Thursday 28 Mar 2024
By
main news image

This article first appeared in The Edge Financial Daily on August 3, 2018

KUALA LUMPUR: DRB-Hicom Bhd’s proposal to dispose of its entire 97.37% stake in Alam Flora Sdn Bhd to related company Malakoff Corp Bhd for RM944.6 million cash spooked the market, leading to a decline in Malakoff’s share price, wiping off RM418 million of its market capitalisation yesterday.

The counter fell by 8.17% to 95.5 sen — its worst drop since early this year, when it fell by more than 9%.

On the contrary, the market cheered the disposal by DRB-Hicom as its share price jumped eight sen or 3.57% to RM2.32, giving it a market capitalisation of RM4.49 billion.

According to Areca Capital Sdn Bhd chief executive officer Danny Wong, the market generally dislikes related party transactions (RPTs) as they are difficult to justify.

“If it is so earnings-accretive, why would a company sell it? The market normally views RPTs as a right-hand-to-left-hand pocket kind of situation, so the companies will need to communicate the decisions to sell and buy clearly to the market,” Wong told The Edge Financial Daily via a telephone exchange.

Another fund manager with a local asset management firm, who spoke on the condition of anonymity, said he believes the deal is fair, although it would be more favourable to DRB-Hicom on the surface. He agreed with Wong that the RPT situation had led to an overselling of Malakoff shares despite the deal being earnings-accretive.

He noted that Malakoff’s net profit had been on a decline since 2015, falling by 68.5% to RM310 million in financial year 2017 (FY17), compared with RM452.4 million recorded in FY15.

“If you say the valuation is too expensive, at least it is earnings-accretive. Because if you are buying too cheaply, people will also accuse DRB-Hicom of selling cheaply and being too favourable to Malakoff. The situation right now appears to be more favourable to DRB-Hicom, but I think what is important is that it will also help to grow Malakoff’s earnings.

“Let us not forget [that Malakoff’s] earnings have been on a decline in the last few years. They need to look for alternative avenues to drive earnings. I think if they were buying from another unrelated company at a similar valuation, such scepticism will not be seen,” he said, adding that the main reason for such a view could be due to both companies having a common major shareholder — Tan Sri Syed Mokhtar Al-Bukhary.

Syed Mokhtar, who is an indirect major shareholder of DRB-Hicom via his 90% shareholding in Etika Strategi Sdn Bhd, which in turns holds a 55.92% stake in the conglomerate. He is also an indirect major shareholder of MMC Corp Bhd, which is the largest shareholder of Malakoff.

 

A win-win deal for both?

Nonetheless, while the market has judged the deal to be beneficial to DRB-Hicom and detrimental to Malakoff based on the share price movements, it could lead to a win-win situation for both.

According to Bursa Malaysia filings, a fair value ranging from RM875 million to RM1.05 billion was arrived at by independent valuer Deloitte Corporate Advisory Services Sdn Bhd, which implies a price-earnings ratio (PER) of nine to 11 times. This was based on a net profit of RM99.45 million recorded by Alam Flora in the financial year ended March 31, 2018 (FY18).

At RM944.6 million for the 97.37% stake in Alam Flora, Malakoff would be buying the company at a PER of 9.8 times.

Steven Chan, an analyst at Kenanga Research, said the proposed acquisition is valued at 10 times PER and 3.3 times price-to-book value based on Alam Flora’s FY18 numbers.

“Despite some initial scepticism given that it is a related party transaction, after further study, we ultimately think the acquisition’s valuation is reasonably fair,” Chan said, pointing to some of the listed waste management companies, such as AWC Bhd’s valuation of forward PER of 8.8 times, UEM Edgenta Bhd at 14.1 times PER and Taliworks Corp Bhd at 23.3 times PER.

Chan added that Alam Flora is currently sitting on approximately RM400 million in cash, and has RM80 million in borrowings, thus rendering Malakoff’s net cash outlay for the acquisition at only roughly RM545 million.

Most analysts, however, noted that Alam Flora will not be able to receive the tax incentive upon the acquisition by Malakoff and thus, the acquisition would be valued at a PER of 12.8 times (excluding the tax incentive) its FY18 earnings instead.

Nur Farah Syifaa’ Mohamad Fu’ad, an analyst at Public Investment Bank’s research division, said that while the deal is earnings-accretive to Malakoff, the acquisition price is expensive as it is 60% above its valuation for Alam Flora.

“Although the acquisition is earnings-accretive, we feel it is expensive and Malakoff could still embark on its renewable energy initiatives without having to own the entire waste assets of Alam Flora,” she said in her note, adding that Malakoff is better off buying waste from Alam Flora without having to own the entire assets.

However, she added that upon completion of the acquisition, it would add about RM28 million per year to Malakoff’s bottom line, which is about 9% of its FY19 expected earnings, based on Alam Flora’s FY18’s earnings after deducting tax and amortisation cost.

Chan, who is positive on the acquisition, estimated it to add RM30 million per year to Malakoff’s bottom line.

Alam Flora is involved in integrated solid waste collection and management as well as public cleansing management services in Kuala Lumpur, Putrajaya and Pahang. It has a concession period of 22 years until 2033, and has opportunities to expand its services to the East Coast states of Kelantan and Terengganu.

DRB-Hicom, which is viewed to be the beneficiary of the deal, said the proposed disposal allows the group to unlock the value and monetise its investment in Alam Flora, which is expected to result in an estimated net gain on disposal of RM735.4 million.

      Print
      Text Size
      Share