By Stephanie Jacob
Iris Corporation is currently Monday’s most active counter, as its stock is being actively traded on the back of its announcement that the it had received an offer from the Federal Land Development Authority (Felda).
Should the proposal be accepted by shareholders, it will be likely be completed in early 2014, which is the beginning of Iris’ financial year 2015 (FY15). According to a TA Securities report, the group’s net gearing should be reduced to 0.22x from 0.42x in FY15, should the deal be successful.
However earnings per share (EPS) will be reduced by approximately 20% for FY15 and FY16 should the move go through. With Felda potentially acquiring a 25% stake, Iris shareholding will also see a significant change in its structure. Holding about a 20% stake of the enlarged share capital upon the completion of the placement, Felda will emerge as the largest shareholder of Iris, added TA.
Although Felda’s offer represents about a 33% premium on Iris’ latest closing price of 21 sen per share and its valuation price of Iris is at a current year 2014 (CY14) price multiple of 14x, which is higher than TA’s price-earning (PE) valuation of 12x. Nonetheless, the research house said it is neutral on the proposal as it will dilute EPS by 20% for FY15 to FY16.
Therefore TA is maintaining its earnings forecasts pending the completion of the placement exercise and maintaining its target price for Iris at 23.5 sen per share based on an unchanged 12x CY14 EPS. It has also downgraded Iris to ‘hold’ from ‘buy’, as its “valuation is already stretched close to its fundamentals”.
The offer on the table is for Felda to subscribe to 394.1 million shares or a 25% stake in Iris for a cash consideration of 28 sen per share. The board of Iris has resolved to accept the offer as a private placement. The offer will need to approved by shareholders at an EGM, which has not been set yet.
According to a TA Securities report, Iris will use the estimated RM110.3 million raised from the exercise on repayment of borrowings, capital expenditure, working capital and expenses as a result of the private placement (see table 1).
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