When the parent company trades at a discount to its subsidiary

  • Business Premium
  • Saturday, 15 Jun 2019

On June 11, the acquisition of a 30% stake in warehousing and logistics company Tasco Bhd’s unit Tasco Yusen Gold Cold Sdn Bhd (TYGC) for RM125mil by a Japanese government fund was finally completed.

The Japanese fund is Japan Overseas Infrastructure Investment Corp for Transport and Urban Development’s (JOIN). It is 87%-owned by the Ministry of Finance, Japan.

With the completion of this deal, JOIN now becomes Tasco’s strategic partner for cold chain and convenience retail logistics businesses.

Tasco Yusen has a combined temperature-controlled storage capacity of 37,000 pallet space at the Berjaya Industrial Logistics Centre in Shah Alam and Westports Logistics Centre in Westports.

Nothing quite out of the ordinary at first glance. At the RM125mil price tag that JOIN paid, this implicitly values Tasco’s cold-chain and convenience retail logistics businesses at approximately RM416.67mil.

Here’s the catch though.

Tasco has a market capitalisation of RM260mil based on its last traded market pricec of RM1.30. Meanwhile, its subsidiary is valued at RM416mil, based on JOIN’s acquisition price. This means that Tasco, the parent company, is trading at a 60% discount to its subsidiary.

Is there an opportunity somewhere?

Could Tasco be trading at a bargain?

In theory, parent companies should have a market value that is the sum of the market caps of its subsidiary companies. This is because the parent company will generally have its own business operations in addition to the businesses of its subsidiaries.

However, there are cases when the parent trades for less.

It is odd though when the parent is significantly cheaper than its subsidiary, and in Tasco’s case, by a whopping 60%.

“This does happen. The parent can trade at some discount due to reasons such as having diversified businesses, non-synergy, low margin businesses or unprofitable operations. What is unusual is when the parent company trades at a heavy discount,” says one fund manager.

He adds that since it is the parent company which conducts the business of its subsidiaries, it is not a case of the subsdiaries being better managed. So perhaps in this case, Tasco could be at a bargain, subject to further evaluation of course, says the fund manager.

Another reason could also be that in general, Japanese investors are seen to be routinely overpaying. International sellers know that, although a Japanese bidder may take longer to bring an offer to the table, that offer is likely to be higher than those from non-Japanese interests. The higher prices by the Japanese could also be due to different valuation techniques and the use of discounted cash flow analysis to price deals. The Japanese tend to be more long term in nature. Thus, a willingness to look at return on investment over a longer time frame usually leads to higher valuations.

Furthermore, Tasco’s gearing level is reduced with JOIN coming in. This is because, out of the total proceeds from the share subscription, Tasco has earmarked RM97mil to repay bank borrowings.

This is expected to save Tasco approximately RM4.6mil in annual interest expense, and will bring its gross gearing from 1 to 0.7 times.

MIDF Investment research analyst Adam Mohamed Rahim feels that there is some value in Tasco’s cold chain business.

“Since it first ventured into this business in 2017, this division has experienced relatively faster growth compared to other core businesses. While the contribution now is still small (around 13% to 15% of revenue), but margins are better. Over the last six quarters, we have seen the cold chain business deliver margins of above 10%,” says Adam.

Tasco first penetrated the cold chain business after it acquired 100% of Gold Cold Transport Sdn Bhd’s (GCT) for RM185.62mil.

The other proposal was related to the acquisition of six parcels of leasehold land in Pulau Indah for RM113.83mil and the takeover of MILS Cold Chain Logistics for RM9.93mil from Swift Integrated Logistics Sdn Bhd.

Thus besides the cold chain business, Tasco’s core businesses are contract logistics, air freight forwarding, trucking, ocean freight forwarding, and origin cargo order & vendor management.

In fact, Adam has a ‘Trading Buy’ call on Tasco with a revised lower target price of RM1.68. He is forecasting Tasco to deliver a huge jump in its net profit to RM21mil for its financial year ending March 31, 2020. This compares to the RM13.06mil it delivered in FY19.

While some may quibble that Tasco’s price earnings ratio (PER) isn’t exactly low at approximately 19 times, this is at its lower historical PE band. Sector wise, transport and logistics companies also tend to trade alot higher, in excess of 25 times. Adam says that among the warehousing companies, Tasco stands out.

“We believe that Tasco’s growth prospect lies in its cold chain logistics assets which it has a clear competitive advantage. Most of its competitors are focusing either on express delivery, (which is currently saturated, especially with new entrants) or traditional core logistics business such as trucking and conventional warehousing,” says Adam.

Adam’s positive stance on Tasco is also predicated on Tasco’s appointment as Red Cargo Logistics’ Sdn Bhd’s first direct logistics partner. Red Cargo is AirAsia Group’s logistics arm. He foresees Tasco’s air freight division benefiting by utilising AirAsia’s network which spans over 320 routes across 25 markets in Asia.

Tasco too, continues to be on an acquisition spree. On May 10, Tasco had proposed an acquisition of 16.3 acres leasehold land in Port Klang for RM25.8mil from Hai San Holdings Sdn Bhd.

The acquisition includes a cold supply chain facility, factories and a warehouse.

The acquisition is expected to be completed in the second half of the year and will increase Tasco’s land in Port Klang from 39 acres to 55 acres. More importantly, it will be increase Tasco’s capacity for its cold supply chain business. Meanwhile for Tasco’s fourth quarter results to March 31, 2019, net profit dropped 57.51% to RM2.14mil. Revenue however increased 5.82% to RM179.37mil.

For the full year, net profit was down 55.57% to RM13.06mil while revenue increased 3.74% to RM736.8mil.

The poorer net profit was due to a significant drop in its trucking business and contract logistics business.

In a filing to Bursa, Tasco had explained that the significant drop in its contract logistics business was mainly due to lower profits from its warehouse business. “Low warehouse occupancy in the southern region, coupled with high operating expenses incurred in newly-secured convenience retail logistics business and reduced volume from the regional distribution centre in KLIA caused profit before tax of warehouse division to drop,” it says.

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