In 2016, the Singapore equity market experienced a wave of privatisation deals, which is likely to continue into 2017 as the benchmark Straits Times Index’s valuation remains inexpensive against regional peers.
Companies that were successfully privatised in 2016 had several similar characteristics such as, but not limited to, share buy-backs, low valuations, profitability, large single shareholder and net cash.
As such, we take a look at three potential privatisation candidates which fulfil two or more of these characteristics.
Our first candidate is Courts Asia (Courts), an established retailer of furniture and electronic goods, which we already had our sights on since June 2016.
Almost a year ago, Courts had a float of 22.7 percent, with a majority of 73.5 percent owned by Singapore Retail Group (SRG), which is partly owned by Baring Private Equity Asia. In June 2016, the group’s share buyback volume surged following the release of its FY16 results, with some 2.8 million shares bought back within the month. The group renewed its share buy-back mandate on 27 July 2016 and had, before that day, bought back over 21 million shares or 3.9 percent of the total outstanding shares over a one-year period.
Currently, Courts only has a float of 20.7 percent, while SRG’s shareholdings have increased to 74.4 percent. As at 16 February 2017, Courts have bought back over 3.5 million shares or 0.7 percent of the total outstanding shares.
Looking at profitability, for 9M17, net profit increased by 31.3 percent to $21.1 million, lifted by lower interest expense and currency exchange losses. It is notable that the group tends to release its full year results towards the end of May and favorable results could mark the start of another round of large volume buybacks.
In terms of valuations, Courts is trading at just 0.7 times price-to-book value with a dividend yield of 3.1 percent. Based on 9M17 results, the group’s shares are also priced at a 19.2 percent discount to the net tangible book value per share of approximately $0.52.
DeClout, a global builder of next-generation cloud, data centres, telecommunications, e-commerce, e-logistics and marketplace companies, has seen its share price on a downward trend over the past two years despite registering higher net profit for both FY15 and FY16.
While it is believed that the negative share price reaction stems from DeClout’s disposal of assets during 2016, it is notable that the group’s financial position has improved significantly over the past year.
As at 31 December 2016, the group’s cash and equivalents surged to $65.4 million from just $22.7 million a year ago, while total liabilities increased by just $1.9 million largely due to higher accrued expenses. Long-term debt decreased by $9.4 million to $7.7 million, placing the group in a net cash position of $14.9 million or $0.02 per share.
In the first four months of 2017, the group bought back close to 33 million shares or approximately 5.3 percent of the total outstanding shares. The latest share buy-back mandate has been renewed on 27 April 2017.
Currently, DeClout is trading at 0.9 times price-to-book value (P/B), approximately half the industry average of 1.8 times. The present valuations could be an opportunity for interested parties to take the company private.
CDW Holdings (CDW), a producer and supplier of precision components mainly in the LCD backlight units, has been facing headwinds due to the loss of market share and technological obsolescence.
Despite the 94.9 percent decline in net profit, CDW still holds potential as a privatisation candidate. As at 31 December 2016, CDW had a net cash position of US$39.4 million ($55.1 million), equivalent to approximately 95.9 percent of the group’s current market capitalisation. In addition, CDW’s shares are currently valued at 0.7 times P/B and a misleading price-to-earnings (P/E) of 98.4 times. In fact, the company’s shares, after stripping away the cash portion, is valued at an attractive four times P/E.
Similar to the previous mentioned companies, CDW also engages in share buy-back activities. As at 20 April 2017, the group has bought back over eight million shares or 3.4 percent of the total outstanding shares mostly at a price of around $0.24 to $0.25. The share buy-back mandate has been recently renewed on 28 April 2017.
The company’s float stands at approximately 43.4 percent, while the largest single shareholder, Kunikazu Yoshimi, holds a significant 50.9 percent of the total outstanding shares.
The group’s high net cash, coupled with a dividend yield of five percent is highly attractive as it would appear that an investor is buying into the business for free.
Investors should take note that investing in potential buyout targets carries certain risks. While the reward for a successful pick can be attractive, the stock could become a value trap should such privatisation not materialise.