Adventa Berhad - An Arbitrage Opportunity Emerges?

INVESTMENT MERIT

- Exiting the glove business.  The share price of Adventa Bhd (ADVENTA) has stayed at its current levels in the past four months after surging c.40% within a week following its privatisation deal in Jul 2012. To recap, Aspion Sdn Bhd (in which the  MD of ADVENTA has a 30% stake) had offered to take over ADVENTA’s glove business for RM320.9m or RM2.10/share. From the disposal proceeds, ADVENTA will distribute RM1.70/share one-off payment to its shareholders and this has already been approved in its EGM on 1 Nov with the payment likely to be made in mid-Dec 2012. 

- Now come the healthcare services.  From a manufacturing-based company, ADVENTA will emerge to be a healthcare services provider (with low capex and high ROI, inter-supportive leverage business and a fast-growth Dialysis market). Post the disposal of  its glove business, ADVENTA’s focus will be in healthcare services with three core businesses, i.e. 1) healthcare distribution; 2) industrial and commercial sterilization and 3) home dialysis treatment.

- Lucenxia the earnings booster. Home dialysis treatment, which is housed under the brand name of Lucenxia, will be the smallest earnings contributor among the three divisions. However, with the growing dialysis patients in the country and ADVENTA having the exclusive rights to distribute the product in nearly the whole of Asia, Russia, South Africa and some Latin American countries, the potential could be huge if the business is executed successfully.

- An arbitrage opportunity emerges?  After the special payment of RM1.70/share, one will be paying for these businesses at RM0.18/share, implying FY13 PER of just 5.0x. Pricing these businesses at 7.5x PER, which is at a 50% discount to the market and still below the small cap companies’ average PER of 8.0x, the stock should be worth RM0.27/share, or RM1.97/share before the special payment. Even then, this will still be lower than the privitisation price tag of RM2.10/share. With the special payment likely to be made out in the next 3-4 weeks, we believe the gap between the share price and offer price will only get closer. Hence, we reckon that there is an arbitrage profit to be made. Trading Buy.

SWOT ANALYSIS

- Strength:  Business leveraging among the three business divisions would make the business model viable.

- Weaknesses:  Lucenxia is a totally new product in non-European markets and hence, the product acceptance could be an issue.

- Opportunities:  Its 20-year exclusive rights to distribute Lucenxia overseas offers huge potentials.

- Threats: Possibility of no renewal for its exclusive rights upon its expiry.

TECHNICALS

- Resistance: RM1.91 (R1), RM2.00 (R2)

- Support: RM1.86 (S1), RM1.82 (S2)

- Comments:  Adventa had been trading within the RM1.86-RM1.91 range for almost two months, and from a technical viewpoint, the share price is likely to continue in this range-bound manner. Beyond those levels, further resistance can be found at RM2.00 while downside support is capped at RM1.82.

BUSINESS OVERVIEW

ADVENTA was listed in 2004 and is primarily involved in the medical glove manufacturing business. However, the  company surprised the market by announcing the privatisation of its glove business in Jul 2012. Post-privatisation, ADVENTA will remain as a listed company with its new core business focuses on providing healthcare services such as healthcare distribution, industrial and commercial sterilisation and home dialysis treatment.  

NEW BUSINESS DIVISIONS

- Sun Healthcare (SHMSB).  Currently, SHMSB supplies and distributes the medical equipments and disposable medical goods to domestic healthcare centres. Post-restructuring,  SHMSB is moving forward to become a third party logistics (3PL) provider.

- Electron Beam (EBSB).  In mid-12, ADVENTA fully acquired Electron Beam Group for RM9.0m from a HK-based corporation. With its strategic facility location in West Port Klang, it provides sterilisation services to the local and regional medical devices manufacturers. EBSB is South East Asia’s first commercial supplier of contractual electron beam sterilisation services.

- Lucenxia (LMSB).  LMSB is a wholly owned subsidiary of EBSB and is in the business of offering automated home dialysis treatment by using peritoneal dialysis (PD). Additionally, LMSB also provides nocturnal automated PD treatment, which enables the treatment to be carried out while a patient is asleep.

Source: Kenanga