Eng Teknologi Holdings: RM2.00 a Fair Price

THE BUZZ

The EGM to obtain shareholders’ approval on TYK Capital’s proposal to purchase Engtek’s net assets at an offer price of RM2.00/share will be held this afternoon.

OUR TAKE

Fairly valued at RM2.00/share. Although TYK Capital has lowered its offer price to RM2.00 from RM2.50 previously (down 20%), we still find the pricing attractive. Compared to its peers under our coverage, the net assets acquisition at 8.5x FY13 PER represents a 44%/77% valuation premium over JCY/Notion’s current 5.9x/4.8x FY13 PERs. On a standalone basis, since Engtek’s shares historically traded at a 5-year average of 5.3x PER, the RM2.00 offer price represents a 60% premium over this average. Nonetheless, we deem the offer price fair since historically, the stock’s 5-year sector average has been about 8x-10x PER.

PNB and LTH likely to give the nod. Meanwhile, the decision of PNB and LTH - which have a combined 23% equity interest in Engtek - whether to accept the revised offer price could largely determine the fate of the privatization proposal. Given the potential 10%-45% upside from their average cost/share of between RM1.40 and RM1.80, we believe that these two entities are highly likely to consent to TYK Capital’s proposal to take Engtek private.

More on its operations. CEO Datuk Teh Yong Khoon Being said being the worst-hit among local HDD component makers by Thailand’s severe floods last year, Engtek would only be able to fully restore its Thai operations by the end of the year. He added that the company will have to spend RM40m-RM42m in new capacity, of which a portion will be used to replace 400 computer numerical control (CNC) machines that were damaged during the floods. In 4QFY11, Engtek shifted production to its manufacturing plants in Johor and Philippines while its Thai plants were being rebuilt. These efforts, plus the higher average selling prices (ASPs), pushed the company’s 1QFY12 core earnings back into the black at RM0.2m.

Maintain NEUTRAL at RM2.00. All in all, we advise existing shareholders to accept the proposal since we are of the view that the company is fairly valued at RM2.00. For prospective investors, however, we maintain our NEUTRAL recommendation as the privatization offer price only offers a slim upside from the current trading price (a ~5% upside). Our preferred stocks in the domestic HDD component sphere are JCY (TRADING BUY, FV: RM2.00) and Notion (TRADING BUY, FV: RM1.50), both of which are grossly undervalued.

Source: OSK