IT is interesting to observe the outcomes when a listed company embarks on a spin-off and list its subsidiary. Typically, a subsidiary is listed to unlock greater value.
In the case of Foundpac Group Bhd, the precision engineering services provider and laser stencil manufacturer is mulling the listing of its 75%-owned subsidiary Dynamic Stencil Sdn Bhd (DSSB).
DSSB’s primary business activity is the manufacture and sales of laser stencils.
Plans to list DSSB are still preliminary, as FoundPac clarified on Monday in a Bursa Malaysia filing.
It said it is “still exploring on the options available and has not set a specific time frame for the initial public offering (IPO) plan”.
“Although the IPO plan is likely to be on Ace Market if it is to be listed in Malaysia, FoundPac is still exploring other available options including listing on other stock exchanges which can offer DSSB a better valuation, ” it said. It is interesting to note that FoundPac recorded a net profit margin of 33.43% and a pre-tax profit margin of 41.7% for the financial year ended June 30,2020 (FY20).
Given FoundPac’s impressive profit margins – it had a low turnover of RM51.05mil and a net profit of RM17.07mil – the plans to list DSSB may be viewed as a move that will dilute the group’s earnings.
Noting that possible outcome, an industry observer explains that the benefits of listing a subsidiary outweighs the drawbacks.
“The listing of the subsidiary will give the company a better profile, making it easier for fundraising, if needed.
“It will also enable the subsidiary to embark on merger and acquisition activities for expansion and growth.
“Additionally, there will be a more accurate valuation ascribed to the company, particularly if the holding company has a greatly diversified portfolio of subsidiaries, ” he says.
While FoundPac may lose out in terms of earnings contribution from DSSB after the listing, it remains to be seen how the shareholding will be like when the potential IPO is structured.
Should FoundPac retain a significant equity in DSSB after the IPO, part of DSSB’s earnings will be reflected in FoundPac’s books.
Since its acquisition in November 2017, DSSB has reported a net profit of RM1.78mil in FY18, RM3.43mil in FY19 and RM4mil in FY20. DSSB’s business was affected by a supply chain disruption and movement control order (MCO) caught for about four months this year.
The prospects for FoundPac are riddled with many uncertainties from the impact of Covid-19 and its compounding effects on global and national rates of economic growth.
Despite the more challenging market outlook, the board of FoundPac remains cautiously optimistic about its prospect in the coming year.
“Our group will continue to uphold our core and long-term strategy to focus on business expansion and diversification, product development, as well as business process optimisation through lean implementation across all operations in the organisation, ” says FoundPac in its 2020 annual report.
As of Friday, FoundPac traded at a historical price-earnings multiple of 34.56 times.
Since hitting a low of 41 sen in March this year, FoundPac’s share price has surged 151% to RM1.03 at Friday’s close.
Another company that is considering to list its subsidiary is property developer Mah Sing Group Bhd, which recently announced that it was exploring the possibility of listing its manufacturing division separately from the group to further unlock its value, although the group did not divulge further information.
Mah Sing manufactures plastic products via its wholly-owned subsidiaries Mah Sing Plastics Industries Sdn Bhd and Vital Routes Sdn Bhd. Apart from that, Bloomberg reported just this week that Sime Darby Bhd is weighing a separate listing for its health care unit.
Citing sources, Bloomberg said Sime Darby has held discussions with potential advisers for an IPO of Ramsay Sime Darby Health Care Sdn Bhd, with a listing on Bursa Malaysia to potentially happen as early as 2021.
To name a few, other notable listed entities that have successfully listed their subsidiaries include Sime Darby and Sime Darby Property Bhd, Telekom Malaysia Bhd and Telekom Malaysia International (known as Axiata Group Bhd today) as well as UMW Holdings Bhd and UMW Oil & Gas Corp Bhd (known as Velesto Energy Bhd today).
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