WITH the market going into a corrective mode following rising uncertainties due to the US-China trade war, flight to safety has indeed been the theme since the beginning of the month as we saw global bond yields falling to levels depicting crisis like environment as central banks race to the bottom in cutting rates.
Yield inversion is becoming a common occurrence as negative yielding papers breached the US$15 trillion mark globally. What do investors do in an environment of uncertainties other than rushing to zero yielding assets like gold or raising their cash positions? One of the ideas is of course positioning in cash rich companies or even in companies where there could be potential privatisation or a merger and acquisition activity as surely the offer price would be attractive enough for investors to profit from a calculated position of entry.
Year to date, we have seen many cases of companies being taken private, mostly by their current major shareholders via selective capital repayment (SCR) exercises, mandatory or voluntary takeover offers and in one case a share-exchange scheme. Typically, what attracts buyers is mostly depressed market values whereby some of these companies are trading way below their respective net asset values (NAV).
Of course, in any takeover or privatisation exercise the merit for the offerer not only looks at the market price of the companies listed but also the cost and benefit analysis as to what it could bring to the shareholders by taking the company either private or via acquisition, which typically results in a larger entity, which gives the offerer the benefit of economics of scale.
This can be seen in the case of YTL Cement acquiring Lafarge Malaysia, Scientex acquiring Daibochi, CAN-ONE taking over Kian Joo Can Factory. In certain cases, we see the majority shareholders consolidating their interest in the listed entity and most of these were family-owned companies and this include Hong Leong Asia’s move to take Tasek Cement private and YTL Corp’s proposed privatisation of YTL Land.
To make sure that a takeover or a privatisation exercise is successful for an offerer, the most important element is the price. In a perfect world, all shareholders would want an offer price for a takeover to be reasonable and fair. To be reasonable, some of the considerations that are used to judge if the offer price is acceptable include liquidity factors, whether the offerer intends to keep the listing status or otherwise, and if there are competing offers on the table for shareholders to consider or not. If most cases, a takeover is mostly viewed to be reasonable if the offer is to take the company private. If the offer is deemed to be not reasonable, it is likely due the fair value of the company being much higher than the offer price.
Fair value means it has to be reflective of the true value of the company, which many perceived it to be at least at the market price of the company’s shares, which is a given assumption. What is fair and how is measured is not only reflective of the market price, which is the minimum expectations anyway, but also conventions deployed in valuations yardsticks such as sector price-to-earnings (PER) or earnings before interest, depreciation and amortisation (EBITDA) or a price-to-book multiples or even historical price performance, especially over the past 12 months.
Typically, a shareholder would definitely reject an offer that is not reasonable and not fair. If the offer is reasonable but not fair, likelihood of acceptance is also high as investors would than feel they are still getting a good deal as the price offered is still good enough although it may not be fair. In cases when it is deemed not fair, chances are the offer price is below the NAV of the company or based on other valuation benchmarks.
Plenty of Bursa-listed companies at below NAV
With the FBM KLCI trading at some 280 points lower than its all-time high level of 1, 895 and some second and third liners having fallen even much more than the overall market, it is of no surprise that we see today some 550-odd companies listed on Bursa Malaysia or 60% of the total 925 listed companies trading below their respective NAV and hence any company is an easy target for privatisation or for a merger and acquisition strategy.
In fact, some of the privatisation or takeover deals this year too were done below NAV levels which include Leweko, Suiwah, YTL Land, Yee Lee and the failed privatisation of MAA.
Other than NAVs, there are even potential candidates for privatisation where the companies’ share prices are not only trading way below their respective NAVs but even lower than the amount of cash these companies have. Indeed this is rare in the market as surely a company’s asset is more than just cash, unless the company itself is nothing but a shell company, having sold its core business. The table below summarizes 14 companies whereby their respective cash and cash equivalents on a per share basis to their respective share prices is less than one time and range between as low as 0.33x (for Kluang Rubber) and to as high as 0.99x for CN Asia.
All the 14 companies trade at price to book multiples of between 0.21x to as high as 0.79x while cash and cash equivalents as a percentage of NAV ranged between 30% to near 100%. The reason for the 100% net cash for Pimpinan Ehsan is due to the sale of its principal subsidiary, TRIPLC BHD to Puncak Niaga and it is now a PN16 company.
Few companies stand out from the above table and they include the three inter-related companies of Kluang Rubber, Kuchai and Sunga Bagan; Dutaland; FACB Industries; and Eksons, as they have huge cash or cash equivalents and all in excess of RM100mil each.
In Kluang Rubber’s case, the company’s cash pile is almost 1.18x its market capitalisation, excluding RM411.2mil held by the company in investment securities. The value of these investment alone is another 1.88x its current market capitalisation. No wonder the company’s NAV is more than RM10 per share while its share price is only at RM3.47. Its inter-related companies, Kuchai and Sg Bagan too have similar characteristics with both having almost 2x and 1.6x value of cash and cash equivalents against their respective market capitalisation, although in both of the companies the actual cash per share is lower than their respective market prices.
In DutaLand’s case, the company’s net cash pile is 1.74x its market capitalisation and clearly a strong target to be privatised by its owners or for some other investors to make an offer for the company’s shares at a good premium to its market price. After all, even if one were to make an offer at 1.5x its current market value, the cash inside the company more than enough to take the company private. DutaLand emerged with its strong cash pile after it sold 11, 579 hectares plantation land located in Sandakan, Sabah to Boustead Plantation for RM750mil in May last year.
In FACB Industries and Eksons case, the market is only pricing their net cash and equivalent holdings at just 0.55x and 0.58x respectively while on a price to book basis, Eksons is trading at just 0.3x book value. FACB Industries is only marginally more expensive on a price to book at 0.47x. The company is mainly involved in the manufacturing of bedding products while Eksons is involved in the business of producing plywoods as well as property development in Selangor.
Notable mention in the list above is Sapura Resources as the company is trading at just 0.21x book value and has net cash pile of more than RM100mil. With a price to cash ratio of 0.9x, any takeover exercise on this property based company is possible as well.
Indeed, with so many listed companies as potential takeover or privatisation targets on a price to book basis, the list of these 14 companies fit the bill more than others as their war chest in the form of cash and cash equivalents are worth more than their respective market capitalization and for these companies, cash is indeed king!
The views expressed here are solely that of the writer.