QL Resources Bhd
(Dec 12, RM3.27)
Maintain “hold” with a target price (TP) of RM3.20: As at the close of the general offer (GO), QL had not received valid acceptance (more than 50% of voting shares or voting rights) in respect of Lay Hong Bhd shares.

QL launched a conditional GO for Lay Hong on Sept 25 at RM3.50 per share. Prior to the GO, QL held an initial 26.8% stake in Lay Hong and subsequently raised it by 11.5% to 38.3% via direct purchases. The GO acceptances amounted to just about 1.6%, taking QL’s total holding in Lay Hong to 39.9% at closing on Dec 10.

As it is a conditional GO, QL will have to return the 1.6% stake, leaving it with a 38.3% shareholding in Lay Hong.

QL acquired the additional 11.5% stake via direct market purchases at an estimated cost of about RM20.1 million. This takes QL’s net gearing (as at end-September) up marginally to 0.46 times from 0.44 times.

We think the additional contributions from QL’s enhanced stake will be offset by interest expense, thus the impact is overall neutral on the group’s earnings. We are neutral on the GO falling through.

A risk, however, is that QL now has no seats on Lay Hong’s board (from one previously out of nine). Valuations-wise, we think QL is fairly valued now, at 21.6 times financial year 2015 price-earnings ratio.

We maintain our “hold” recommendations, forecasts and our discounted cash flow-derived TP of RM3.20. — Maybank IB Research, Dec 11

This article first appeared in The Edge Financial Daily, on December 15, 2014.