Bursa an attractive hunting ground for privatisation

TheEdge Mon, Nov 26, 2018 08:50am - 5 years View Original


KUALA LUMPUR: With the current fall in share prices, tens of billions of ringgit in market capitalisation have evaporated; Bursa Malaysia is getting more attractive as a hunting ground for privatisation or takeover targets.

Based on an analysis of listed companies, several can be considered as potential privatisation targets based on relatively low price-earnings ratios (PERs) and price-to-book ratios (P/B ratios).

Stocks in the banking and property sectors stand out based on data collected by The Edge Financial Daily (see tables). Banks are among the largest companies listed on the local stock exchange with the lowest valuations due to either declines in their share prices year to date (YTD) or healthy earnings growth.

For instance, CIMB Group Holdings Bhd and AMMB Holdings Bhd (AmBank Group) have seen their share prices decline by 10.75% and 2.6% respectively YTD. Meanwhile, Public Bank and Hong Leong Bank shares have appreciated over 20% since the start of the year but have met expectations of earnings growth.

Affin Bank Bhd, a smaller publicly listed bank, also appears to be attractive with a P/B ratio of 0.54 times and a PER of 9.59 times.

However, it is worth noting that several of Malaysia’s largest banks are controlled by government-linked investment companies, such as the Employees Provident Fund (EPF), Khazanah Nasional Bhd and Permodalan Nasional Bhd. They are unlikely to be in acquisition mode as the government is keen on hiving off assets to pare down its debts.

For those that are not — namely AmBank Group, Public Bank and Hong Leong Bank — their largest shareholders may still face challenges in finding willing buyers. A proposed merger between Ambank Group and RHB in 2017 fell fallen through, with Ambank Group’s largest shareholder Australia and New Zealand Banking Group Ltd left unable to divest its 23.78% stake as planned.

On the other hand, property stocks are not burdened with the same issues. Seeing as how the market has been relatively soft for the last few years, it is unsurprising that property stocks are trading at lower valuations than those in other sectors.

Of the top 31 unique stocks with market values of between RM1 billion and RM10 billion as well as low PERs and P/B ratios, 12 are heavily involved in the property sector (see tables).

Several property players have already been targets of privatisation offers. They include Selangor Properties Bhd and Daiman Development Bhd whose major shareholders have yet to secure shareholder approval for their proposed selective capital repayments (SCRs).

Other takeovers, such as Petaling Tin Bhd and IGB Corp Bhd, have been successfully completed.

 

On and off again?

Another top potential privatisation target is Lotte Chemical Titan Holding Bhd (LCTH), which was relisted on the Main Market of Bursa just 15 months ago. The group has been plagued by poor investor sentiment since its listing and was last trading with the lowest PER among Bursa’s top companies by market capitalisation.

Its South Korean parent Lotte Chemical Corp previously took Titan Chemicals Corp private in 2011 after acquiring the group a year earlier.

Lotte Chemical Corp now controls 76.01% of LCTH, while the EPF is the group’s second largest shareholder at with 3.93%. It is also worth noting that LCTH is one among the few large-cap companies with a positive net cash balance, which will come in handy if a privatisation bid is to be made.

It is not unusual for shareholders to take a company private when share prices are low and relist it at a later date for higher valuations. One such company is QSR Brands, which was delisted in 2013 but released its draft prospectus last month.

Another company that recently sparked rumours of privatisation is Astro Malaysia Holdings Bhd, whose shares hit a fresh all-time low of RM1.13 on Nov 14. Its largest shareholder T Ananda Krishnan had previously taken the group private and relisted it in 2012.

However, QSR’s relisting has been said to be on the table since 2017, signalling that poor investor sentiment concerning the stock market may have stalled its comeback.

A total of 18 companies have been listed on Bursa so far this year, compared with 14 last year, but the bulk of these have been on the LEAP market. The ACE market has seen nine listings this year and the Main Market only one, compared with six initial public offerings each for both markets last year.

Meanwhile, privatisation offers have been flat compared with last year, with eight bids made so far via SCRs and voluntary takeover offers. This does not include mandatory general offers and offers which intend to maintain the listing status of the company as in the case of Unisem (M) Bhd. The group’s controlling shareholder John Chia joined forces with Chinese firm Tianshui Huatian Technology Co Ltd for the RM1.82 billion offer.

“It is a good time [to privatise], technically speaking, but owners are still cautious [and] worried that earnings will no longer be as strong based on economic growth conditions,” said Michael Ho, corporate finance director of KAF Investment Bank Bhd.

According to Ho, financial institutions are also treading carefully when it comes to funding privatisation offers.

“A lot of companies may be undervalued but there are not many buyers. Owners themselves are not confident about earnings going forward,” he said.

Affin Hwang Capital managing director Datuk Maimoonah Hussain said the sentiment after Malaysia’s 14th general election had been subdued, citing how investors took a wait-and-see approach.

However, she noted that this also meant share prices had come off their highs and were now offering investors more value for money.

“We see a lot more opportunities for mergers and acquisitions. Going forward, we see, potentially, players will be sniffing around for either privatisation or divestment,” she said.

“Because of the lower level of valuation, people are sometimes more willing to talk [and] to consider [such corporate exercises],” Maimoonah added.

But whether or not these talks bear fruit is another question. Several deals have already fallen through this year after shareholders rejected the offers made by either controlling parties or outsiders and offerors decided not to pursue the deal.

For example, UMW ceased its pursuit for control of MBM Resources Bhd after MBM’s largest shareholder Med-Bumikar Mara Sdn Bhd failed to approve the bid. This was after UMW twice extended the validity of its takeover offer, which was at a 13.3% premium to MBM’s five-day volume weighted average market price.

Meanwhile, Scomi Group Bhd’s shareholders approved only one out of two proposed mergers, resulting in the delisting of Scomi Engineering Bhd, while Scomi Energy Services Bhd continued to operate as a separately listed entity.

According to Vincent Khoo, head of research of UOB Kay Hian Malaysia, privatisation bids could boil down to two key factors. The first is whether or not a company has enough cash to buy out minority shareholders and the second is whether or not the bidding party has the commitment to see the bid through.

Having a strong cash balance would certainly be an advantage to controlling shareholders looking to make an offer for the remaining shares in a company, as it could be used to fund SCRs.

That being said, low cash reserves have not deterred some determined shareholders. For example, Hovid Bhd founder and largest shareholder David Ho partnered with private equity firm TAEL Partners Ltd to make a voluntary offer for the firm, which had a negative net cash balance in October 2017.

Although the offer of 38 sen per share was deemed fair and reasonable, the offerors had to extend the acceptance period thrice and twice lowered the acceptance threshold.

Their persistence appears to have paid off as Ho and TAEL had managed to accumulate a 78.61% stake in January this year, allowing them to seek the pharmaceutical firm’s delisting in August.

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