This article first appeared in The Edge Malaysia Weekly on January 22, 2018 - January 28, 2018
Kluang Rubber Co (M)
Price to book: 39.1%
Net cash to share price: 102.4%
Price to earnings: 62.7 times
Opportunity: The the bulk of the group’s cash (RM271.64 million) is consolidated from its subsidiaries — Kuchai Development Bhd (RM66.6 million net cash) and Sungei Bagan Rubber Co (Malaya) Bhd (RM150.92 million net cash).
The Lee family (led by Lee Thor Seng) controls and manages all three companies and controls 49.85% of Kluang Rubber.
Flattening the group’s structure by privatising the subsidiaries could unlock value. That being said, the biggest discount to net asset value lies at the top, in Kluang Rubber.
Challenges: Kluang Rubber’s share price has attracted lots of speculative trading in the past week, rising almost 30% to a record high of RM4.60 before easing off; this has created a window for long-time minorities to exit. It may be challenging to price the offer attractively.
Parkson Holdings
Price to book: 23.9%
Net cash to share price: 96.38%
Price to earnings: Loss-making
Opportunity: Parkson has lots of cash on its books — RM3.197 billion — the result of the disposal of Beijing Huadesheng Property Management Co Ltd. On a net basis, Parkson has RM555.4 million cash or almost 96% of the group’s market capitalisation. The group is 32.6%-controlled by Tan Sri William Cheng.
Challenges: To take the company private, Cheng would need to muster about RM430 million (assuming a 10% premium). Funding may be challenging as Parkson is loss-making.
It also has RM2.077 billion worth of HK dollar-denominated bonds that are maturing in May this year. Refinancing the bonds may be easier with a listed entity that can tap the capital markets for funding.
Most of the group’s cash (about RM2.9 billion) is deposited in China and is subject to foreign exchange controls. Only RM110 million is estimated to be held in Malaysia.
Oriental Holdings
Price to book: 66.3%
Net cash to share price: 56.71%
Price to earnings: 9.19 times
Opportunity: With over RM2.29 billion in net cash on its books, speculation about a privatisation has dogged Oriental Holdings for years. Debt aside, the company has a whopping RM3.09 billion cash and RM841.7 million in short-term investments.
The company is 57.5% controlled by executive chairman Datuk Loh Kian Chong. For a company worth RM4 billion, Oriental Holdings has been less than proactive in engaging shareholders. Media engagement is minimal and the stock is not covered by any analyst.
On paper, it would only cost RM2 billion to take the company private at a 20% premium to its current market cap.
Challenges: Oriental Holdings is relatively well institutionalised, most notably with the Employees Provident Fund holding more than 9% of the company. The offer has to convince EPF to sell.
Malaysia Marine and Heavy Engineering
Price to book: 50.9%
Net cash to share price: 47.15%
Price to earnings: Loss-making
Opportunity: MMHE is currently valued at a mere 51.3% of its book value and has a net cash position of RM614.9 million.
It is 66.5%-controlled by MISC Bhd. In other words, MISC could take MMHE private with the latter’s own cash reserves. Note that MMHE has virtually no borrowings.
It has been a tough year for MMHE but it looks to be turning the corner with a net profit for the quarter ended Sept 30, 2017.
Challenges: MMHE is a well-institutionalised stock and its share price has been recovering, albeit in a volatile manner. MISC may have to put a modest premium on the table to convince funds to sell.
‘Unfair’ but minorities should accept the deal
2017 saw a number of privatisations with a clear intention to delist the companies. Most of the privatisations were internal — undertaken by or in concert with the management and/or controlling shareholders. These deals were almost all assessed as unfair for minorities. Yet, the independent advisers would advise minorities to accept the deals as there were virutally no other options on the table for them to exit the stocks.
The privatisations of OldTown Bhd and Century Bond Bhd (and to some extent IGB Corp), were the exception rather than the norm.
Even in the case where the premium to 1-month volume-weighted average price was high, the offer was susbtantially lower than the company’s intrinsic value as determined by independent advisers.
‘Maintain’ listing status
Mandatory general offers are a key mechanism that allow minority shareholders to exit a company when there is a substantial change in the shareholding and the management of the company.
In practice, however, some of the pricing of some MGOs have been so low that it would be irrational for minorities to accept the offer. In some cases, the offer price was similar or well below the open-market price of the shares.
At the same time, it allowed for new shareholders to take control of the company, or for existing ones to tighten their grip.
Since these are willing buyer-willing seller transactions, there is little that regulators can do, unless it can be proven that there was additional consideration changing hands.
The bottomline is that minorities only have one real option — sell in the open market and hope there is sufficient liquidity to exit.
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.