Hwang Capital: Potential bumper dividend round 2? (3)

Recall in an earlier posting that highlighted the takeover offer by Hwang major shareholders. It was speculated that another major stakeholder DBS would accept the offer but the parties agreed for acceptance did not work out as expected as per news article summarized below:

http://www.thestar.com.my/business/business-news/2016/07/02/takeover-offer-for-hwang-capital-turns-unconditional-and-acceptances-period-extended/

http://www.thestar.com.my/business/business-news/2016/10/10/hwang-capitals-conundrum/

Since the company’s share has been suspended there will be no room for entry or further opportunities and this post caps off the Hwang privatization journey.

Note: This is not an investment advice. Buy and sell any securities at your own risk.

Disclosure: None.

Hwang Capital: Potential bumper dividend round 2? (2)

Recall in an earlier posting that yours truly has speculated on the possible bumper dividends for the 2^nd time coming from Hwang.

In a surprise turn of events, Hwang had announced on Bursa Malaysia that its major shareholders, holding about 30% of total shares outstanding in Hwang Capital intend to launch a conditional takeover offer for the remaining 70% shares outstanding for Hwang Capital at RM2.65 per share, a decent premium of about 16% from current share price of RM2.21.

The share price had a brief run up in late March, almost breaching the RM2.65 levels before share price took a dive following an announcement that it will be extending timeframe for acquisition of new business for another year to April 2017.

Shareholder wishing to sell back their shares to Hwang at RM2.65 can do so should Hwang able to control more than 50% of voting shares after tabulating all valid acceptances to the offer.

A quick check on the shareholder register showed another substantial shareholder, DBS bank, which is in turn controlled by Temasek, Singapore’s sovereign wealth fund, with the potential in becoming the kingmaker in this deal. Its stake at a price of RM2.65 is valued at approximately SGD61 million, chump change compared to its huge asset base. The author is of the view that likelihood of DBS selling away the stake is high, thus paving way for an eventual delisting, which is incidentally the major shareholder’s desired intention.

Minority resistance may surface due its substantial discount of 21% compared to its NTA of RM3.22 per share. However, low interest rate environment and a continued delay may force shareholders to sell in view of the dimming prospects for its only core moneylending business.

Ultra patient shareholders may finally see light at the end of tunnel after holding on to Hwang shares. Since the bumper dividend on April 2014, share price has been on a steady uptrend from a low of RM1.80, and shareholders may have the chance to dispose its shares for a total of 47% capital gains after 2 and a half years.

Share price movement post announcement of the deal when the stock begins trading may present further opportunities for risk arbitrage.

Final thoughts:

Pros: Opportunity for unlocking share value for shareholders, higher offer price

Cons: Failure to obtain requisite valid acceptances pass conditions precedent.

Note: This is not an investment advice. Buy and sell any securities at your own risk.

Disclosure: None.

Hwang Capital: Potential bumper dividend round 2?

Since the sale of its investment banking and brokerage arm to Affin, Hwang Capital (Stock Code 6688) quoted on the Bursa Malaysia stock exchange has been a cash rich company since. From the latest quarterly financials announcement for quarter ended 31 October 2015, Hwang held liquid readily convertible into cash available for sale securities amounting to RM436million (~RM1.7 per share) Note that RM250million (approximately RM0.98 per share) has been earmarked for potential acquisition of new business and Hwang has up to 7 April 2016 to announce on its proposed new acquisition should it had identified (if any).

Shareholders may be in for a surprise bumper dividend of at least RM0.98 per share should management decide to return the excess cash for failing to identify any target acquisition.

Based on the current market value of its share price of RM2.38 (last closing as at 18 February 2016), market is implying a valuation of 0.5 based on the P/B (Price to book) ratio of its moneylending consumer financing business and P/E (Price to earnings ratio assuming annualized EPS of RM0.14) ratio of 4.7 which may seem fair for a small scale money lending business with total loan book of RM369million.

The latest gross interest margin on its loan book is approximately 10%. Assuming a 50% impairment to its loan book (which is a pretty bad case but not entirely impossible for the unsecured consumer financing business space), the liquidation value of Hwang Capital still stands at around RM2.40 per share, which is around its current share price. This may indicate a fair margin of safety. Note that Hwang does not have any significant financial liabilities. It had also recently declared a decent dividend amounting to RM0.10 per share which translates into a 4% dividend yield.

Share price has been on an uptrend since mid-2014, gradually increasing in price since. Could the price increase be in anticipation of a pending corporate action involving another round of bumper dividends from its reserves?

Final thoughts:

Pros: Potential unlocking of share value via dividend distribution catalyst, acquisition of earning accretive business, decent margin of safety via annual dividend distribution and liquid asset backing

Cons: Extension of timeline for new acquisition of business thus delay in full realization of share value/narrowing of discount to NTA, Management hoarding cash (low probability), acquisition of value destroying business.

Note: This is not an investment advice. Buy and sell any securities at your own risk.

Disclosure: None.