KSTB has recently been the subject of a takeover attempt by its co-founder, Dato' Chee Peck Chia, an oil and gas industry veteran who together with his concert parties, announced a conditional voluntary takeover  offer (the "Offer") on 23 March 2015 for all remaining shares not owned by them. The offer price of RM0.48 per share is at a small premium to the last traded price of RM0.46 a share before the takeover announcement and a significant discount to its last reported NTA of RM0.67 per share as at 31 December 2014. However, taking into account the timing of the offer and the adjusted NTA per share of RM0.44, we do not think this is necessarily a bad development for KSTB shareholders.

Background

Up until 2014, KSTB had been engaged in the core business of providing tubular handling equipment and running services as well as tubular inspection and maintenance services for companies in the oil and gas industry. It was also in the business of providing land rig services. 

However, that began to change in November 2013 when it entered into an agreement with Bursa-listed Destini Berhad to dispose of its entire interest in Samudra Oil Services Sdn Bhd ("Samudra Oil"), through which it had been conducting its tubular handling equipment business, for RM 80 million. The consideration was satisfied fully in new Destini shares to be disposed of via a placement exercise. The disposal of Samudra was subsequently completed in April 2014 following which the Destini consideration shares were placed out at RM0.35 each[1].

Concurrently with the disposal of Samudra Oil, KSTB also entered into two separate agreements with Indonesian drilling services provider, PT Duta Adhikarya Negeri, to dispose of its 2 land rigs for a total consideration of US$10.5 million.

Figure 1. Part of KSTB’s tubular inspection & maintenance services

With the disposals, KSTB effectively exited both the tubular handling and land rig businesses, leaving it with a relatively small tubular inspection and maintenance services business which is currently operated by its wholly owned subsidiary Samudra Timur Sdn Bhd. As a result, the Company triggered Practice Note 17 ("PN17") of the Bursa listing rules giving it until 2 April 2015 to acquire a new core business in order to maintain its listing status. The Company subsequently triggered Practice Note 16 of the Bursa listing rules as a cash company on 27 February 2015. On the basis of its PN16 status, it has applied to seek an extension of the deadline to acquire a new core business to 26 February 2016. The outcome of this application is currently pending.

For the half year ended 31 December 2014, the group recorded after-tax profit (PAT) of approximately RM3.67 million, translating into a fully diluted EPS of 1.61 sens per share[2]. PAT was up from RM0.13 million in the previous corresponding period in 2013 with the increase largely attributed to foreign exchange gains of RM2.45 million and interest income of 1.65 million. Revenue was RM5.85 million.

Conditional Voluntary Takeover Offer by Dato' Chee and Concert Parties

On 23 March 2015, Dato' Chee Peck Kiat, his son Chee Cheng Chun and Darmendran a/l Kunaretnam (collectively "Joint Offerors"), an Executive Director of the Company, made a conditional voluntary offer for all outstanding shares not held by the Joint Offerors amounting to 76.72% of the total outstanding shares of the Company.  The all cash offer was  RM0.48 per share. Concurrently, the Joint Offerors[3] also made an offer of RM0.18 for all outstanding warrants of the Company not held by them amounting to 69.92% of the total warrants in issue. The Offer is conditional upon the Joint Offerors achieving a minimum shareholding percentage of at least 50% by the close of the Offer. In addition, the Joint Offerors have indicated their intentions to keep KSTB listed.

Our Views

Success of the Offer lies in the hands of a few shareholders

With sizeable stakes in the Company concentrated in the hands of a few key shareholders (We will call them “Key Shareholders” here), the success of the Offer depends very much on their willingness to accept the Offer terms.

Figure 2. A few significant shareholders hold the key to the Joint Offeror’s success in the takeover Offer. Joint Offerors are shaded blue and key shareholders highlighted yellow.

These Key Shareholders include long time shareholders, Innoteguh Sdn. Bhd.  and Trance Equity Sdn. Bhd. (not to be confused with Trance Rex Sdn Bhd) as well as Sterling Honour, Seamless Excellence and Oval Triangle, all of whom became shareholders by virtue of converting their ICULS[4] holdings. The Key Shareholders altogether hold 39.50% out of the 76.72% shares not owned by the Joint Offerors and have yet to give any indications as to their intentions with regards to the Offer.

