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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