Delloyd Ventures Berhad

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Marian Sanders
5 years ago
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1 Investment Research for CMDF Bursa Research COMPANY UPDATE 18 June 2014 Delloyd Ventures Berhad Bursa / Bloomberg Code: 6505 / DV MK Stock is Shariah-compliant. Price : RM4.60 Market Capitalization : RM460.0 mln Market : Main Market Sector : Industrial Product Recommendation : Hold Privatization Offer from Major Shareholder Delloyd announced on 16 May 2014 that it had received a privatization offer from its major shareholder, Chung & Tee Ventures Sdn Bhd (CTVSB), via a selective capital reduction and repayment exercise pursuant to Section 64 of the Companies Act, 1965 (Proposed SCR). Under the proposed offer, minority shareholders would receive RM4.80 per share in return for their shares. CTVSB, together with other persons acting in concert with them (PAC) collectively hold approximately 63.58% of the voting share capital of Delloyd. To recap, Delloyd has an issued and paid up capital of RM100.0 mln comprising 100 mln ordinary shares, of which 3.4 mln shares are treasury shares. CTVSB indicated that it does not intend to maintain the listing of Delloyd following the Proposed SCR. The proposal is subject to various conditions, such as:- o Approval by shareholders who are not part of the PAC (i.e. the minority shareholders) through an Extraordinary General Meeting (EGM) to be called; PAC needs to secure approval by at least 50% in number of, or 75% in value of the minority shareholders votes (voting in person or by proxy) at the EGM; and Not objected by more than 10% in value of the votes o Consent of SC for the content of explanatory statement, circulars to shareholders, and independent advice letter o Exemptions by the SC for the Proposed SCR from compliance with Practice Note 44 of the Malaysian Code on Take-Overs and Mergers, 2010 o Consent of Bursa Malaysia for the issuance of circulars to shareholders o Approvals of MITI, if required o Obtaining grant of an order by the High Court of Malaya approving the Proposed SCR o Approval or consent of existing financiers and/or creditors of Delloyd; and o Any other relevant approvals. The rationale put forth by the PAC for the Proposed SCR include challenging and competitive outlook in the automotive industry where profit margins are shrinking, while in the plantation sector, Delloyd faces rising production cost, foreign currency fluctuations due to its operations in Indonesia, as well as the cyclical nature of the plantation sector with fluctuations in CPO price affecting profitability. It also pointed out that the trading of shares in the stock has been very illiquid and hence, the Proposed SCR offers an opportunity for the minority shareholders to realize their investment at a premium to the share price prior to announcement. The proposal is expected to be completed by end of 2014 should all approvals are secured on a timely basis. Our comments. While the Proposed SCR was a surprise to us, we can understand the rationale behind the action of the PAC. The daily trading volume of the shares was indeed very illiquid at less than 0.05% of share capital (daily trading average of 39,000 shares and 34,000 shares for the past 1 year and 3 years respectively) and the share price had always been at a 1 of 6

2 deep discount to its NTA at least for the past 10 years or so, with little attention from the investing community. As such, we opine that the PAC may believe there are little benefits keeping Delloyd as a listed entity and they could better unlock the embedded value in the Group as a private vehicle. As with any exercise, there are arguments both for and against this privatization offer, from the perspective of a minority and in particular, a retail shareholder. Arguments in favor of the Proposed SCR a) Automotive business in the doldrums. Business-wise, it has not been a smooth sailing for the Group over the last three years. In the automotive segment, revenue has been trending downward since FY12, falling some 20% from RM316.4 mln in FY12 to RM251.9 mln in FY14. Segmental operating profit fell more substantially by 33% to RM22.5 in FY14 from RM33.8 mln in FY12. The main contributing factor, we believe, is the lackluster performance of Proton, Delloyd s largest customer, which is losing market share to Perodua as well as non-national marques. While Delloyd does sell to the likes of Perodua, Toyota, Naza etc, the contributions from these makes are far lesser by comparison to Proton. Meanwhile, other factors include rising cost pressures coupled with inability to past through cost increases to customers. Looking forward, we expect the operating environment to remain highly challenging given the time and effort required to scale up the business with non-national marques, while at the same time, we also do not expect much improvement in Proton s market share anytime soon. b) Plantation earnings affected by foreign exchange loss. Delloyd posted a surprise quarterly loss of RM2.7 mln in 2QFY14, mainly due to a RM12.4 mln unrealized foreign exchange loss following the depreciation of Indonesian rupiah against USD and RM. The Group s plantation income is substantially derived from Indonesia, and as such, would remain susceptible to fluctuations in the currency movements of Rupiah against USD and RM. c) Offer price is the highest price point in at least 10 years. Against the reasons stated above, the offer price of RM4.80 per ordinary share appears to be decent. It pegs a forward FY15 PER of 14x vs. the Group s 3-year historical average of 9.5x. The offer price is, in fact, considered attractive if one considers that the share price of Delloyd has never reached RM4.80 level in the past 10 years. The highest it traded in the last 10 years (prior to 2014) was about RM3.60 in early 2012, and it reached about RM4.00 in early April 2014, a month before the announcement. On the flip side, the share price touched a low of RM1.20 in December 2008 during the US subprime crisis period. Before this, given the illiquid nature of the share trading (daily average of 39,000 and 34,000 shares for the past 1 year and 3 years respectively), it is also not easy for investors to divest shareholding without depressing the share price. Therefore, the privatization proposal presents an avenue for the minority shareholders to realize their investment at a healthy gain over their cost. Delloyd s last 10 years share price chart Source: Bloomberg 2 of 6

