.15% of market cap), UMS is an attractive takeover target.
• For Fu Yu Corp, while current valuations of 0.9x P/BV and 10.3x PE seem fair, the stock looks attractive for its 7.2% yield and ex-cash PE of only 3.3x for FY17F (which is the lowest among its peer group), leading to potential for a privatisation or takeover offer. With net cash accounting for 65% of its market cap, a privatisation offer representing 20% premium would require only 82% of its net cash, while a takeover offer at premium of 20% would present an excash acquisition PE of just 5.8x.
• Venture Corp is a global provider of technology products and solutions. It is best known for its superior capabilities in Original Design Manufacturing (ODM) and in providing high mix, high-value and complex manufacturing. It is in net cash position and has fragmented shareholding structure. Founder Mr Wong has a stake of about 7% in Venture.
• Sunningdale Tech has gone through several rounds of M&A in the past to become one of the biggest one-stop turnkey plastic solutions provider. Sunningdale‘s competitive advantages lie in its tooling capabilities, expertise in high cosmetic parts, credibility in the healthcare and automotive business and the scalable robust system and processes that have been built over the years. At 0.7x P/BV and 9x FY17F PE, attractive valuations could lead to takeover potential – especially from PE funds or larger top-tier players in the precision plastic field seeking Asian exposure.
• Sunright is flushed with cash, with net cash of about S$51.5m as at 31 July 2016, which is more than its market cap of S$38.1m! Others like Cheung Woh Tech, Ellipsiz, PCI and Sinostar are in net cash position, trading at below book value and their major shareholders own >50% stake in the company.

Seeking brand value in the F&B sector 

• In the Food & Beverage space, companies that were acquired/privatised in 2016 included OSIM, Select Group, Eu Yan Sang and Super Group (general offer in process). Just last month, Auric Pacific (Auric) announced the privatisation offer by controlling shareholder, the Riady family via Silver Creek Capital, at S$1.65 cash per share. The controlling shareholder and concerted parties own about 80% in Auric Pacific. Trading volume for Auric’s share had also been low prior to the privatisation offer, with average daily volume of < 100,000 shares in the past one year. More deals could be expected from this segment. One of the key factors for the F&B sector is strong brand names, rather than cheap valuations. For e.g., Super Group was privatised at 30x FY17F PE while the offer price of S$1.65 values Auric at about 28x FY16 PE (consensus). 
• Delfi could be an attractive takeover target. The owner had previously spun off its upstream cocoa processing business. 
• In 2013, Delfi sold the division to Barry Callebaut AG for US$950m. Delfi is now left with a strong branded consumer business in Indonesia. It is a market leader with share of c.50% in branded chocolates market in Indonesia. Its competitive advantage lies in its extensive network across Indonesia. It has a first-mover advantage and considerable reach in the country. Global players have already been competing in the market but market share remains relatively low. We believe Delfi’s strong brand and network will be attractive to investors who are keen to dominate the chocolate space in Indonesia. However, Delfi’s valuation is pricey which can be a stumbling block for any deal to be done. The main shareholder owns 50.5% of Delfi. Market capitalisation of the stock is approximately US$1bn currently. 
• Based on our analysis of successful takeovers on the SGX, it normally takes a 30% premium to succeed in buyouts. The cost would potentially be at least US$1.3bn from the current market cap, which also implies a valuation that is a whopping 31x FY17F PE or more. 
• Other potential targets with strong brand names include QAF, which owns the Gardenia brand bread. The owner of Auric Pacific, which owns the Sunshine brand bread, announced a privatisation offer recently. 
• Both Metro and Isetan are well-known in the retail market. Khong Guan is also another widely known brand. Its peer, Prima Group, was delisted few years ago. 
• There were a few watch retailers that had been privatised / taken over in recent years, including Sincere Watch and Cortina. We would not rule out the possibility of The Hour Glass as the next target. The major shareholder owns about a 64% stake. 
• The market cap for companies like Nobel Design, Nippecraft and Informatics are below their net cash position. Genting Hong Kong is also flushed with cash and 69% of the shares, are tightly held by major shareholder. Shares of Courts Asia, on the other hand, are mainly held by PE funds. 

