Monday, January 08, 2007

M&A = Private Equity Mania

The driver for the bullish undertone in KLSE stocks should be M&A activity. Why are so many Malaysian listed companies considering M&A exercises? Not due to the ingenuity of our under-powered merchant bankers for sure. Its directly correlated to the private equity boom over the last 24 months all over the world. The boom started in the US, rolled over to Europe and then into bigger markets in Asia.

Malaysia kinda missed the boat owing to "equity ratio thingee", the general fact that Malaysian companies are too small, and the fact that many of the "undervalued companies or under-managed companies" are GLCs (which would present a whole new set of issues when trying to take them private).

Still, I do believe that the smaller private equity funds will find their way via JVs into Malaysian markets sooner rather than later. Many savvy company owners would be able to see the trend and they'd better move to gobble up undervalued companies themselves or face a bidding war later. Owners of undervalued companies themselves would want to quickly take themselves private before going into a bidding war with someone else.

Privatisation works on two levels generally: one, where the breakup value is much higher than market value (market cap); the other being "synergistic values" where bigger is better and stronger.


BANKING - The relaxation of rules by Bank Negara in November to allow banks to talk with more than one suitor at a time is a boost to the players. Basically, what they are saying is Bank Negara is allowing competitive bidding. Best candidate should be RHB Capital and EON Capital. For the record, Cank Commerce bought Southern Bank at 2.3x NTA and Temasek paid 2.0x NTA for Alliance Bank. This would translate into a pricing of RM4.00 to RM4.20 for RHB Capital, and a pricing of RM6.70 to RM7.20 for EON Capital.

PROPERTY - Quite straight-forward, just look at P/BV and just consider the discount. Sapura Resources RM0.32/BV1.93. Menang RM0.14/BV0.70. Pasdec RM0.38/BV1.57. Equine Capital RM0.48/BV1.84. Malton RM0.29/BV1.18. Mutiara Goodyear RM0.52/BV1.63. Meda RM0.18/BV0.59. Tanco RM0.075/BV0.25. PJ Dev RM0.47/BV1.59. Matrix International RM0.43/BV1.31. Of course the list of discount to NTA is long, when we try and pick winners we have to note the existing volume trends and shareholding spread as well to determine likely winners. So do the homework and put them on your watchlist.

STEEL - Those looking best in terms of having a discount to Book Value plus a strong dividend yield: 1) Ornasteel 2) Prestar

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