Cashed-up buyers, low liquidity and bashed-up valuations for cyclicals are driving Singapore’s economy, particularly leading to a wave of privatisation here, say CGS-CIMB Research analysts Lim Siew Khee and Cezzane See.
Lim and See’s Jan 22 note comes on the back of a “flurry” of corporate transactions here, from tech and manufacturing to hoteliers.
Tech leads the wave
The tech sector led the way in this wave of privatisation, note the analysts. Following Sunningdale’s privatisation offer in November 2020 by controlling shareholders and private equity fund Novo Tellus at $1.55 per share or FY2020F 0.78 times price to book value (P/BV) and 16.7 times price to equity ratio (P/E), Fu Yu’s founders sold their stake to Pilgrim Partners at 26 cents per share, or 12.3 times FY2020F P/E.
This was followed by AEM acquiring smaller contract manufacturer CEI at $1.15 per share, or 13.9 times FY2019 P/E to help the former’s vertical integration and customer diversification, add the analysts.
On Jan 15, UK hotel operator GL Limited was privatised by Guocoleisure Holdings at $0.70 per share or approximately 0.7 times P/BV of historical 1HFY2020 P/BV.
On Jan 22, workboat shipyard Penguin International (PBS) announced a voluntary conditional cash offer of 65 cents per share by key management, Jeffrey Hing Yih Peir and James Tham Tuck Choong, and strategic investor, Fairy L.P, owned by Dymon Asia Private Equity (S.E. Asia) II Ltd.
The offer price implies approximately 0.8 times current FY2020F P/BV. PBS’s net cash stood at $50 milion (23 cents) as of June 2020 and 10 times FY2021F P/E or ex-cash 7 times FY2021F P/E. “The offer is also 18% above our last target price of 55 cents (0.7 times FY2020F P/BV, or 10-year mean). We believe a gradual recovery post-Covid-19, rising commodities prices, coupled with low trading liquidity, prompted the privatisation offers,” say Lim and See.
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Driving the wave
Private equity and funds are cashed up after going through the Covid-19 scare and are preparing for recovery, note Lim and See.
“Among the bigger corporates, investment or expansion plans have been put on hold due to the uncertainty. We think the vaccine rollout and expected gradual recovery are key drivers for mergers and acquisitions pipelines before valuations spike,” they note.
In addition, as global demand turns down and industrial activity slows, commodity stocks have been suffering from overcapacity and concerns over insufficient demand, say Lim and See. Such a scenario could change on the back of rising commodities prices, they add.
Finally, companies may be looking at expanding their value chain, especially among the tech companies, to take advantage of common customers’ platforms to increase product offerings and market share, say the analysts.
“We think corporate actions might go on, especially among small-caps. We believe that globally, corporates have been preserving cash since Covid-19 broke out and they have the means to make an offer by taking the longer-term perspective, hunting for companies that have the potential for rebound if oil prices recover,” say Lim and See.
Highlighted companies
Lim and See highlight a handful of net cash small-cap offshore and marine (O&M) and industrial companies in their report.
Baker Technology is trading at 0.22 times historical P/BV, with major shareholder Benety Chang and spouse holding a total stake of 52.69% in the company. Its key revenue is derived from the 54.98% stake in offshore vessels company, CH Offshore, which is also trading below book of 0.34 times historical P/BV. Baker Tech is one of a few small-cap Singapore listed companies remaining that have the capabilities to build liftboats and rigs.
As at 3.23pm, shares in Baker Technology are trading 2.5 cents higher, or 7.58% up, at 35.5 cents.
Dyna-mac Holdings trades at historical P/BV of 3.2 times with a rising order book of $227 million in November 2020, compared to approximately $96 million in November 2019.
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In December 2020, Dyna-mac also announced its foray into clean and renewable energy sectors. The company announced that it is repositioning its business to pursue opportunities in the global green hydrogen market, which is adjacent to its core capabilities. In conjunction with this, it is currently evaluating the need to expand its yard facilities to fulfil potential demand by increasing its production capacity, maximising operational synergies and to undertake new green hydrogen projects.
As at 3.23pm, shares in Dyna-Mac are trading 0.1 cent higher, or 0.90% up, at 11.2 cents.
Largely controlled by the Cheng family, Hai Leck Holdings trades at 0.8 times historical P/BV with net cash of approximately $72 million. Hai Leck is one of the key players in the project and maintenance services to the oil and gas and petrochemical industries in Singapore. To diversify away from the mechanical engineering business, Hai Leck acquired contact centre services, Tele-centre, in 2011. Contact centre contributed approximately 51% of its revenue in FY2020.
As at 3.23pm, shares in Hai Leck are trading at 1 cent higher, or 2% up, at 51 cents.
PEC Ltd is a key onshore engineering, procurement and construction (EPCC) and plant maintenance service provider with an orderbook of $191 million as at FY2020. The company has net cash of $37 million and trades at 0.46 times historical P/BV.
As at 3.24pm, shares in PEC are trading 1 cent lower, or 2.44% down, at 40 cents.
