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PUC's 33% Purchase Of Pictureworks - An Opinion

Details of exercise:  PUC to buy 33% of PW for RM52.8m. That values PW at just 52.8 x 3 = RM156m. That might be a shocker to many as investment bankers in China have hinted on taking PW public at between RM400-600m minimum. Looking at the share rise in PUC, and the fact that they are issuing new shares at 32.2 sen, only at current valuation can PUC eat up the 33% stake. To be able to issue at that price is a huge victory for PUC shareholders, being able to take a meaningful stake and issuing shares at recent highs.

  1. (i)  Issuance and allotment of 64,596,273 new PUC Shares at an issue price of RM0.322 per PUC Share (“Issue Price”) amounting to RM20.80 million (“Consideration Shares”); and
  2. (ii)  Cash settlement of RM32.00 million to be made on a staggered basis upon meeting a certain Profit Guarantee (as defined herein) (“Cash Consideration”).

    1. In consideration of PUC agreeing to purchase the Sale Shares in accordance with the terms of the SSA, Cheong Chia Chou (“Promoter”) for and behalf of the Vendors, covenant with and undertake to PUC that:
      1. (i)  the PW Group shall achieve a profit after tax (“PAT”) of RM14,800,000 for the financial year ending 31 December 2018 (“2018 Guaranteed Profit”); and
      2. (ii)  the PW Group shall achieve a PAT of RM20,500,000 for the financial year ending 31 December 2019 (“2019 Guaranteed Profit”); 

A 33% will allow PUC to equity account based on the fact that both companies have the same controlling shareholder, which is good for PUC. Plus a profit guarantee, its a pretty sweet deal for PUC.

Basis and justification of arriving at the Purchase Consideration
The Purchase Consideration of RM52.80 million for the 33% equity interest in PWHSB was arrived at on a willing-buyer and willing-seller basis, after taking into account the following:
  1. (i)  The valuation of 100% equity interest in PWHSB between a range of RM172.89 million to RM222.13 million as appraised by FHMH Corporate Advisory Sdn Bhd, vide its letter dated 21 December 2017. This translates into a valuation of 33% equity interest in PWHSB between a range of RM57.05 million to RM73.30 million; (you will note that the actual valuation was higher than the final consideration)
  2. (ii)  The Profit Guarantee of RM14.80 million and RM20.50 million for the financial year ending 31 December 2018 and 31 December 2019 respectively, as set out in Section of this Announcement. Based on the Profit Guarantee and the value accorded to 33% equity interest in PWHSB of RM52.80 million, the Purchase Consideration represents a price-to-earnings (“PE”) multiple of approximately 9.07 times of forward earnings based on the average of the Profit Guarantee of RM17.65 million;
  3. (iii)  The rationale and benefits of the Proposals; and 10

(iv) The favourable outlook of the digital imaging solutions for amusement park in the Asia Pacific region industry as well as the prospects and growth potential of the PW Group as set out in Section 4.3 of this Announcement.
  1. 2.1.7  Basis and justification for the Issue Price
    The Issue Price of RM0.322 per Consideration Share was determined based on the volume weighted average market price (“VWAMP”) of PUC Shares for the 5-day immediately preceding the date of signing of the SSA.
    The Board of PUC notes that the Issue Price represents a premium of RM0.162 or 101.25% over the audited net assets (“NA”) per PUC Share of RM0.16 as at the financial year ended (“FYE”) 31 December 2016. Further, the Issue Price represents a PE multiple of approximately 119 times calculated based on the earnings per share (“EPS”) of RM0.0027 for the FYE 31 December 2016.
    The Board is of the view that the issuance and allotment of the Consideration Shares to satisfy approximately 39.4% of the Purchase Consideration is appropriate after taking into consideration that the issuance and allotment of the Consideration Shares will only increase the current issued share capital of PUC by approximately 4.73% and thereby resulting in slight dilution to the existing shareholders’ equity interest in PUC.
    Furthermore, the issuance and allotment of the Consideration Shares will also provide the PUC Group with greater flexibility to utilise its existing financial resources to fund the growth of its existing businesses. As at 30 September 2017, PUC reported an unaudited cash and cash equivalents of RM3.92 million. As at 21 December 2017, shareholders and holders of three (3)-year, 4%, irredeemable convertible unsecured loan stocks of PUC (“ICULS”) have approved the variation of the utilisation of the remaining balance ICULS proceeds of RM36.45 million for the further expansion of its technology business, particularly in e-payment and e-commerce as well as advertising and media. 

Conclusion:  If you work back on the figures, the valuation for PW was obviously depressed in order for it to be a sweetheart deal for PUC. In fact, working through the figures, it looks like they used a WACC (weighted average cost of capital) of around 13%, which was debilitatingly high. For a relatively established business with visible growth timeline, plus a profit a guarantee, the WACC should be much less, say 8%-9%. 

Realistically speaking I would still put forward a "current IPO listing value" of RM350-450m based on niched based, tech based platform, which is to say PUC basically paid RM52.8m for a stake that is technically worth RM116m-150m.

How will the share price react? Possibly over 40 sen at least. If the rumoured tie up with Tencent were to come into fruition as well, 50-60 sen is not out of range. Its pointless to judge PUC based on PER now. Look at the building blocks PUC has assembled, its well thought out business platform that leverages on their tech/media advertising base, links with Bersian which connects to a few thousand retailers, getting e-wallet license (no big deal really) but if the Tencent linkup is true, then the e-wallet has new meaning ... the launch of Presto which is a better version of Groupon/Lazada ~ making the prospects of a flourishing and dominating e-wallet a possible reality. The acquisition of a meaningful stake in PW will give PUC a much better balance sheet and a better fundamentals moving forward. Suffice to say, the 33% stake is an excellent proxy should PW gets listed here or overseas later. Thus a valuation in the RM600-800m is not untoward.

p/s this is not a recommendation to buy or sell... just an opinion based on available information and debating the hearsays ... please contact your dealer/remisier before making any decision


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