Is Yi-Lai’s privatisation offer price attractive?

Major shareholders make conditional offer at 78.5 sen per share

THIRTY months after a failed reverse takeover attempt of Yi-Lai Bhd, the tile maker’s major owners have decided to try to privatise the company.

But is their offer of 78.5 sen per share attractive enough for the remaining 67% of minority shareholders?

On Wednesday, the largest shareholders of Yi-Lai – Aaron Tan Jian Hong and Wendy Kang Hui Lin – made a conditional offer to take the tile manufacturer private. Tan is the executive director of Yi-Lai, while Kang holds the non-independent non-executive director post. Both were appointed to the board on June 5, 2014.

The conditional mandatory take-over offer was triggered after vehicles used by these major shareholders crossed the 33% threshold following a series of open market transactions.

Solely going by the share price movement of Yi-Lai, the 78.5 sen price tag is lower than Yi-Lai’s 52-week high of 86.5 sen around this time last year.

Yi-Lai’s 52-week low of 72 sen was on Sept 7, 2017 and the stock has since climbed 9.07% to settle at 78.5 sen on Oct 5. On a year-todate basis, Yi-Lai’s shares have fallen 0.62%.

However, the company’s earnings have fallen off a cliff. For the first six months ended June 30, 2017, the company posted a net loss of RM137,000 from a net profit of RM4.79mil, a year ago, against a 17.7% drop in revenue at RM58.1mil, from RM70.58mil.

Yi-Lai said decline in sales volumes of tiles led to the lower turnover during the period.

As a manufacturer of tiles in Kulai, Johor since 1990, the company was incorporated in June 2000 and listed on the Main Market of the Bursa Securities two years later.

Yi-Lai’s tiles are distributed under its own brand name Alpha Tiles. It also manufactures tiles for clients under their brands.

Similar to other tile-makers, Yi-Lai’s business is very much dependent on construction activities and the propery market. Sales volumes usually peaked prior to festive seasons due to increased renovation works.

According to Yi-Lai’s 2016 Annual Report, its factory has an annual production capacity of 11 million sq metres of tiles based on seven production lines.

Apart from the factory, the company has two showrooms cum marketing offices in Kulai and Petaling Jaya, four mini product centres/marketing offices in Ipoh, Melaka, Butterworth and Singapore.

Essentially, with the overall slowdown in property market, stiff competition from foreign ceramic players and rising costs in gas and labour wages, Yi-Lai is faced with downward pressure in its profit margins.

For the financial year ended Dec 31, 2016 (FY16), the company booked a net profit of RM4.94mil, on revenue of RM129.92mil, resulting in earnings before interest, tax, depreciation and amortisation (Ebitda) of RM12.16mil.

In FY15, Yi-Lai’s net profit was RM9.48mil, on revenue of RM136.98mil, with Ebitda of RM19.9mil.

The drop in profits and Ebitda is significant in FY15 and FY16 compared to FY14’s net profit of RM13.25mil and revenue of RM162.7mil, with Ebitda of RM25.69mil.

Dividend wise, the company did not pay any dividend for FY16. It paid the highest dividend of 8 sen in FY13.

So with its business dwindling, maybe that is the reason why the company sought to participate in reverse takeover attempt 30 months ago. Recall that in February, 2016, Salient points Yi-Lai announced a planned RM550mil RTO of the company by Penang-based Aspen Vision Group.

The rationale for the reverse takeover, according to Yi-Lai, was to enable existing shareholders to partake in a ‘new, viable and profitable core business in property development’ via Aspen.

At that time, the purchase consideration was to be settled via the issuance of 450 million new ordinary shares of RM0.50 each in Yi-Lau at an issue price of RM1 each, and the balance RM100mil in cash.

However, this fell through as Aspen failed to meet the three-year profit track record requirement. Despite Yi-Lai appealing for a waiver against this rule, the regulator turned it down. Therefore, going strictly by the balance sheet of Yi-Lai, one can also get a gauge of whether the 78.5 sen price tag is fair to minority shareholders.

For one, it has a rather clean balance sheet, with RM50.3mil sitting in its coffers and no debt.

In addition to that, the company has in its portfolio properties worth RM41.42mil, which was last valued on Dec 31, 2016.

Of the properties, the top three that are ranked highest in value include a 17-year old factory and warehouse on 4.05ha worth RM13.38mil, followed by a 19.46 sq metre 10-year-old warehouse, valued at RM7.79mil and a RM7.04mil 26 year-old factory. All of which are freehold and located in Kulai.

Hence, combining Yi-Lai’s cash and properties, this amounts to about RM91.72mil, which translates into a value of about 60 sen per share. Minorities have to study this and decide if they want to part with their Yi-Lai shares or indicate to management that their shares are worth more. To be noted also is that the fact that listed shells carry some premium value too.

Yi-Lai’s management team is headed by independent non-executive chairman Datuk Wong Gian Kui. The 57-year-old Wong, an accountant by profession, was appointed to the board as independent non-executive director on Aug 11, 2015. He later assumed the chairman’s post in February, last year.

Based on Yi-Lai’s filings on Oct 4, both Tan and Kang’s stake in Yi-Lai stood at 32.9%.

The second largest shareholder in Yi-Lai after Tan and Kang, is Lembaga Tabung Haji with a 10.3% stake.

The stock closed down one sen or 0.64% at 79 sen yesterday, with 358,300 shares changing hands. At this price, Yi-Lai is worth RM120.27mil.