Takeover offer for Wing Tai Malaysia seen undervalued
Second-largest shareholder dissatisfied with price
ON the face of it, the general offer for Wing Tai Malaysia Bhd seems like a compelling deal.
For one thing, the generous premium attached to the offer will give investors a profitable exit from their positions in the company, which engages in the property development and investment, apparel retailing, and garment manufacturing businesses.
For another, investors can realise their investment in cash from the relatively illiquid counter that has been underperforming the market and has not been able to trade anywhere near the level of its book value in recent years.
But if one were to take into account the assets and the underlying business of Wing Tai, one would find the premium of the offer price does not justify the value of the company.
On that note, at least one shareholder - Pangolin Asia Fund, which is listed as the second-largest shareholder in Wing Tai with a 2% stake in the company - has voiced its dissatisfaction over the general offer.
“The offer is a significant discount to Wing Tai’s book value... there is a disconnect between the company’s share price and underlying business.
“On a continuing business basis, the company is massively undervalued,” Pangolin Investment Management director James Hay argues.
The Cheng family of Singapore has over the week launched an offer of RM1.80 per share for the remaining 33.9% stake that it does not own in Wing Tai.
The unconditional cash offer, valued at a total RM290.7mil, was made through Singapore-listed Wing Tai Holdings Ltd (WTH) and its wholly owned unit Wing Tai Investment & Development Pte Ltd (WTID), both of which are controlled by the Cheng family.
Through WTH and WTID, the Cheng family directly owns a 66.1% stake in Wing Tai.
Reasonably priced?
At RM1.80 cash per share, the offer comes at a 52.5% premium to the last traded price of Wing Tai’s shares at RM1.18 before the announcement of the takeover offer was made on May 22. It also represents a 57.9% premium to Wing Tai’s three-month volume weighted average market price.
However, the offer implies a 34% discount to Wing Tai’s net assets per share of RM2.73 as at end-March 2017, or a price-to-book value of 0.66 times.
One has to note that before the completion of a rights issue during its financial year ended June 30, 2016, Wing Tai’s net assets per share stood at RM3.44 as at end-June 2015.
At present, Wing Tai manages a portfolio of 12 international fashion brands, including Topshop, Topman, Dorothy Perkins, Miss Selfridge, Warehouse and Karen Millen, in Malaysia.
In addition, the group’s 45% joint venture with Japan’s Fast Retailing Co Ltd currently operates 38 Uniqlo outlets in the country as well as an online store.
Besides these, Wing Tai also owns some land in the Klang Valley and Bukit Mertajam in Penang as well as premium property projects in Kuala Lumpur such as Ambassador Row Hotel Suites, Lanson Place Bukit Ceylon Serviced Residences and Kondominium No 8 as well as the 195-unit high-end development, Le Nouvel KLCC, opposite the Petronas Twin Towers.
Based on the group’s business portfolio and real estate assets, Hay says, Wing Tai’s shares should be worth more than RM3 apiece.
According to Pangolin’s sum-of-part calculation, Wing Tai’s fair value should be RM3.42, and this could go up to RM3.63, if Wing Tai managed to sell one of the two towers of Le Nouvel KLCC.
The recent takeover of The Store Corp Bhd by the Tang family is a similar case of an undervalued offer.
Last November, the Tang family launched a general offer for the company that owns and operates a chain of supermarkets at RM3.52 per share. The Tang family and parties acting in concert with them then held some 42.05%.
The offer implied a premium of 16.6% to The Store’s last traded price of RM3.02 before the takeover offer for the company was announced. But it was almost 50% lower than the net assets per share of the company at RM6.76 as at end-September 2016.
After the first offer was made, some shareholders still accepted the Tang offer, but the level of acceptance was not sufficient.
More than a month after its first offer, the Tang family then raised its offer price to RM3.70 apiece to enhance the appeal of the deal.
Although still undervalued, independent adviser Mercury Securities Sdn Bhd urged minority shareholders to accept the deal, which it deemed “reasonable”, even though it was “not fair”.
The deal went through after the Tang family crossed the shareholding threshold of more than 90% to take The Store private in January this year.
Mercury Securities has been appointed as the independent adviser for Wing Tai’s case.
Free-float constraint
While Hay concedes that Pangolin could still make some gains from accepting the offer of RM1.80 per share for its stake in Wing Tai, he stresses that the fund’s investment objective is not only about making how much profit from a takeover offer, but it is also about being given a fair value for its investments.
Nevertheless, he reckons that in the case of Wing Tai, most minority shareholders will find themselves in a situation of being forced to accept the buyout offer, even if they are not happy with the price, because of the real threat of the counter being delisted based on the minimum free-float requirement under the country’s listing rules.
“The problem is the 25% free-float require- ment, which presents a real threat of the company being delisted, and makes it difficult and sometimes unfair to minority shareholders who do not want to sell out,” Hay explains.
In the takeover notice, the joint offerors (WTH and WTID) have already stated they will not take any steps to address the shortfall in the public shareholding spread or free float of Wing Tai in the event the counter does not meet the requirement after the closing date of the general offer.
While non-compliance of the public spread requirement would not automatically result in the delisting of Wing Tai’s shares on Bursa Malaysia, the offerors have already said that they have no intention to maintain the listing status of Wing Tai.
Once their aggregate holdings in Wing Tai exceed 75%, they will make the necessary application to withdraw the listing status of the company.
As it stands, Malaysia’s free-float requirement of 25% is the highest in Southeast Asia. This compared with the minimum free-float requirement of 10% in Singapore; 15% in Thailand and the Philippines; and only 7.5% in Indonesia.
Stale prospects
The bid to take Wing Tai private is widely seen as a move to streamline WTH’s businesses.
It comes at a time when Wing Tai is seeing some improvements in its financial performance despite still facing headwinds to its business, what with the high-end property market in Malaysia turning soft and consumer retail spending remaining sluggish.
Some Singaporean analysts say the takeover offer could turn out to be a re-rating catalyst for WTH’s shares. It’s been suggested that interests in WTH could also be spurred, as investors who still want to have exposure to Wing Tai’s business in Malaysia will soon have to go through WTH.
According to UOBKayHian, for one, the takeover of Wing Tai could raise WTH’s earnings per share (EPS) by 36.3% to S$1.24 (RM3.83) and net tangible asset per share by 1.5% to S$4.10 vis-a-vis the values in the financial year ended June 30, 2016.
Since the announcement of the takeover offer, WTH’s shares have gained eight sen to close at S$1.92 yesterday.
Similarly, Wing Tai’s shares have jumped and they have been trading near the offer price in the last few days. It closed at RM1.78 yesterday.
One analyst notes it won’t be surprising if the parties acting in concert with the joint offerors are accummulating Wing Tai’s shares from the open market to increase their holdings in the company to ease the takeover process.
He says it may be difficult for minority shareholders in Wing Tai to hold out for a better offer, as the joint offerors are not expected to face any difficulty in raising their stakes to more than 75%.
He further notes that only less than 15% shares in Wing Tai are held collectively by institutional investors, who are more likely to have the holding power.
“Even if they stand together, it will be difficult to pose any challenge to the offer,” he explains.
For the nine months ended March 31, 2017, Wing Tai saw its net profit increase 21.7% to RM26mil from RM21.4mil in the corresponding period last year, driven by the retail segment.
During the period in review, the company’s revenue increased 12.6% to RM240.3mil from RM213.4mil in the previous correponding period, and its EPS increased to 5.48 sen from 4.87 sen previously.