(04-11-2012, 12:47 PM)pianist Wrote: just read the circular to shareholders concerning the conditional offer to acquire Neptune's shares and have these thoughts:
1) will neptune shareholders accept the offer which is pricedat 32.9% discount to its nav?
2) mtq gearly ratio will be up 60++% for a full privatisation
3) amazed at seeing mtq ascending price in face of embracing a 'heavy' ...shoud i say stone/gem?
1) The offer is actually at a 6.4% premium to Neptune's NTA, which I feel is a more accurate reflection of Neptune's asset value as many unrelated acquisitions in the past had saddled its Balance Sheet with a lot of goodwill and intangibles. If viewed from this perspective, it seems MTQ are almost paying 1x book value for this Company, which means the offer probably does not price in future potential growth prospects, Neptune's branding (with NEPSYS) and prospects within its niche industry.
2) The gearing is a major concern for me as a shareholder, seeing how it would rise to >60% assuming 100% control over Neptune. This will be the key question I would raise at the upcoming EGM - how will they manage the debt repayment, how much the financing would cost and what is the borrowing cost. Page 23 of the circular mentions financing costs of S$1.283 million for full privatization.
3) The price rise may be due to the declaration of the 2c/share interim dividend, rather than a direct result of the Neptune deal. Note that MTQ also has PSL under its belt and is looking to turn Bahrain profitable within the next few years, so these are also catalysts for the share price to re-rate. That said, Engine Systems would likely drag the Group down if it continues to earn a return below its cost of capital.
My thoughts:-
A) With MTQ digging deep into the Oilfield Engineering and O&G side with recent acquisitions, it seems more likely now that they may slowly let go of Engine Systems, or at least devote less resources there. This is a good thing since the margins are super thin, competition is intense and lots of working capital (and inventory) are required.
B) Page 18 of the Circular details MTQ's plans for Neptune assuming 100% privatization. I suspect MTQ may be impatient or dissatisfied with Neptune's progress and wants to conduct its own strategic and operational review, and also to replace the BOD at the same time. KBW and KKK combined do have the expertise to evaluate deals and to do top down reviews of companies, especially from an operational standpoint. KKK also has experience from his RCR Tomlinson deal back in 2005. This is another point to raise at EGM - their plans for Neptune and how do they see synergies in revamping systems and ops, and in streamlining processes?
C) Neptune is actually profitable if the goodwill impairment is removed as well as losses from discontinued operations (Page 17 of the Circular). Considering revenues have remained the same year on year even after the restructuring shows some level of business resilience and branding even as unprofitable divisions are being shed. After the streamlining and major cost-cutting exercise (and the recapitalization of the Balance Sheet), Neptune is quite a lean machine now. A glance at their Balance Sheet on Page 16 shows loans of just A$1.6 million and cash of A$7.7 million. If MTQ is able to add more value to the operations, do more staff cuts by consolidation operations and making the Company more lean, and assuming Neptune continues to leverage on its core competencies to generate sustainable revenue, it is foreseeable that it would be profitable within 2 years.
D) What was NOT included was a cash flow statement for Neptune, to see if it was generating FCF. Accumulated losses are still severe and will drag down the Balance Sheet for a while, but if the business is cash-flow positive hereon, the Balance Sheet should start to improve.
E) It remains to be seen how much FCF the MTQ Group can generate (ex-Neptune) once PSL is fully integrated and Bahrain is 100% up and running. This is another issue to bring up, as I suspect Management is aware that FCF would improve strongly which is why they are willing to take up such leverage. The wild cards would be Engine Systems division and Neptune and whether it would be a drag on earnings and cash flows.
Will post more thoughts as I look through the 2Q financials and the circular once more.
(Vested)
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