Tuesday 13 March 2012

ENG (FV RM1.52 - SELL) Corporate News Flash: Revises Offer Price


THE BUZZ
An announcement was made on Bursa yesterday,  stating that TYK Capital is still negotiating with its financiers to fund the privatization of Engtek. We understand that the offer price will likely be adjusted to a value not exceeding RM2.00/share, instead of the earlier proposed RM2.50/share made prior to the Thai floods, depending on the outcome of the due diligence exercise scheduled to be completed by 19 March.

OUR TAKE
Definitely below RM2.00/share or no go. In our 4QFY11 results review note, we noted that Engtek posted a net loss of RM42.9m,  arising from the recognition of asset impairments and write-offs amounting to RM45.6m. We also highlighted that the company is looking to replace 400 damaged computer numerical control (CNC) machines with 300 new generation CNCs costing approximately RM90m, in order to restore its production capacity back to pre-Thai  flood  levels (with  half of the  new machines already delivered). Thus, we believe that the revision of  the  offer price to RM2.00/share  or below  is  highly likely but the final price will be determined by TYK Capital along with its financiers.

Nod from major shareholders? As PNB and LTH have a combined 23% equity interest in Engtek (held since early 2000), their decision on whether to accept the revised offer price may prove crucial in sealing the  privatization deal. Based on our estimates, PNB and LTH’s average cost per share amounts to between RM1.40 and RM1.80. Assuming that the offer price is now RM2.00/share, there is an upside of 10%-45% compared to 35%-75% based on the previous offer of RM2.50/share. Given the scenario is as such, we  think  that there is  still a  high chance that both entities will give their consent, especially with the HDD  segment now facing long-term headwinds  arising from: (i) the proliferation of smartphones and tablets which has sapped the demand for PCs, and (ii) the  slow but  steady transition to  solid state drives (SSD) as the primary medium of storage. However, any offer price below RM2.00/share could discourage PNB and LTHfrom participating in the proposed privatization.

Downgrade to SELL. We are not making any changes to our fair value of RM1.52 on Engtek, premised on 0.9x FY12 P/NTA, but we are downgrading our recommendation from NEUTRAL to SELL due to the fluidity of the situation. We advise investors to cash out from Engtek as we see better trading opportunities for both Notion (TRADING BUY,FV: RM2.43) and JCY (TRADING BUY, FV: RM1.80) which have a better product mix and economies of scale respectively. Moreover, the potential new offer price of RM2.00 for Engtek would only provide a  rather limited upside potential of 12% from the current market price. Being a HDD component  maker that is severely affected  by the Thai floods, Engtek’s short- to long-term outlook is undoubtedly murky.

Source: OSK188

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