Spotlight on M&A - DBS Research 2019-07-02: Spider Web Listing On SGX

Singapore Market Strategy - DBS Group Research | SGinvestors.io UNITED ENGINEERS LTD ORD (SGX:U04) VICOM LTD (SGX:V01) SBS TRANSIT LTD (SGX:S61) UNUSUAL LIMITED (SGX:1D1) VIVIDTHREE HOLDINGS LTD. (SGX:OMK) MM2 ASIA LTD. (SGX:1B0)

Spotlight on M&A - Spider Web Listing On SGX




Spider web listing – Optimising structure to maximise returns

  • Cross holdings among listed companies is common and offers benefits such as retaining greater control of the group. However, this leads to a smaller free float which could hinder these entities from reaching a wider audience especially when fund raising. As a result, the individual listed entities are not deriving the full benefits of a listed status.
  • Stocks that fall into this category include mm2 Asia / UnUsUaL / Vividthree, and ComfortDelGro / Vicom / SBS Transit.

MM2 ASIA (SGX:1B0) / UnUsUaL Limited (SGX:1D1) / Vividthree (SGX:OMK)

  • mm2 Asia (SGX:1B0) owns 39% stake in listed entity UnUsUaL LIMITED (SGX:1D1) and 42% stake in another recently listed entity Vividthree (SGX:OMK). With the acquisition of the Cathay cinema business in Singapore in 2017, the group has taken on debt to fund the acquisition. As a result, it has transposed from an asset-light group to own cinemas in both Singapore and Malaysia. It also reversed from a net cash position to net debt of 0.8x as at Mar-19, with interest coverage of about 4x.
  • Going forward, though net debt position is expected to improve to 0.4x in FY Mar 20F, the hefty interest expense is still a drag on the group’s bottomline. To alleviate the debt burden, mm2 Asia could explore various options:-
    1. A spinoff / dilute its stake in the cinema business
    2. Divest its stakes in UnUsUaL and Vividthree
    3. Bring in strategic investors
  • The cinema business helps the group to derive synergistic effect from having a full value chain. The complete integration of the content business (production of movies, Vividthree) and platform business (Cinema, UnUsUaL) would lead to better efficiency and cost savings for the group. For example, ownership of cinemas not only provides a source of recurring income but also cost savings as mm2 Asia usually has to pay about 50% of its gross box office proceeds for rental of cinemas. mm2 Asia’s multiple platform capabilities would place the group in a position to better distribute and exhibit content to reach a wider audience.
  • That said, mm2 Asia can still derive the synergistic effect even with a smaller stake in the cinema business. Thus, the group is exploring various options to improve the financial matrix, especially with its current depressed share price. mm2’s share price has fallen by more than half from a high of S$0.645 before it acquired the Cathay cinema business. Coupled with the current cautious mood, especially for small-mid caps, current valuation is at an attractive level.
  • Based on sum-of-the-parts valuation, and stripping out its stakes in UnUsUaL and Vividthree, the market is valuing the core production and cinema segment at only S$144m, which works out to P/EBITDA of slightly over 2x, which is too low in our view. mm2 Asia paid 13.8x for the Cathay cinema chain in Singapore and about 8-9x for the Malaysia cinemas while peers are trading at about 5.5x P/EBITDA.
  • Divesting its stakes in UnUsUaL and Vividthree to pare down its debt level is another option to improve its financial matrix.
  • Both UnUsUaL and Vividthree have a healthy project pipeline. UnUsUaL has lined up its artistes in various locations including Singapore, China, Hong Kong, Malaysia, Bangkok, and Jakarta while its family entertainment shows, which have a wider target audience reach, provide even greater visibility. Vividthree, on the other hand, is riding on the momentum of the Train to Busan tour set.

ComfortDelGro (SGX:C52) / Vicom (SGX:V01) / SBS Transit (SGX:S61)

  • Vicom (SGX:V01)’s principal activities include the provision of motor vehicle evaluation and other related services. The group is engaged in the business of testing services, which include the provision of motor vehicle inspection services and provision of non-vehicle testing, inspection and consultancy services. It also provides various related services, such as vehicle assessment, emission test laboratory, motor insurance and road tax renewal. Major shareholder, ComfortDelGro (SGX:C52) owns c.67% stake.
  • Vicom has reported consistent revenue of around S$100m in the last five years while net profit is in the range of S$26m – S$35m. Share price has generally been on an uptrend since listing in 1995 and given its net cash position, the group has not embarked on any major fund raising exercise to tap the equity market.
  • ComfortDelGro also owns a majority stake of 74.5% in SBS Transit (SGX:S61), which is engaged in the provision of public transport services, such as bus and rail services. Revenue, net profit and also share price are in an uptrend in the last five years. Similar to Vicom, there was also no major equity fund raising exercise in the last few years for SBS Transit.

United Engineers (SGX:U04)

  • A consortium led by Yanlord Land Group (SGX:Z25) and Perennial Real Estate Holdings (SGX:40S) (both listed on SGX) made a mandatory takeover offer for United Engineers (SGX:U04) after acquiring a 33.5% stake in United Engineers at S$2.60 per share in July 2017. The offer lapsed due to insufficient takers as the offer price was 4% below the last close before the offer was announced. Other than major shareholder Yanlord Perennial which owns 35.3% stake in United Engineers currently, other shareholders include Oxley Holdings (SGX:5UX), which is also a listed entity.
  • Trading at below book value of 0.8x, we believe the offer for United Engineers could re-surface again. Alternatively, the Group could streamline its operation, as it is currently in three key business segments – Property, Engineering & Distribution and Manufacturing.


See also






Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2019-07-02
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