Friday, February 17, 2006

Flip-Flopping of businesses!

ACPI to buy MTD Capital's construction arm for over RM80m

What a shocker!

What we have here is MTD Capital, a construction company, selling out its construction business to ACPI, a subsidiary company of MTD Capital for 80 million. And MTD Capital will then become a holding company!

What the...!!!!!

From an investor point of view, isn't MTD Capital simply moving away the 'cheese' from its minority investors???

Isn't there a lack of respect from MTD Capital towards their minority shareholders?

Put it this way.. if one had invested in MTD Capital because one believed in the potential of its construction business, this sale of the construction business has effectively taken out the very justification why one should have invested in the stock. How on earth is this possible? How can they allow such flip-flopping of business between subsidies.

Consider this. Say one still believes in this group of company and decides to chase after its construction business and invest in ACPi. Now my very cynical question is what's there to stop MTD Capital from privatising ACPi in the future (hence, taking the cheese away again!)? Not possible?

Here is a snippet from RHB commentary on this issue. (they are ceasing coverage on MTD Capital!)

X Reverse takeover of ACP Industries (ACPI) by injecting into it its construction division. MTD Capital (MTD) has proposed to inject its 100%-owned construction division valued at RM88m into ACPI, in exchange for 88m new ACPI shares that translate into a 39.7% direct stake in ACPI based on ACPI’s post exercise enlarged share capital. MTD, via 75%-owned Metacorp, currently already indirectly owns 38.7m shares in ACPI. In other words, the exercise will increase MTD’s effective stake in ACPI to a controlling 52.8%.

X Selling the construction division to ACPI cheap. We believe the price tag of RM88m for MTD’s construction division is on the low side. We arrive at an NPV of RM129m by discounting potential profits from the division’s RM1.8bn outstanding orderbook (including RM700m worth of job from the East Coast Expressway Phase 2) by 10%, assuming an average pretax margin of 12%, effective tax rate of 28%, and that profits will be recognised equally over the next three years (see Table 2). In fact, the transaction also comes with a profit guarantee of an average net profit of RM11m per annum from MTD’s costruction division over the next three years. The saving grace may be at RM88m, MTD’s construction division is valued at 2.8x its NTA as at 31 December 2005.

X New ACPI shares issued at a steep premium to market. Ceteris paribus, MTD will also be taking an immediate hit on the market value of its new 39.7% stake in ACPI as the new shares are issued at RM1 par, at a steep 37% premium to ACPI’s last traded price of 73sen. The saving grace may come from a potential re-rating of ACPI. For 1HFY03/06, ACPI reported a net profit of RM6.3m. Assuming this performance is sustainable in FY03/07, coupled with RM15.5m net profit contribution (based on our forecast) from the newly acquired MTD’s construction division, ACPI’s FY03/07 total net profit could come up to be RM28.1m (RM6.3m x 2 + RM15.5m), translating into about 13sen/share based on an enlarged share capital of 221.5m. Applying our 1-year forward target PER of 8x for construction stocks with a small capitalisation, ACPI’s post exercise indicative fair value could work out to be RM1.04.

X MTD diminishes into a mere holding company. We believe the biggest drawback of the exercise is that it diminishes MTD into a mere holding company.

MTD no longer offered direct exposure to its highly profitable KL-Karak Expressway when the toll road was spinned off to a listed vehicle, namely, MTD Infra Perdana, a few years back. With now its only bread and butter, the construction division, being injected into another public listed company, i.e. ACPI, MTD will no longer be a direct construction play. We believe the exercise will severely erode MTD’s appeal as a "must-have" construction company in investors’ portfolios. Investors who like MTD’s construction projects could always invest direct in ACPI.

X Downgrade to Underperform from Market Perform, cease coverage. All in, we are negative on the latest corporate move by MTD. Indicative fair value is. reduced by 20% to RM1.52 (based on 8x FY03/07 EPS) from RM1.90 (based on 10x FY03/07 EPS) previously. The de-rating in PE multiple is to reflect MTD’s diminution into a mere "holding company of a public listed construction company", from a public listed construction company previously following the proposed corporate exercise.


Incredible, isn't it?