3 Arguments against the Proposed SCR a) Recovery in plantation earnings. Delloyd s financial performance in FY14 was unexciting as its plantation earnings were affected by the depreciation of Indonesian Rupiah against USD and RM, in addition to weak CPO price. Following a lackluster year in 2013, CPO price has since recovered and is currently hovering between RM2,400-RM2,500/mt after touching a high of RM2,900-level in March The recovery in CPO price bodes well for Delloyd s plantation earnings, along with the expected rise in FFB output as well. The Group produced some 150,000 tons of FFB in FY14 and the output is projected to further increase to above 180,000 tons in FY15 as more oil palm trees mature. Against this backdrop, we estimate the Group s net income to exceed RM30-mln level again in FY15, barring sudden and drastic deprecation of Indonesian Rupiah. b) Deep value in its plantation land in Kuala Selangor. Delloyd has 1,449 hectares of freehold agricultural land in Sg. Rambai, Kuala Selangor in which it is currently planting oil palms. The Group acquired the land in 1999 for RM75.2 mln or approximately RM21,000/acre. The land has never been revalued and is still being carried at cost in its book today. Based on our channel checks and rough estimates, the land could be worth between RM100,000 and RM150,000/acre at present (please note that our market value estimate has not been verified by professional valuer). We note that our estimate is very conservative, considering its large tract of land. We do see some listings of land-for-sale in the area with much higher asking price but these are usually below 5 acres, in contrast to Delloyd s 3,578 acres. All else equal, our estimate could add a surplus of between RM2.83 and RM4.62 per share to its book value just on the Sg. Rambai land alone (refer to the table below on the calculation). That is, Delloyd s shares could easily be worth between RM7.32-RM9.11. Valuation of Sg. Rambai Estate Land size (hectares) 1,449 Land size (acres) 3,578 Cost carried in book (RM mln) 75.2 Year acquired 1999 Cost/acre (RM) 21,025 Low estimate (RM) High estimate (RM) Market value/acre (RM) 100, ,000 Total market value (RM mln) Est. surplus (RM mln) Est. surplus/share (RM)* Book March Est. revalued net asset value, RNAV (RM) * based on its 100 mln share base Source: Delloyd annual report, We note that the Group has a much larger plantation land bank in Indonesia, at 14,422 hectares in Belitung, Indonesia. The Belitung land, which is leasehold with expiry in 2029 and 2036, has a book value of RM100.8 mln. We are, however, unable to make an estimate of the market value of its land in Indonesia due to insufficient information. c) Value in its Klang land. Then, there is the Group s headquarter and factories located right by the main road of Jalan Kebun, Klang measuring a total of 6.01 hectares. These assets are carried at cost as of 1999 and 1994, at a book value of RM26 mln. A quick check on some landfor-sale listings at the area puts the estimate of the land at between RM50-RM70 psf. Based on these estimates, the land alone could be worth between RM32 mln and RM46 mln, without taking into considerations the buildings, and therefore further boosting the RNAV. Funding. In order to privatize the company, the PAC would require funding of approximately RM170 mln to pay the 34.62% minority shareholders RM4.80/share, after excluding the 3.4 mln 3 of 6

4 treasury shares. According to CTVSB, it would fund the exercise via a combination of internal resources and band borrowings. We believe it would not be difficult for CTVSB to raise the funds. After all, as at end-march 2014, Delloyd has cash holdings of RM71.4 mln or net cash of RM40.5 mln. Should the privatization exercise succeeds, CTVSB could subsequently tap into the cash resources at Delloyd to help repay the bank borrowings taken for the exercise. Shareholding structure. We undertook a review of the top 30 shareholders of Delloyd in its 2013 annual report. The shareholding info is dated 16 July 2013, and there are no further changes to substantial shareholders holdings thereafter when we checked against the announcement page of Bursa Malaysia. We noted that there are no institutional shareholders in Delloyd s top 30 shareholders list. The list comprises mainly individuals and several private companies in addition to CTVSB and its PAC. From the list, the top 3 non-pac shareholders are Aneka Nostalgia Sdn Bhd (ANSB) with a 4.51%-stake or 4.4 mln shares, followed by Ipjomas Sdn Bhd (1.41%) and Tan Ah Kee (1.28%). Recall that one of the precedent conditions for the Proposed SCR to go through is that the exercise must not be objected by more than 10% in value of the votes held by the minority shareholders, which in this case, translates to 3.52 mln shares. As such, we believe ANSB s voting decision may make or break the deal. Beyond ANSB, it would be difficult though not impossible for the other minority shareholders to muster sufficient voting power, and under such circumstances, the Proposed SCR would likely go through. Recommendation The offer price appears to be substantially lower than the Group s potential RNAV or intrinsic value. Nevertheless, while the offer price may not reflect the true intrinsic value of Delloyd s assets, we opine that the offer could be a decent one especially for investors who have held the stock for many years and would not mind cashing out with a healthy profit. Indeed, the intrinsic value (e.g. value of its land) may be much higher but it would likely also take a long time together with a lot of uncertainties before the monetization of assets would happen, if it does happen. At this juncture, we maintain our Hold recommendation on Delloyd and peg our fair value to RM4.80, which is the offer price under the Proposed SCR. We believe further upside to the share price is limited to the offer price under the Proposed SCR. At RM4.80, it implies a forward FY15 PER of 14.2x based on our FY15 earnings estimate of RM32.7 mln. We shall monitor the development and provide further update when the circular to shareholders (which shall include the independent adviser s report) is available. Per Share Data FYE Mar FY13 FY14 FY15f Book Value (RM) Cash Flow (sen) Earnings (sen) Net Dividend (sen) Payout Ratio (%) 29.4% 28.4% 29.6% PER (x) P/Cash Flow (x) P/Book Value (x) Dividend Yield (%) 2.2% 1.7% 2.2% ROE (%) 7.9% 6.3% 7.1% Net gearing (x) net cash net cash net cash P&L Summary FYE Mar (RM mln) FY12 FY13 FY14 FY15f Revenue Operating Profit Net Int Exp (4.5) (3.5) (3.3) (3.4) Pre-tax Profit Eff. Tax Rate 19.5% 20.5% 20.6% 20.0% Net Profit Operating Margin (%) 12.7% 10.1% 9.1% 9.8% Pre-tax Margin (%) 11.8% 10.3% 8.6% 10.0% Net Margin (%) 8.4% 7.8% 6.6% 7.5% 4 of 6

5 Delloyd s last 12-month share price chart Source: Bloomberg Analyst: Nicole Tan Yoke Ping (nicole@zj.com.my) 5 of 6

6 RATING GUIDE BUY SELL HOLD Price appreciation expected to exceed 10% within the next 12 months Price depreciation expected to exceed 10% within the next 12 months Price movement expected to be between -10% and +10% over the next 12 months from current level DISCLAIMER This report is for information purposes only and has been prepared by ZJ Advisory based on sources believed to be reliable at the time of issue of this report. We however do not give any guarantee as to the accuracy or completeness of the information provided. Any opinions or estimates in this report are that of ZJ Advisory as of this date and are subject to change without notice. ZJ Advisory has no obligation to update its opinion or the information in this report beyond the scope of participation under the CMDF-Bursa Research Scheme. ZJ Advisory and/or its directors and staff may have an interest in the securities mentioned herein. Furthermore, ZJ Advisory and its related companies may, from time to time, provide or seek to provide advisory and/or other services for the company(ies) mentioned in this report, and may be involved in share placement exercise involving securities mentioned herein. In reviewing this research report, investors should be aware that any or all of the foregoing, may among other things, give rise to real or potential conflicts of interest. This report is under no circumstances to be construed as an offer to sell or a solicitation of an offer to buy any securities. Investors should seek financial advice regarding the appropriateness of investing in any securities discussed or opined in this report. Investors should understand that statements regarding future prospects may not materialize. This report may contain forward looking statement and forecasts, which are based on assumptions that are subject to uncertainties. Any deviation from the expectations may have adverse effect on the projections and prospects contained herein. ZJ Advisory accepts no liability for any direct, indirect or consequential loss arising from the use of this report. This report has been prepared by ZJ Advisory for purposes of CMDF-Bursa Research Scheme ("CBRS") administered by Bursa Malaysia Berhad and has been compensated to undertake the scheme. ZJ Advisory has produced this report independent of any influence from CBRS or the subject company. For more information about CBRS and other research reports, please visit Bursa Malaysia s website at: ZJ Advisory Sdn Bhd (Co No: V) (An investment adviser licensed by the Securities Commission) Suite 22B, 22nd Floor, Sunway Tower, No 86, Jalan Ampang, Kuala Lumpur Tel (603) Facsimile (603) of 6

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