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07-05-2019, 10:15 PM
Business Times has written a good article on the offer to privatise 800 Super. But is the offer fair, especially for the long term opmi?
1) What were their projections?
Privatisation will cost the Lee family about $36m, based on free float of about 23% of the $160m market cap of the company, valued at 90 cents per share. For the Lee family to take on a loan of this amount -- which is what they intend to do with the assistance of KKR, must be substantial to their net worth-- it must mean that they are confident of being able to extract this much worth of dividends to be able to repay in 4 years time.
For KKR to be willing to loan the sum, it must mean that they are confident of 800's projected profits and dividends. Assuming that dividend payout ratio is about a third -- their creditors are unlikely to be comfortable with a high payout ratio, and should be expecting them to deleverage -- this must mean that they are projecting profits to return to about $24m a year. Incidentally, this figure is also close to what you will get if you apply 800 Super's average ROA over the past 9 years (11%) against its latest total assets ($240m). Is this expectation a realistic assumption?
2) What makes the Lee family and KKR sufficiently confident to take the company private?
The reduction in profitability since fy17 is largely due to the operations of the new Tuas plant. As with most greenfield projects, but particularly for 800 Super due to its inexperience in this business, it has taken a long time to bring up its plant production to a profitable level. As of now, it is still unknown whether the plant is close to achieving full utilisation, though the next quarterly results may provide some clues. Nevertheless, it is reasonable to assume that the plant's utilisation, and hence its profitability, will continue to increase.
The Tuas plant's profitability is key as it will allow the company to bid for public waste management and cleaning contracts at lower than industry average margins; which means greater potential market share for 800 Super. The lease of the land where the Tuas plant sits on expires in 2035.
3) Is the offer compelling, or even fair?
For shareholders who bought the shares with the expectation that the Tuas plant will yield an increase in company profitability, they must be disappointed to see that management is now taking advantage of the low profitability and share price, amidst the plant's imminent improvement in profitability, to attempt a privatisation with such an underwhelming offer.
If it can be assumed that profits will be about $24m from FY20 then the present offer of $160m values it at a multiple of a mere 6.6x earnings.
If these assumptions are fair, it hence seems likely that the Lee family is hoping that opmi remains ignorant of the future prospects of the company. After all, it's reasons for delisting are hardly satisfactory; there are so many more listed companies with lower profitability still paying listing expenses, and there are also so many more listed company shares trading at lower liquidity.
Furthermore, KKR's involvement is not just a strong hint on the high probability of 800 Super's improved profitability. As KKR is also offered 22m convertible preference shares -- the percentage of shares if converted against total shares is not revealed -- this means that there is a high likelihood that we may see 800 Super relisted after 2023, and no doubt at a higher valuation.
4) What should an opmi with a longer term view do?
In any case, given the likelihood of the company's increased future profitability, the market value of the company's shareholders -- if it remains listed -- is certain to be higher. If the Lee family wishes to take the company private, they should have made a more compelling offer; one which reflects the future potential. Shareholders who believe that they deserve a fair offer should consider not accepting the offer.
I suspect that the latest results, which shall soon be released, may yet again show a poor bottom line to motivate opmi to accept the offer.
1) What were their projections?
Privatisation will cost the Lee family about $36m, based on free float of about 23% of the $160m market cap of the company, valued at 90 cents per share. For the Lee family to take on a loan of this amount -- which is what they intend to do with the assistance of KKR, must be substantial to their net worth-- it must mean that they are confident of being able to extract this much worth of dividends to be able to repay in 4 years time.
For KKR to be willing to loan the sum, it must mean that they are confident of 800's projected profits and dividends. Assuming that dividend payout ratio is about a third -- their creditors are unlikely to be comfortable with a high payout ratio, and should be expecting them to deleverage -- this must mean that they are projecting profits to return to about $24m a year. Incidentally, this figure is also close to what you will get if you apply 800 Super's average ROA over the past 9 years (11%) against its latest total assets ($240m). Is this expectation a realistic assumption?
2) What makes the Lee family and KKR sufficiently confident to take the company private?
The reduction in profitability since fy17 is largely due to the operations of the new Tuas plant. As with most greenfield projects, but particularly for 800 Super due to its inexperience in this business, it has taken a long time to bring up its plant production to a profitable level. As of now, it is still unknown whether the plant is close to achieving full utilisation, though the next quarterly results may provide some clues. Nevertheless, it is reasonable to assume that the plant's utilisation, and hence its profitability, will continue to increase.
The Tuas plant's profitability is key as it will allow the company to bid for public waste management and cleaning contracts at lower than industry average margins; which means greater potential market share for 800 Super. The lease of the land where the Tuas plant sits on expires in 2035.
3) Is the offer compelling, or even fair?
For shareholders who bought the shares with the expectation that the Tuas plant will yield an increase in company profitability, they must be disappointed to see that management is now taking advantage of the low profitability and share price, amidst the plant's imminent improvement in profitability, to attempt a privatisation with such an underwhelming offer.
If it can be assumed that profits will be about $24m from FY20 then the present offer of $160m values it at a multiple of a mere 6.6x earnings.
If these assumptions are fair, it hence seems likely that the Lee family is hoping that opmi remains ignorant of the future prospects of the company. After all, it's reasons for delisting are hardly satisfactory; there are so many more listed companies with lower profitability still paying listing expenses, and there are also so many more listed company shares trading at lower liquidity.
Furthermore, KKR's involvement is not just a strong hint on the high probability of 800 Super's improved profitability. As KKR is also offered 22m convertible preference shares -- the percentage of shares if converted against total shares is not revealed -- this means that there is a high likelihood that we may see 800 Super relisted after 2023, and no doubt at a higher valuation.
4) What should an opmi with a longer term view do?
In any case, given the likelihood of the company's increased future profitability, the market value of the company's shareholders -- if it remains listed -- is certain to be higher. If the Lee family wishes to take the company private, they should have made a more compelling offer; one which reflects the future potential. Shareholders who believe that they deserve a fair offer should consider not accepting the offer.
I suspect that the latest results, which shall soon be released, may yet again show a poor bottom line to motivate opmi to accept the offer.