SPINDEX: At 85 cents, general offer underprices stock?

Excerpts from Maybank Kim Eng report (8 March 2017)

Analyst: Clement Ho

Steady growth in profitability of Spindex.
Amid a management buyout, Spindex is cast into the spotlight for management’s alleged lack of disclosure on potential counter offers, which could make a material impact on the share price.

Briefly, on 9 Feb, controlling shareholder and chairman of the precision engineering firm, Tan Choo Pie @ Tan Chang Chai (TCC), proposed a buyout offer at $0.85 c/share via a scheme of arrangement.

“TCC’s $0.85/share offer may be depressed. Even at $0.88, this implies a trailing 2.7x EV/EBITDA and 9.7x historical P/E, more than half of the valuation given for the recent buyout of its peer, Innovalues, which was valued at 9x EV/EBITDA and 18x P/E.”

-- Clement Ho, Maybank Kim Eng

However, Straits Times reported that Spindex ignored a request from a separate party on 23 Feb, to conduct due diligence on the company in relation to a potential offer. This was not made public until 3 Mar, when the interested party sent a second request to the company citing Rule 9.2 of the SGX Takeover Code, that it is obliged to disclose any information to other potential offerors.

Notably throughout the offer period to 3 Mar, concert parties of TCC’s stake rose from 25.49% to 30%, which prompted the offeror to switch from a scheme of arrangement to a mandatory general offer instead.

This led to a tender of shares from minority shareholders via the market, and resulted in the offeror crossing the 50% threshold, making the offer now unconditional.

The circumstances could be explained given that TCC’s $0.85/share offer may be depressed. Even at $0.88, this implies a trailing 2.7x EV/EBITDA and 9.7x historical P/E, more than half of the valuation given for the recent buyout of its peer, Innovalues, which was valued at 9x EV/EBITDA and 18x P/E.

The cheap valuation could be a compelling reason why Star Engineering (owned by Northstar Advisors), the PE fund which took Innovalues private, is considering a potential bid.

As a gauge, an unrated report by a local broker dated Apr ’16 provided a fair value of $0.99/share for Spindex.

Excerpts from DBS Vickers report dated 11 April 2016

Analyst: Ling Lee Keng

The Business
Integrated solution provider of precision machined components. Spindex is a highly integrated solution provider of precision machined components and assemblies with manufacturing locations in Singapore, Malaysia, China and Vietnam. The Group serves diverse market sectors in Imaging & Printing, Machinery & Automotive systems and Consumer-related products.

Machinery & Automotive and Consumer segments to drive growth. Machinery & Automotive systems accounts for about
50% of the total revenue while Consumer products make up about 20%. The market for Automotive is big but the product range for Consumer-related products is much wider.

Steady growth; strong net cash position. Spindex has been growing steadily, with an 8-year (FY07-FY15) pretax profit CAGR of 13%. Pretax margin has also improved to 13.3% in FY15, from 7.7% in FY07. A strong net cash position of about S$22m would enable the Group to capitalise on business opportunities.

The Stock
Trades at steep discount to peer Innovalues. At 6x FY16F PE, Spindex trades at a steep 50% discount to peer Innovalues of about 12x, and 53% discount to industry average of 13x. Applying a 40% discount on Innovalue's PE, given Spindex’s much smaller market capitalisation (Innovalues is about 3x larger), fair value works out to be S$0.99, offering potential upside of 32%.

Risks: Low liquidity, slowdown in auto sales

Comments

#1 millionfaith 2017-03-10 08:35

I wonder if the independent directors are aligned to CP Tan. I also do not understand why some of the major shareholders sold their shares (over 1 million shares) to Tan at 0.85 but market is actually trading at above 0.90. Any one can enlighten me? Thanks

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SPINDEX: At 85 cents, general offer underprices stock?

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