We do not think any of the Key Shareholders holding significant shares have any compelling reason to put up a competing offer with the offer price already at a premium to adjusted NTA per shares. Should they wish to thwart the takeover attempt by the Joint Offerors, inaction may be the best course of action as the Joint Offerors still need to acquire another 26.72% of shares just to make the Offer unconditional. Furthermore, the board of KSTB had also announced on 25 March 2015 that it does not intend to seek an alternative offer.

Offer Price is at a premium to adjusted NTA representing a decent valuation of the remaining tubular inspection and maintenance business  

The offer price of RM0.48 per share is only at a small premium of 4.3% over the last traded price of KSTB prior to the Offer announcement. It is also at a significant discount of 28.0% to its last reported NTA of RM0.67 per share as at 31 December 2014.

However, taking into account adjustments from shares issued arising from conversions of the ICULS issue and warrants as well as its recent dividend payout of 4.5 sens per share, we estimate that the offer price is actually at a premium of 9.8% to KSTB's adjusted NTA of RM0.44. See Figure 3 below for computation.

Figure 3. Computation of adjusted NTA of KSTB

For the past 5 financial years, the remaining tubular inspection and maintenance service segment has contributed between RM 8.77 million to RM11.11 million in revenue and RM 0.72 million to RM 2.78 million in profit before tax, or an average of RM 1.53 million equivalent to a fully diluted pre-tax earnings per share of just 0.6 sens. 

Figure 4. Historical segmental results of the remaining tubular inspection & Maintenance Service business

As such, the offer premium over NTA of RM0.04 per share implies a valuation of approximately 7 times profit before tax for the tubular inspection and maintenance services business, which is neither too expensive or cheap in the current environment.

Takeover timing needs to be taken into consideration too

Further taking into consideration that the Company is already past the first deadline of 2 April 2015 for submission of a regularisation plan to Bursa Securities to continue its listing status and with the further extension of such deadline to 26 February 2016 uncertain, we believe existing KSTB shareholders should see the Offer as a welcome insurance in the event that the Company is forced to delist. According to the Malaysian takeover rules, the offer document has to be sent to shareholders within 21 days of the takeover announcement on 23 March 2015 and the Offer will need to be open for acceptance for at least another 21 days after the offer document has been despatched. This should buy some time while shareholders await Bursa's response to the Company's request for extension of time to acquire a new core business.

Recommendations

We believe shareholders should wait and see if the application by KSTB to extend the deadline to acquire a new business to 26 February 2016 is approved before making a decision on the Offer. As the Offer will be open for a minimum of 21 days after the Offer document has been despatched to shareholders, they will likely have between 3-4 weeks time while awaiting Bursa's decision. In the event that the extension is rejected by Bursa and the Company faces the prospects of being delisted, we believe that the RM0.48 cash offer provides an adequate compensation for shareholders to exit their investments. Should the extension be approved, KSTB will have until 26 February 2016 to acquire another new business to stay listed. In this case, even if shareholders decide to hold on to their shares, we believe that the downside will be limited given that the bulk of KSTB's assets consist of cash.

For investors not vested in the Company as yet, there is little risk but limited upside in buying in at the current price of RM0.48 per share pending acquisition of a new core business.

[1] Although the Destini consideration shares were placed out at the same consideration of RM0.35 at which they were issued, we note that this price was at an unusually large discount to the then prevailing share price of between RM0.57 and RM0.69 during the placement period even if we account for the low trading liquidity.
[2] Adjustments include interest and interest savings from the warrants conversion proceeds and ICULS conversion.
[3] On an unrelated but interesting note, we noticed that Chee Cheng Chun and Darmendran had also amassed a sizeable 18.64% stake in another Bursa listed company, Rex Industry Bhd, from 23 February 2015 to 5 March 2015 just prior to the Offer announcement. There are no indications as of now that the two transactions are related though.
[4] KSTB issued RM12.0 million worth of 5-year Irredeemable Convertible Unsecured Loan Stocks ("ICULS") to Maybank Berhad as part settlement of debt pursuant to a Debt Settlement Agreement dated 3 September 2013. It is not disclosed if Sterling Honour Sdn Bhd, Seamless Excellence Sdn Bhd and Oval Triangle Sdn Bhd are entities related to Maybank.

