ENG (FV RM2.00 - BUY) Company Update: Revised Offer Price Still Appealing

Engtek’s  board announced on Bursa that the financiers of TYK Capital SB have completed due diligence on the company and deemed the initial offer price of RM2.50/share unjustifiable given the impact of last year’s Thai floods on Engtek’s operations and financial position. Nonetheless, the financiers  have  agreed to back  the privatization at a revised RM2.00/share. We are now aligning our fair value to RM2.00, premised on 1.2x FY12 P/NTA, and think that  this new privatization initiative may just materialize. Hence we upgrade our recommendation from SELL to BUY.

Still attractive at RM2.00/share. We find  the newly tabled  offer  attractive  since Engtek’s operations were severely scarred  by  the Thai floods. Compared  to its peers under our coverage, the privatization offer price at 1.2x FY12 P/NTA represents a 37% discount to JCY’s 1.9x FY12 P/NTA given Engtek’s relatively smaller scale of operations, but is at 9% premium to Notion’s 1.1x FY12 P/NTA, based on yesterday’s closing prices respectively. On a standalone basis, the company historically traded at a 5-year average of 0.9x P/NTA, representing a 25% discount on the offer price.

Deal may just squeeze through. We  are of the view that  the only  hurdle that may scuttle the deal may be the new condition requiring Engtek to have a net cash balance of not less than RM20m as at 31 March 2012. Note that the cost of  replacing the 400 damaged computer numerical control (CNC) machineries amounted to RM90m and as at 31 Dec 2011, Engtek was sitting on net cash of RM42.1m. Assuming a conservative 50% insurance coverage, the company is looking to recover some RM45m from the loss of assets. Thus, this should bolster the company’s net cash to RM87.1m, which would cover the asset replacement cost of RM90m. As for the RM23m shortfall in meeting the deal’s new requirement, we think that Engtek may be able to cough out this amount by executing more cash transactions and shortening its sales outstanding collection period. As at 31 Dec 2011, Engtek had inventory and receivables totaling RM131m.

Upgrade to BUY. We see Engtek’s share price  tracking  closer to the offer price of RM2.00/share. We advise  those who own  shares  in the company to accept the  new offer price as its valuation is still attractive, or dispose of the shares should the market price  get close to  RM2.00/share. Hence, we are pegging  our fair value  at RM2.00, premised on 1.2x FY12 P/NTA. Given the 13% upside to its last closing of RM1.77, we are upgrading our call from SELL to BUY. Note that our previous cautious stance was in view of the potential of the entire exercise  collapsing. With the latest revised offer, we are of the view that the privatization initiative may just materialize.

Source: OSK188