Privatisation 2008

IS the wind of privatisation going to blow next year in view of the low valuation of stocks?

Since the beginning of this year, there have been more than 20 privatisation proposals. The latest included those of DK Leather Corporation Bhd, Industrial Concrete Product Bhd (ICP), VADS Bhd, TH Group Bhd, M3nergy Bhd and Mesdaq-listed Modular Techcorp Holdings Bhd.

Analysts have a mixed view. For one, Jupiter Securities head of research Pong Teng Siew said the trend of privatisation was unlikely to persist next year, with funding likely to be an issue in view of the global credit crunch that had already reduced funds available to investors to take part in such exercises.

“Just take the proposed plan to privatise AirAsia as an example. It illustrates well a crucial issue in privatisation, which is the funding source,” he told The Edge Financial Daily.

AirAsia’s major shareholder Tune Air Sdn Bhd, led by the group’s chief executive Datuk Seri Tony Fernandes, had to put on hold its plan to privatise and delist the counter from the local stock exchange due to the difficulties in securing funding amid the global financial crisis.

Pong said the magnitude of the global credit crunch had prompted local banks to be more cautious and prudent in their lending.

Also, he said the global economic recession did not bode well for privatisation initiatives, even for those that were currently under way.

On the other hand, OSK Research head Chris Eng said the wind of privatisation was expected to be strong next year in view of the low valuation of stocks, although earnings may contract.

The Kuala Lumpur Composite Index (KLCI) had tumbled to 876.40 points on Dec 19, 2008, a 73% drop from its peak of 1,516.22 on Jan 11, 2008.

It is worth noting that the price-to-earnings ratio (PER) of the KLCI had also dipped to 10.10 times as of the week ended Dec 19, 2008 from a high of 16.84 times as of the week ended Jan 11, 2008. Its lowest PER for the year was 9.31 times for the week ended Oct 24, 2008.

“We think there will be increasing privatisation given the low valuation of stocks. Even if earnings contract next year, PERs are still low,” Eng told The Edge Financial Daily.

An ideal example is ICP, which was a 63.4% subsidiary of IJM Corporation Bhd. ICP, which is Southeast Asia’s largest pre-tensioned spun concrete piles (PSC piles) manufacturer, had been registering an annual average net profit growth rate of 70% since 2000.

“I believe we will see an increasing trend of privatisation among small, family-owned public-listed companies especially where cash per share is higher than the share price,” Eng added.

Other factors that may fuel privatisation include businesses that were fairly stable where there was no need to raise cash via equity, which in turn, made the requirements of a listing such as the need to hold AGMs and issue annual reports expensive.

Kenanga Investment Bank Bhd’s head of corporate finance Debbie Leong agrees. She said other than cheap valuation, other motivating factors included the cost of maintaining the listing.

She said the same goes for companies that were not benefiting from having a listing status, such as the inability to tap the capital market for funds due to lack of visibility to investors, low analyst coverage, or the mere fact that the companies were too small to attract institutional shareholders.

“We are of the view that privatisations among locally listed companies over the next year are likely to continue, albeit at a much reduced pace, compared to this year.”

She said although the valuation of listed entities had been further depressed, the number of privatisation cases expected to be completed next year would be lower given the difficulty in obtaining funding.

“We see that privatisations are likely to involve small to mid-cap companies moving forward, as the quantum involved in completing the privatisation would be smaller (less than RM100 million) and thus more manageable when it comes to obtaining funding,” Leong told The Edge Financial Daily.

Minority interest
Analysts said privatisation also played a significant role in bringing stock prices closer to their intrinsic values. But the main concern is the offer price, whether it is in the interest of minority shareholders to sell out.

Are these shareholders getting a fair deal or are they being taken advantage of? Is the premium offered over the existing stock price sufficient to compensate the minority shareholders?

The proposed privatisation of Harrisons Holdings (M) Bhd by its single-largest shareholder Bumi Raya International Holding Co Ltd is one good example of minority interest taking a tough stance and succeeding.

SC Fund Management LLC, based in New York, had accumulated 8.41%, and had sought a higher price for the takeover offer by the offerors, which held a collective 42.54% stake.

Bumi Raya proposed to take Harrisons private in July at RM1.20 a share. It later revised the offer price to RM1.45 a share following criticism that the initial offer price was too low. Even at RM1.45, SC Fund Management said the price was only equivalent to 45% of Harrisons’ book value as at end-June.

The proposed privatisation had also prompted the Minority Shareholder Watchdog Group (MSWG) to urge Harrisons’ minority shareholders to reject the offer. The privatisation eventually failed.

All in all, no matter where the wind of privatisation blows next year, to ensure a successful exercise, the offer price must be attractive enough, or more importantly, “fair” to all shareholders.