Mamee-Double Decker’s privatisation on track
MAMEE-DOUBLE Decker (M) Bhd has been in the limelight recently due to a privatisation proposal by major shareholders in a selective capital reduction (SCR) and repayment exercise under Section 64 of the Companies Act, 1965. This is a privatisation route that has been used successfully by several other companies.
Some examples are Halim Mazmin Bhd and Telekom Malaysia Bhd (TM) unit VADS Bhd, both of which were de-listed in 2009.
Jupiter Securities head of research Pong Teng Siew says for some companies, the SCR is a preferred method for privatisation as the company foots the bill to pay off minority shareholders.
“Perhaps one out of 100 companies will use this method rather than making a general offer. Normally companies that use this method are quite strong financially. Also, the company would have strong cash flows, a good track record over the long term, the share is undervalued (cheap in context of price to earnings ratio – PE). A good yard stick would be share price to cash flow ratio.”
However, Pong pointed out that the company’s gearing level can balloon substantially if the SCR was successfully concluded.
Affin Investment Bank Bhd research head Andy Ong shared a similar opinion.
As far as the offer is concerned, most analysts agree that minority shareholders of Mamee-Double Decker are getting a “fair deal” based on the capital repayment offer of RM4.39 per share, which as pointed out by Jupiter Securities, represented a 21.9% premium over the last traded price of RM3.60 prior to its trading suspension and 2.6 times book value as at end-Dec 2010.
The research house points out that the offer is 9.2% lower than the firm’s fair value of RM4.75, which is based on 13 times price to earnings ratio (on FY11 projected earnings per share of 36.5 sen.
Mamee-Double Decker’s shares surged 17% or 60 sen on Monday to close at RM4.20 following the announcement.
However, there was no change in the closing price of Mamee-Double Decker’s shares yesterday which had a day high of RM4.21. The volume traded yesterday was also low at 199,500 shares.
Jupiter Securities said “at the closing price of RM4.20, the stock is still about 4.3% away from the offer price of RM4.39. With the time needed to complete the deal estimated at six months, annualised return at current price is slightly in excess of 8%.” The report added that the risk of a non-successful conclusion of the privatisation was low, as the offer price is at 22% above the pre-suspension price.
Mamee-Double Decker in its announcement last Friday, had said “the board is concerned about the trend of increasing raw material prices as well as foreign exchange volatility amidst the uncertain economic environment.
Mamee-Double Decker plans to fork out RM100mil capital expenditure this year to upgrade its facilities and machinery in Malacca.
The company also noted that its shares had been thinly traded.
Jupiter Securities said “the low trading volume arose from a “chicken and egg” situation where fund managers that are interested in the stock are unable to get meaningful amount of shares without driving the price up. On the other hand, the controlling shareholders with a 71.9% stake are unwilling to part with their holding at a give-away price.”
Hence, the privatisation would help resolve the valuation issue for the major shareholders and permit minority shareholders to exit at a premium to the market price.
However, the privatisation exercise, if successful, would result in a substantially higher level of gearing.
Under the plan, major shareholders of Mamee-Double Decker who control the company would repay RM179.8mil or RM4.39 a share to minority shareholders.
The report said there was a possibility that post-privatisation, a new equity partner would take up a substantial stake in the company and would provide the funds for its expansion and reduce the gearing. It further speculated a possible re-listing of Mamee-Double Decker a “few years down the road.”