JH is a familiar small cap stock – I took position in mid 2013 and exited in last March. JH has agreed to dispose its existing businesses Mermaid Marine Asia Pte Ltd for $625 million.
Since the circular issued by JH on 21April, I re-established my position again. This time the investing thesis is different – now looking at a potential micro cap play supported by infusion of new business.
In short, shareholders, subject to successful conclusion of SPA, will receive 62.5 cents from special dividend and 16 cents from capital reduction proposal. Since last week, share price has inched up to 80c. If one buys Jaya at 80 cents now, net purchase cost would be adjusted to below 2 cents.
There is one potential risk – completion risk of the SPA. Although I view such event as unlikely but potential investors should be aware. On a worst case scenario, assuming SPA is terminated, share price will likely drop.
However, on post sale scenario, Jaya will become a shell company. JH has sought and received approval from SGX to keep its listing status for 1 year pending injection of new business. If this condition is not met, the listing status will be cancelled. Loss to new shareholders is less than 2 cents (if one buys at 80 cents).
Injection of new business will result in a new ball game for JH. Price of stock then will be a function of business potential, quality of assets, quality of new management/new majority shareholders etc.
I see this potential play on Jaya as somewhat exciting that could bring significant returns to shareholders. The directors will have the responsibility to ensure that the new business injected (likely leading to RTO) is suitable for JH and brings value to current shareholders.
For those who are keen to follow this up, please read carefully the company’s circular of 21April and make your own decision.
Interesting thing to note is that a couple of substantial shareholders in the controlling group have been buying in the stock at around the 0.785 range previously. This may indicate that there may indeed be an "afterlife" for Jaya.
On the other hand, if listing is cancelled and the counter liquidated (which is very unlikely) there would be no loss to shareholders buying in at present rate of 80 cents. There would still be a gain of 2.8 cents. Together with the bank balance of $13m the total cash available for distribution would be $638m (as at time of reporting). This represents the 82.6 cents implied value referred to by the management. After paying off 78.5 cents (special dividend and capital reduction) and minus the management payout and other expenses of not more than $1.5m, the balance cash available for a final distribution to shareholders would represent another 3.8cents. There is also the very likely possibility of the bank balance increasing over the coming months because the group is still operational and business is still as usual. I think there is a proviso in the sale arrangements that allows either purchaser or seller to abort the transaction if the implied value increases by more than 6 % (as a result of either the holding company's bank balance rising substantially or its market stock value rising higher by that value).
Last edit: 10 years 7 months ago by Aquarius. Reason: typo error
Good that you digest the circular and read the company's sgx announcements. Yes, there were some recent purchases by significant shareholders.
The cash balance is to fund ongoing operational needs pending
completion of SPA and for post sale expenses. Hence, better to exclude as residual balance in assessing our potential risk of loss.
Be that as it may, on balance of probability of SPA being satisfactorily concluded, the risk reward in my view is stacked in our favour if we invest in JH now.
Actually, another way of looking at what I am saying about the residue capital (cash balance) after paying off the anticipated disbursements is that Jaya will still be trading at a holding value of 4 cents on SGX (provided there being no material changes).
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