By Khairie Hisyam
DRB-Hicom wants to hive off a subsidiary and a land parcel for RM835 million to associate company Pos Malaysia. The problem is while the deal looks good for the seller, it does not look that attractive to the buyer – yet.
It is nearly a week since DRB-Hicom announced its proposed disposal of wholly-owned subsidiary Kuala Lumpur Airport Services Sdn Bhd (KLAS) plus a land parcel to Pos Malaysia Bhd. In a week’s time, Pos Malaysia will have to decide whether the deal is good enough to accept.
And that is quite a question: a look at the particulars of the proposed deal suggests it is good for DRB-Hicom but not so much for Pos Malaysia.
Here are the essentials of the deal: DRB-Hicom proposes to sell to Pos Malaysia KLAS for RM766.16 million as well as a 4.01ha, freehold industrial land parcel in Shah Alam, Selangor valued at RM69 million by CH Williams Talhar and Wong (WTW).
That comes to a total of RM835.16 million which will be fully satisfied by issuances of 250.8 million new Pos Malaysia shares at the issue price of RM3.33 per share – a 13% premium to Pos Malaysia’s closing price of RM2.95 per share on the day the offer was announced.
Part of the deal’s conditions is that two parcels of agricultural land located in Kubang Pasu, Kedah are transferred from KLAS to a DRB-Hicom subsidiary at their prevailing nett book value on the date of the transfer. These parcels collectively measure 100 acres.
The deal also takes into consideration the capitalisation of some RM552.9 million from two loans owing by KLAS to DRB-Hicom.
On the surface it may seem like a win-win deal. DRB-Hicom gets to streamline its operations, relieve itself of its commitments to KLAS and gain efficiency by consolidating its interests in the logistics business.
At the same time, it gains a majority stake in associate company Pos Malaysia as the deal is set to bump its shareholding from roughly 32% to around 54% – this may seem the main point of the deal as the increased stake is a direct boost to DRB-Hicom’s earnings, according to PublicInvest Research, as the increased stake will enhance its earnings in the next full financial year by 10% compared to the current 4% contribution from KLAS to its revenue.
And Pos Malaysia may seem like it is also getting a good deal as it is forking out no cash for these assets and even gets to issue shares at above market value to pay for them.
However, some important considerations should give Pos Malaysia shareholders pause.
First, DRB-Hicom gets to keep two parcels of agricultural land currently owned by KLAS at nett book value. While this is taken into consideration in the proposed transaction price, shouldn’t these two land parcels be freshly valued to avoid doubt as to whether the valuations are accurate and up to date?
Bear in mind that, in proposing to dispose of KLAS at RM766.16 million, DRB-Hicom is already taking the higher end of its valuation – KPMG valued KLAS as worth between RM699 million and RM775 million as at Aug 31, 2015.
In deriving this valuation range, KPMG also took into account the market value of other properties held by KLAS and the methods involved are briefly spelt out in DRB-Hicom’s disclosures to Bursa Malaysia on the offer.
It is then a strange discrepancy that the two land parcels DRB-Hicom is keeping while selling KLAS would be benchmarked at nett book value, especially since the RM69 million figure for the Shah Alam land parcel being sold together with KLAS is also derived from a fresh mark-to-market valuation.
One concern that may arise is that the two land parcels might actually be worth more than their nett book values, meaning in that scenario the pricing for KLAS is not discounted as much as it should be.
Secondly, it is obvious that the immediate concern for Pos Malaysia’s shareholders would be the massive dilution in their shareholdings to pay for KLAS and the Shah Alam land parcel.
At this stage it is uncertain whether the benefits of acquiring KLAS – likely synergistic benefits primarily – would outweigh the dilution and shareholders would be wise to ask for more clarification on this aspect.
And this is even before delving into the post-acquisition scenario of KLAS’ business expansion.
KLAS may require cash injection from its owner to expand and while Pos Malaysia has some RM500 million in nett cash as of Sept 30, 2015, its own financial results have not been encouraging, considering its first half of financial year 2015 (1H15) nett profit was at RM26.2 million compared to RM61.1 million in 1H14.
In other words, Pos Malaysia may need the cash to weather its own storm and it remains questionable whether it needs this deal right now.
Thirdly, the pricing of KLAS also raises questions. According to DRB-Hicom’s annual report, KLAS posted RM6 million in nett profit for its latest concluded financial year. That indicates a price-earnings ratio (PER) valuation of more than 100 times, as noted by Hong Leong Investment Bank in a report on Dec 11.
That is a mind-boggling PER value by any measure and Pos Malaysia shareholders would be more than justified in requesting an independent appraisal by its own appointed valuer to double-check DRB-Hicom’s price tag for KLAS.
There are some days to go till Dec 23, the last day Pos Malaysia has to respond to the offer, and these concerns should adequately be addressed for its shareholders’ sake if it decides to go forward with this offer.
GRRRRR!!!
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