Property stocks – undervalued, under owned and strong asset backing 

• Bukit Sembawang is one of the few developers in Singapore that still have substantial undeveloped landbank in Singapore and could be an interesting target for investors looking to landbank. Its major shareholder, Lee family of Lee Rubber / OCBC, owns a 44% stake which could be for sale given the family has been in a ‘divestment’ mode in the past few years (OCBC’s non-core assets such as F&N & potentially United Engineers and Outram Rd shop houses). 
• Given ample liquidity and recent M&A deals in Singapore, we believe that Bukit Sembawang is an attractive prospect for any investor/developer who wants access to landbank in Singapore. The stock is trading at ~1x P/NAV but is at a substantial discount to its market value as a majority of its assets are marked to historical cost. 
• The share price of Global Logistics Properties has gone up about 50% in the last four months due to ongoing rumours of a possible offer for the company. So far, at least three bidders have been shortlisted for due diligence. According to Bloomberg, the three bidders are i) Chinese parties comprising management-backed Hillhouse and Hopu, ii) Blackstone, and iii) Warburg Pincus consortium (teaming up with its related company e-Shang Redwood, said to be the second largest logistics developer after GLP). 
• The attractiveness in GLP is its leading position in the warehouse logistics space in key markets of China, USA, Japan. In China, through its joint venture companies and key shareholders, the group has access to valuable land resources to grow its operational footprint. Through its various development and income funds, the group’s fund management business has also been a regular source of income and has also built up substantial amount of accrued interest upon exit of the funds in the medium term. Plans to also realise value from its China warehouses through an income fund/REIT will enable the group to close the NAV/RNAV gap. 
• Major shareholders, OCBC, Great Eastern and affiliates, have announced a potential sale of their combined stake of c.32% of United Engineers (UE), which will trigger a general offer, based on SGX listing rules. We believe UE will be of interest to prospective acquirers given the group’s strong recurring income base and well-positioned assets – UE Bizhub City (UE Square), One North mixed development, as well as UE Bizhub West which are strategically located at the fringe of the Central Business District (CBD) or in key suburban commercial districts. 

Oil & Gas – bottoming out on bombed out valuations 

• In the Oil & Gas (O&G) space, depressed oil prices have led to rising impairment charges and loan defaults. The sector’s depressed valuations and moderate recovery in oil prices could catalyse more M&A activity. This presents opportunities for cash-rich upstream players to acquire resource-rich but financially distressed E&P assets / companies. We also expect to see a wider consolidation scale in the O&G industry as players face further financial pain. 
• Vard has recently announced a privatisation offer by majority shareholder Fincantieri.  Other possible privatisation candidates are Mermaid Maritime, Pacc Offshore (POSH) and PEC Ltd. 
• Mermaid is c.87.3% held by the Thoresen group and its related management, leaving only S$36.6m in free-float market capitalisation on the table. With c.S$250m in cash on hand, the Thoresen group has the necessary ammunition to take Mermaid private. Additionally, Mermaid is net cash as of end December 2016, and this adds to its attractiveness as a privatisation candidate. 
• POSH is 81.89%-owned by the Kuok group, and is a more stable long-term bet versus peers with no immediate debt concerns (as committed undrawn bank lines cover capex requirements) and positive operating cash flows as at end December 2016. The company has also demonstrated an ability to secure work for its vessels amid an anaemic market (e.g. long term contracts recently inked for work in the Middle-East for 13 vessels). 
• PEC is deemed an appealing privatisation candidate, sitting on a cash hoard of S$148m with minimal debt of S$13m as of end-December 2016, close to its current market cap. In addition, it is tightly held by the founder – Ko family - which collectively owns c.65% of PEC, based on our estimate. 
• CSE Global has a net cash position of S$54m (20% of market cap) which is used to support its ongoing projects. 
• This would support the company's plans to maintain its dividend at 2.75 Scts as well as for potential M&A activities during this period. Ownership is fragmented with founder and CEO holding only a 12% stake. 
• Baker Tech has net cash amounting to its current market cap, while the major shareholder of both Hai Leck and CH Offshore own close to 90%. 

SIA Engineering – potential dividend upside while awaiting corporate action 

• Other potential candidates that could unlock value include SIA Engineering (SIE). In our view, SIE is a potential privatization by parent SIA, who has a cash balance of about S$3bn as of end-December 2016, and would effectively have to fork out only c.S$390m cash to take SIE private. 
• We think the possibility of a special dividend at financial year-end (due to the current large cash balance of c.S$560m, boosted by the receipts from disposal of the HAESL stake in 1Q-FY17) as well as prospects of privatisation by parent SIA should continue to provide a sentiment boost to SIE’s share price.

Janice CHUA DBS Vickers | Ling Lee Keng DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-03-08

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