HLIB: Opportunities for investors to lock in long-term returns in three SPACs

  • Business
  • Thursday, 11 Dec 2014

PETALING JAYA: The three listed special-purpose acquisition companies (SPACs) that have yet to make their qualifying acquisition (QA) are trading below their “intrinsic cash values” and hence offer a unique opportunity to investors, according to Hong Leong Investment Bank Research.

REACH ENERGY BHD, Sona Petroleum Bhd and Cliq Energy Bhd are currently trading at a 13% to 16% discount to their respective intrinsic cash values,” said analyst Jason Tan in a note.

He added that the current discount provides a “unique opportunity” to lock in long-term returns.

SPACs are firms that raise money from the market for the purpose of making acquisitions in specific industries. All these three SPACs aim to invest in oil and gas exploration and production assets.

The intrinsic cash values of SPACs are based on the cash kept in the trust account.

Under the Securities Commission’s (SC) guidelines, SPACs are required to place at least 90% of the initial public offering proceeds in a trust account managed by an independent custodian, where it will earn interest.

This is to prevent the mismanagement of funds.

If by the end of the three years, the company fails to make an acquisition, then investors will get back almost all of their capital plus the net interest earned.

“Theoretically, this will serve as the base value of the SPACs, as investors can choose to vote against QAs and get back the cash value from the trust account plus the net interest earned.

“Hence, buying into these three SPACs now will provide the base potential return of 15% to 19%,” he said.

In a worst-case scenario, investors holding to maturity could get an attractive return of 17% to 29%, he said. This is after accounting for interest earned at 3.2% per annum, and 10% tax on interest and other expenses.

“This translates to an 11% to 13% risk-free return per annum, which is significantly higher than the average fixed deposit rate of 3.2% per annum,” Tan noted.

Furthermore, the successful completion of a QA could provide better upside for the SPACs.

The current weakness in oil prices could provide the three SPACs with better bargaining power when negotiating for oilfield assets.

Based on the intrinsic cash value, Tan believed the market had mispriced the stocks due to a misunderstanding of the SPAC structure.

He added that the SPACs’ cash backing per share should underpin the share price.

Tan added that the gap between the share price and the intrinsic cash value of the three SPACs was widening, mainly due to the plunge in oil prices, as well as high participation from retailers while institutional shareholders were limited.

Also, he said there was a lack of instant arbitrage opportunities, as the SPAC’s value could only be realised once it had successfully acquired its QA, or it is approaching the end of its three-year time frame as guided by the SC.

Tan said HIBISCUS PETROLEUM BHD had historically traded at a discount to its intrinsic value.

However, when Hibiscus announced its QA, the discount was zerorised and thereafter the stock began trading at a premium towards the completion of the deal.

“This underpins our belief that the intrinsic cash value serves as a base return with an upside option from a value accretive QA,” Tan said.

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