|Adventa rallies on takeover deal|
|In The Edge Financial Daily Today 2012|
|Written by Chong Jin Hun of theedgemalaysia.com|
|Thursday, 12 July 2012 17:00|
KUALA LUMPUR: Adventa Bhd’s share price jumped as much as 20% to an intra-day high of RM1.94 yesterday after the company received an offer by its controlling shareholder to acquire its glove making business for RM320.8 million or RM2.10 per share.
The stock surged 33 sen to RM1.94 before closing lower at RM1.88, up 27 sen from the last traded price of RM1.61. The stock has gained 18% year-to-date.
RHB Research said the RM2.10 offer price “appears fair”. On a price-earnings ratio (PER) basis, RHB said although the offer price translates into a forward PER of seven times, which is lower than the industry average of 11.6 times, the discount is deemed reasonable.
The offer is considered fair as it takes into account Adventa’s smaller size compared to its rivals, and the firm’s higher earnings risk. RHB said the company’s earnings had disappointed the investment fraternity over the past four quarters, primarily due to a longer time lag in passing on higher raw material cost to buyers.
“However, if we were to value the offer based on consensus estimates, the offer price of RM2.10 translates into CY13 PER of 12.4 times, ie a premium to peer average, and would appear to be a good deal for minorities given the reasons above.
"We believe our estimates are ahead of consensus mainly due to stronger operating profits in light of easing latex prices and its expansion into production of higher-margin gloves,” said RHB, which raised its target price for Adventa to RM2.10 from RM2.09 previously, and upgraded its call to “trading buy” from “market perform”.
Adventa told Bursa Malaysia on Tuesday that it had received a takeover offer from its managing director and major shareholder Low Chin Guan, who will undertake the exercise with private equity firm Southern Capital Group. Low and Southern Capital, via their jointly owned vehicle Aspion Sdn Bhd, plan to acquire Adventa’s assets and liabilities for RM320.85 million.
The offer price is 45% higher than Adventa’s latest reported net assets per share of RM1.45 and a 30% premium to the stock’s pre-suspension closing price of RM1.61 on July 5. Upon completion of the acquisition, Adventa plans to return a portion of the sale proceeds or at least RM1.70 a share to shareholders.
Analysts, however, believe the rubber glove producer will make full distribution amounting to RM2.10 a share as there are no indications of Adventa venturing into other businesses.
Low and his family collectively own 43.5% of the issued share capital of Adventa. Accordingly, the acquirers will need to secure the consent of shareholders holding at least 75% of the value of the remaining stake in Adventa for the deal to go through.
RHB is of the opinion that the offer allows Adventa’s shareholders to capitalise on “the capital gain from the offer”. This compares to another option of waiting for Adventa’s financials to improve and its share price to appreciate later.
CIMB Investment Bank Bhd analyst Yeoh Yung-Juen said the takeover offer is deemed an opportunity to exit a business, which is seen as “deteriorating”. This comes against weaker demand for natural rubber gloves as customers buy more synthetic rubber or nitrile products.
According to Yeoh, Adventa could have “waited too long” to expand its nitrile glove production capacity, and as such, needs to play catch up with larger rivals. The glove maker’s earnings dropped sharply for the financial year ended Oct 31, 2011 to RM4.18 million from RM35.15 million the year before.
Earnings per share fell to 2.7 sen for FY11 versus 23.62 sen per share for FY10. In the latest annual report, the company said the fourth quarter’s (4Q) performance was significantly below expectations in comparison to previous quarters, posting a first-ever quarterly loss.
The quarterly loss had dragged down the annual earnings substantially. However, Adventa’s earnings have shown nascent signs of recovery in the second quarter. The company posted a net profit of RM6.15 million for its 2Q ended April 30, up 36% from RM4.59 million in the previous corresponding period.
Revenue rose 2.23% to RM106.63 million versus RM104.3 million. For the first half of FY12, Adventa’s net profit came in at RM8.85 million compared with RM8.63 million previously.
Revenue was at RM210.4 million. However, from another viewpoint, Yeoh said the takeover offer from the Adventa’s Low could be an indication that the rubber glove sector has reached its trough.
This follows two years of rising cost and falling demand, said the analyst who also raised the target price of Adventa to RM2.10 from the previously estimated RM1.49. Being the chieftain of the company for years, Low should have better insight than others on Adventa’s value and its future prospects, said analysts. “It is unlikely that the controlling shareholder will take over the business if it is not going to do well,” said an analyst.
Having held 43.5% shareholding in Adventa, Low and his parties acting in concert would also receive nearly RM113 million should the company distribute RM1.70 cash per share back to its shareholders. With that, Low is paying about RM207.8 million for Adventa’s glove manufacturing business.
This article appeared in The Edge Financial Daily July 12, 2012.