The following article was recently published on www.nracapital.com and is reproduced with permission.
JAYA SHARES have been hovering around the price that the previous major shareholder had divested to some strategic investors in early 2011 - S$0.48.
The share price rebounded recently on a broker report of a possible takeover at S$0.65.
Jaya has responded to an SGX query on this takeover in an announcement.
I don't know anything about this possible takeover but think it's worth sharing the Good, the Bad and the Possible for Jaya following a recent meeting with management in January 2012.
The Good
The key Good areas in Jaya revolve round its financial health.
Net gearing has improved from 0.31 in June 2010 to 0.16 in June 2011 and remains at a similar level in November 2011 after the release of its Q1-2012 results.
The second good factor is its low cost of funding.
When Jaya got into trouble in 2008/2009, it restructured its debt into a five year term loan with attractive interest rates of around 3.5% for five years with no principal payment for the first two years. This secure financing will help Jaya ride through the uncertain credit markets now.
The Bad
The operating environment for charter rates for its OSVs remains soft. Jaya indicated fleet utilisation rates of around 60-70% with most of the Charters being on spot rates because of the uncertainty.
The Group's fleet of vessels has increased to 28 from 22 with a new building programme for another 16 vessels planned between 2012 to 2014 with a market value of US$558-616mn compared to costs of US$359mn.
Profit for 2012 will be lower than 2011 because of fewer vessel sales. Jaya will be using its stronger balance sheet to try and return to its previous income model where the bulk of its income was from charter - it had switched this after it went into financing difficulty by selling more vessels.
Its Q1-2012 results show a decline in net profit to US$4.79mn down from US$22.8mn in Q1-2011. The Group indicated in its item 10 that it's positive on the long term demand for OSV's while acknowledging that short term charter rates are soft.
Jaya cannot pay dividend under the loan restructuring agreement .
The Possible
There was some discussion that some of the new controlling investors were interested to divest but no price was indicated nor was there any indication of who the interested buyers were.
What to do with your Jaya shares ?
If there is a takeover - we should wait for the advice of the indepenent financial adviser on the merits of the takeover offer. Meanwhile, we should evaluate Jaya on its own fundamentals.
I still like Jaya because it's undervalued. Its NAV per share in Q1-2012 was US$0.593 or about S$0.74 if we use S$1.26=US$1 exchange rate.
Jaya's current fleet in my opinion has a hidden value of US$100mn against their market value.
This would add another S$0.16 to its reported NAV, bringing its NAV to S$0.90. Earnings are likely to be disappointing but charter income should come in around S$25-30mn, then you can add another S$10-20mn from vessel sales.
You then have a range of net profit of about S$30-50mn giving you an EPS of between S$3.9 cents to S$6.5 cents or a PER of 9-16 times which is probably fairly valued on earnings basis.
Given Jaya's strong balance sheet and NAV support, the shares are still undervalued at these levels even if the takeover offer doesn't materialise but investors need a recovery in the OSV charter rates for the share price to rerate fundamentally close to the S$0.90 level.
Recent stories:
"JAYA has much stronger balance sheet today, so pay up, IHC'
JAYA 'likely' to be taken over; STX OSV fair value is $1.60, BROADWAY'S loss 'worse than expected'