Developments since our last update on 25 January 2015 (link)

1. On 27 February 2015, ABRIC announced that it had recorded a profit after tax of RM69.3 million for the FY ended 31 December 2014.
2. Substantial shareholder, Pui Cheng Wui, has been steadily increasing his stake through open market purchases. As at 13 March 2015, Pui owned about 18.4% of ABRIC's total outstanding shares, almost doubling his stake in 2 months.

Our Views

The profit after tax of RM69.3 million is largely due to a one-time gain from the sale of its security seals business. As ABRIC is currently a cash company (PN16), the profit recorded from this sale is immaterial going forward.

Based on the latest announced balance sheet, the Company has cash of RM126.1 million. Adjusting for dividend payments of RM42.1 million, full proceeds from warrant conversion of RM13.8 million (RM1.1 million had been recognised as at balance sheet date), and conservatively subtracting all borrowings of RM8.1 million and payables of RM14.8 mil, net cash is around RM74.8 million or RM0.50 per share, substantially the same as we previously estimated. Revised NAV estimate is slightly lower at RM 0.62.

Note that some variations in subsequent quarters to these two estimates are to be expected due to ongoing corporate expenses, rental and interest income.

As for Pui, we do not wish to speculate on his intentions. However, we note that with him holding a 18.4% stake in ABRIC and stepping up his interests rapidly, any future use of the company's large cash reserves such as for an acquisition may eventually require his buy-in. For comparison, the controlling Ong Family holds around 35% of ABRIC's total outstanding shares.

Recommendation

At the closing price of RM0.505 on 19 March 2015, ABRIC's share price is already up by 25% since our first report 2.5 months ago, adjusted for the special dividend of RM0.30. While the margin of safety at this level is considerably lower than at RM0.405, we still see ABRIC as a low risk value play. We expect good support at its net cash level of RM0.50. Further upside will depend very much on what happens over the next 9 months. If ABRIC does not acquire a new business within this period, shareholders will likely be returned an amount close to its estimated NAV of RM0.62. Any potential acquisition could boost the returns even more.

Events since our first report on 6 January 2015 (link)

1. On 16 January 2015, ABRIC announced that it had entered into a sale and purchase agreement for the acquisition of an office unit within a 45-storey Grade A office building known as Q Sentral, part of the Kuala Lumpur Sentral development. The consideration is RM3,704,590, to be paid over the construction period of 48 months.
2. ABRIC Berhad has been trading ex-dividend (of RM0.30 per share) since 21 January 2015 which reduces our entry price at the date of last report to RM0.405 vs last close of RM0.425.
3. As at 25 January 2015, ABRIC has only announced total outstanding shares of 140,486,774 instead of the maximum 148,578,750 had all its outstanding warrants being exercised.

Our Views

The property purchase does not materially affect our estimates. Recall that ABRIC had sold off all its operating assets except for two properties that are currently leased out to its former subsidiaries. This new property once completed is intended to serve as its corporate headquarters. It will be constructed and paid progressively over 48 months, meaning that the cashflow impact is minimal and should be more than offset by incoming cash proceeds of up to RM11.0 million yet to be received as part of the sale of its security seal business.

As it stands, there are still 8.1 million company warrants that have either curiously not been converted or which conversions have not been announced as at 25 January 2015. Pending further announcements on new conversions that made the 23 January 2015 books closure date deadline, holders of these warrants likely missed out on the RM0.30 special dividend bonanza. The implication is that the additional RM2.4 million saved bumps up our cash estimates by another RM0.02 per share.      

Our revised estimates of the NAV and cash per share is now RM0.50 and RM0.64 respectively:

Notes:
1. The newly acquired property has not been included as it will only be recognised progressively over the next 48 months
2. Updated to cash position announced on 21 Jan 15 and adjusted for actual special dividends likely paid based on total outstanding shares as at 25 Jan 15
3. Net of 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

Recommendation

At RM0.425 per share, ABRIC continues to trade at significant discounts to its breakup value of RM0.64 per share and net cash per share of RM0.50 which does not include another RM0.05 worth of receivables even after conservatively adjusting fully for the new property purchase. We believe the current share price provides an attractive entry point and a good margin of safety for value investors.

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: