Background
ABRIC Berhad ("ABRIC") is a Malaysian company listed on Bursa Malaysia (formerly known as Kuala Lumpur Stock Exchange). Prior to December 2014, it was primarily engaged in the provision of security sealing solutions with a presence in over 80 countries worldwide.
In September 2014, ABRIC announced that it has entered into an agreement with UK based Essentra PLC to dispose of its core operating business for a total consideration of RM146.0 milllion on a "cash-free, debt-free" basis. The disposal was subsequently completed following approval from its shareholders at a shareholders' meeting held on 9 December 2014.
Post completion, ABRIC has become a cash company with the majority of its assets in cash and properties. Under Bursa rules, ABRIC has to submit a proposal for approval to acquire a new core business within 12 months from the date it becomes a cash company implement its proposal within the timeframe prescribed by the Securities Commission, failing which they would be forced to delist, a scenario which would likely mean that they would be forced to dispose of the remaining assets and distribute the cash back to its shareholders.
Significant Undervaluation
We estimate that the shares are worth conservatively RM0.92 per share vs the current price of RM0.705 per share giving the shares potential upside of 30%. Our computation is as follows:
ABRIC Berhad ("ABRIC") is a Malaysian company listed on Bursa Malaysia (formerly known as Kuala Lumpur Stock Exchange). Prior to December 2014, it was primarily engaged in the provision of security sealing solutions with a presence in over 80 countries worldwide.
In September 2014, ABRIC announced that it has entered into an agreement with UK based Essentra PLC to dispose of its core operating business for a total consideration of RM146.0 milllion on a "cash-free, debt-free" basis. The disposal was subsequently completed following approval from its shareholders at a shareholders' meeting held on 9 December 2014.
Post completion, ABRIC has become a cash company with the majority of its assets in cash and properties. Under Bursa rules, ABRIC has to submit a proposal for approval to acquire a new core business within 12 months from the date it becomes a cash company implement its proposal within the timeframe prescribed by the Securities Commission, failing which they would be forced to delist, a scenario which would likely mean that they would be forced to dispose of the remaining assets and distribute the cash back to its shareholders.
Significant Undervaluation
We estimate that the shares are worth conservatively RM0.92 per share vs the current price of RM0.705 per share giving the shares potential upside of 30%. Our computation is as follows:
(All numbers in '000 except per share data)
Notes
1. Based on cash consideration received as 16 Dec 14 less estimated expenses of RM6 million
2. Based on Cash and cash equivalents less total borrowings but not inclusive of cash in the escrow account of RM10 million and addition RM1 million which has been lumped together under Receivables
We further note that ABRIC has entered into a lease agreement with its former subsidiaries to lease out its 2 properties for a combined RM1.1 million per year for at least 2 and 3 years respectively. This implies a high capitalisation rate of 11.4% based on the current book value of the properties. As such, we believe that the market value of the properties would be higher than that stated in its books. However, to be conservative, we have not included any potential property valuation surplus in our computation.
Recommendation
The stock is trading at a significant discount to its breakup value of RM0.92 per share and net cash per share of RM0.78 which does not include another RM0.08 worth of receivables due as part of the disposal. We are a buyer at this price. Further upside will come from potential acquisition of a new core business as management has set aside RM50.0 million for this purpose.
Downside is limited to its cash holdings in the event of a liquidation or breakup pursuant to a delisting. Furthermore, ABRIC has announced a special dividend of RM0.30 per share which will enhance the already favourable risk-reward at RM0.705 as net exposure will be down to RM0.405 per share ex-dividend against RM0.62 and RM0.48 per share of NAV and net cash respectively. While management has set aside another RM15.2 million for working capital, we think this is purely for contingency purposes as the remaining 2 properties leased to its former subsidiaries are its only assets left and hardly justify such a large working capital.
Key Risks
As with cash companies, the key risks would be for the management to spend all its cash on acquiring a value destructive business. However, this risk is partially mitigated by the special dividend that has already been announced and is to be paid on 6 Feb 15 (ex-div date is 21 Jan 15)
1. Based on cash consideration received as 16 Dec 14 less estimated expenses of RM6 million
2. Based on Cash and cash equivalents less total borrowings but not inclusive of cash in the escrow account of RM10 million and addition RM1 million which has been lumped together under Receivables
We further note that ABRIC has entered into a lease agreement with its former subsidiaries to lease out its 2 properties for a combined RM1.1 million per year for at least 2 and 3 years respectively. This implies a high capitalisation rate of 11.4% based on the current book value of the properties. As such, we believe that the market value of the properties would be higher than that stated in its books. However, to be conservative, we have not included any potential property valuation surplus in our computation.
Recommendation
The stock is trading at a significant discount to its breakup value of RM0.92 per share and net cash per share of RM0.78 which does not include another RM0.08 worth of receivables due as part of the disposal. We are a buyer at this price. Further upside will come from potential acquisition of a new core business as management has set aside RM50.0 million for this purpose.
Downside is limited to its cash holdings in the event of a liquidation or breakup pursuant to a delisting. Furthermore, ABRIC has announced a special dividend of RM0.30 per share which will enhance the already favourable risk-reward at RM0.705 as net exposure will be down to RM0.405 per share ex-dividend against RM0.62 and RM0.48 per share of NAV and net cash respectively. While management has set aside another RM15.2 million for working capital, we think this is purely for contingency purposes as the remaining 2 properties leased to its former subsidiaries are its only assets left and hardly justify such a large working capital.
Key Risks
As with cash companies, the key risks would be for the management to spend all its cash on acquiring a value destructive business. However, this risk is partially mitigated by the special dividend that has already been announced and is to be paid on 6 Feb 15 (ex-div date is 21 Jan 15)
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