Wednesday, May 30, 2012

Should Eng Teknologi Revise Back Its Privatisation Offer Back To $2.50?

One of the stocks currently enduring a privatisation saga is Eng Teknologi Holdings.

It was just in July 2011, when Eng Teknologi announced its privatisation offer.

  • TYK makes privatisation offer for Eng Teknologi at RM2.50 Written by Financial Daily
    Tuesday, 26 July 2011 11:17

    Eng Teknologi Holdings Bhd
    (July 25, RM2.28)
    Upgrade to add at RM2.28 with revised target price of RM2.50: In a Bursa announcement last Friday, TYK Capital proposed to acquire all the assets and liabilities of EngTek at an offer price of RM2.50 per share. TYK Capital is controlled by major shareholder Datuk Teh Yong Khoon and Datin Low Yeow Siang (combined 95% interest) and the remainder is held by Advance Capital. Teh and Low collectively own 23.2% equity interest in EngTek. Should the proposed takeover offer be accepted, EngTek would become a cash-rich company with about RM307.2 million cash based on its current outstanding shares of 122.8 million. It is then proposed that EngTek undertake a capital reduction exercise to return the cash to shareholders.

    The privatisation offer price is about 9.6% above Friday’s closing price, and also above its 10-year average share price of RM1.47 but short of its recent high of RM2.75 in March 2010. Based on the offer price of RM2.50, EngTek is valued at 7.6 times FY12 earnings per share (EPS), which is at a premium to its three-year mean price-earnings ratio (PER) of 4.3 times and also above its net tangible assets per share of RM2.20 as at end-1Q11.

    Even after stripping off cash of RM89.8 million or cash per share of 73 sen, the privatisation offer still prices EngTek at 5.4 times FY12 EPS. This is still at a premium to its three-year historical mean PER of 4.3 times.

    We therefore think that the privatisation offer is fair and doubt that prevailing fundamentals alone (in the absence of the privatisation offer) would have been able to re-rate the share price to RM2.50 at least over the near term.

    We believe that investors would be better off accepting the offer especially given the volatility in the global equity markets and the weak fundamentals in the sector.

    We revise upwards our target price for EngTek from RM1.69 based on 5 times FY12 EPS to its privatisation offer price of RM2.50 and upgrade our rating from a Reduce to an “add” (underpinned by the offer).

    Separately, we think that the EngTek privatisation offer could spark off interest in the remaining two larger listed hard disk drive component manufacturers — JCY International Bhd (not rated) and Notion VTec Bhd (not rated), particularly for the latter. Notion’s relatively attractive PER valuation of 6.7 times (compared with 11.3 times for JCY) and smallish market capitalisation of RM317 million could also make it a compelling target. — Affin IB Research

    This article appeared in The Edge Financial Daily, July 26, 2011.
Of course I do not agree with what was written at all. It's simple. Stock prices does not necessary reflect a company's true value. That's common sense. What a stock is trading bears no indication to a company's true worth and value. There will be times when the market over prices the stock and there will be many times the market under price the stock. Using a 10 year average stock price does no justice. An offer price should not be deemed fair just because the offer price is above the 10 year average stock price. That cannot be the basis to judge the offer. But hey, what do I know? This is just my flawed thinking. For me, to privatise at a PE multiple of 7.6 times FY 12 earnings is absurd. And more since the company is cash rich, with some 89.8 million in its piggy bank.

Then in Oct, the Thai floods happened and floods were used as a reason to delay the privatisation.
  • “The company and TYK Capital are working together to assess the flood situation, the impact on the financial position and prospects of the Eng Tek group (once there is clarity on the flood situation) and how this may affect the terms and conditions and/or the viability of the proposals,” it said. The Thai operations contribute about 40% to group revenue for FY10 ended Dec 31.
  • While the damage and losses could not be ascertained yet, Eng Tek said the floods would have a negative impact on its FY11 ending Dec 31 results.
  • Eng Tek increased six sen to close at RM2.00 yesterday with 441,500 shares done.
Eng's share traded at rm 2.00, well below the offer price of 2.50.

In another article:
  • Another question raised was why had Eng Tek’s shares trading at such a large discount to the privatisation offer price of RM2.50. The analyst said the concern was the market’s concern whether the privatisation could go through.
( Ah..  this Eng's case should be the perfect example on why betting on a stock with a large discount to its offer price is not a 100% sure win strategy!)

Few days later, Eng Tek issues warning of significant losses from these floods:

By late afternoon that day, Eng Tek shares fell to 1.50++.

Then on 22 Feb 2012:
  • The hard disk drive (HDD) parts manufacturer posted a net loss of RM53 million for 4QFY11 compared to a net profit of RM9.3 million a year earlier as its operations in Thailand were affected by floods during the quarter. The loss was also due to impairment and write-off of property, plant and equipment and writedown of inventories of RM45.8 million as a result of the floods.
Huge losses were recorded, much due to impairment and writedown of inventories.

But the amazing thing, as stated in the article.
  • Engtek said the insurance claims are expected to be paid in the second half of 2012. “Insurance claims have been submitted and loss adjusters surveys are expected to complete by end-February 2012,” it said.
The insurance claims that they were making, they did not disclose how much they were claiming for.

And with these huge losses ( losses should be much less, once the insurance claims were adjusted back into the books), the market sensed that perhaps a lower offer price might happen.

True enough, on March 2012, Eng made the long waited announcement: Eng Tek's takeover price revised to RM2
  • PETALING JAYA: Eng Teknologi Holdings Bhd has had its takeover price revised to RM2 per share from RM2.50 earlier.

    In a filing with Bursa Malaysia, the company said the price was lowered as the financiers were unable to justify the funding at RM2.50 after taking into account the firm's financials considering that Eng Tek's business was affected by the floods in Ayutthaya, Thailand.
Wasn't it incredible? The Thai operation only contributes about 40% of Eng's revenue. Yes, the flood caused damage but was it a justified excuse to delay the privatisation offer and then lower the offer price???

It was absurd. Totally sickening. How could corporate Malaysia behave like this? This is an outrage!

Eng made a public offer to the market and to its shareholders. It made an offer. A promise. How could it be allowed to rescind and lower its offer price?

This other article was even more ludicrous.
  • Founders of Eng Teknologi Datuk Teh Yong Khoon, and Low Yeow Siang via private vehicle TYK Capital Sdn Bhd, have proposed to lower the offer price to RM2 from RM2.50 as their financiers were unable to justify the funding of the takeover at RM2.50, according to Eng Teknologi.
OMG! What a pathetic excuse! Unable to justify the funding of the takeover at 2.50??? What a load ...

Now I wonder. Yesterday Eng announced its earnings. On Star Biz: Eng Tek Q1 earnings surge 250% to RM16.82m

Now that Eng's earnings is on the recovery, shouldn't Eng be the gentleman and do the right thing by revising the offer price back to rm2.50?