Valuation issues in Apex-Mercury proposed merger

Brokerage poised for another change in major shareholder

PETALING JAYA: A year after seeing a change in shareholding, Apex Equity Holdings Bhd is poised for another change in its major shareholder with the proposed merger with Mercury Securities Sdn Bhd.

While the proposed merger is aimed at bringing about synergies, it also seems to address a thorny shareholding issue that had been hanging over Apex.

In a nutshell, here’s the proposed deal announced last Friday: Apex is looking to acquire Mercury Securities’ stockbroking, corporate advisory and other related businesses for RM140mil.

Of this, RM48mil will be settled in cash and RM92mil through the issue of new Apex shares.

The price tag of RM140mil values Mercury at 14.89 times its FY2018 earnings of RM9.4mil.

In its filings, Apex said the valuation of Mercury is in line with listed companies in the same business.

Still, some reckon it appears an expensive price to pay considering the highly competitive nature of the industry, especially for standalone brokerages versus bank-backed ones. TA Enterprise Bhd, which also owns a non bank-backed broking firm TA Securities Sdn Bhd, trades at a paltry value of 3.8 times its earnings.

Banking institutions like CIMB Group Holdings Bhd, RHB Bank Bhd and AMMB Holdings Bhd trade at a PE of around 10 times, while Malayan Banking Bhd is at 13.93 times. Kenanga Investment Bank Bhd, meanwhile trades at a PE of 14.65 times, according to Bloomberg data.

Furthermore, the industry is seeing thinning margins partly due to the entry of technologically advanced players like Rakuten into the scene.

The other issue to note is that Apex is issuing its new equity to Mercury at a price tag of 92 sen per Apex share, which is the five-day volume weighted average market price of the stock.

However, that price is at a 36% discount to Apex Equity’s net tangible asset (NTA) value of RM1.45 per share.

So are Apex shareholders, especially the minorities, getting a good deal?

Business synergy-wise, the deal will allow Apex, which owns JF Apex Securities Sdn Bhd, to dive into the corporate side of the equities business, which is a strength of Mercury Securities.

It will also give Apex scale and size in the stockbroking industry.

The proposed merger comes a year after the entry of an entity called ACE Investment Bank into Apex. The entity emerged with a 23% stake in Apex at about the time when a similar sized block was traded off market by the late Chan Guan Seng, Apex’s former executive chairman and parties close to him. The share price of Apex then was around RM2 a piece.

ACE Investment is an offshore financial institution incorporated in Labuan.

However, an issue that cropped up from his disposal of shares was whether the new shareholders had got the nod from the regulators to become a major shareholder of Apex.

Financial institutions such as stock brokers also need to have major shareholders who fulfil the “fit and proper test” of the Securities Commission (SC).

According to people familiar with capital market rules, the SC’s licensing handbook before it was updated in April this year, required approval for change in shareholding in the licensed entity, but was silent on a change in shareholding in the holding company.

“However, out of good form generally all parties will go to the SC to seek its approval prior to the purchase of stockbroking firms,” says a banker.

The SC licensing handbook has since been updated to provide clarity where the regulator’s prior approval is required for any proposed change in both direct and indirect shareholding, which will result in the change of controller.

Even so, bankers said that ACE Investment would still need to fulfil the fit and proper criteria.

This is similar to Bank Negara’s requirements of key responsible persons in financial institutions, where the objective of this guideline is to ensure that the financial institution is led by persons of credibility and competency.

Besides this, the new owners also ought to display a clear business plan on how he or she is going to bring value to the business, bankers say.

It is unclear if ACE Investment has fulfilled these.

The SC, when contacted, said “as a matter of policy, it does not comment on the status of any corporate application.”

An ACE Investment official declined to elaborate, saying “the full facts are not at his disposal.”

Worth noting is that if the proposed deal materialises, Mercury Securities will emerge as the single largest shareholder in the merged entity with a 31% stake.

The deal with Mercury is dilutive. Besides the 100 million new shares being issued to Mercury, Apex is proposing the issuance of another 20 million new shares, about 10% of its existing issued share capital, at an issue price to be determined later to raise fresh cash to finance the merger.

Apex’s other major shareholder now is Fun Sheung Development Ltd with 15.78%.

The family of Chan, who passed away early this year, still hold a direct 8.79% stake.

Hence the question remains if this deal with Mercury is the best deal on the cards for Apex shareholders? Should the company consider other options?