KAF Seagroatt-Campbell: Risk Arbitrage or reverse risk arbitrage? (2)

Recall earlier posting that there is a potential risk arbitrage gains about 7.5% should you purchase KAF shares on 22 February 2016. The offer has officially become unconditional and the offeror had proceeded to scoop up the remaining shares in KAF. KAF IB will have full control of KAF Seagroatt-Campbell. This deal will be finalized by June 2016 and will close a chapter on the takeover deal. The price has shot up to RM2.69 per share and those holding on to the shares can sell them back at RM2.70 for some savings on brokerage expenses. No further opportunities are expected from this share.

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

 

MAA: Something Brewing? (2)

Recall that yours truly had in an earlier blog posting highlighted the pending sale negotiations for MAA to dispose its 75% stake in MAA Takaful. Fast forward to present day, on 4^th May 2016, MAA officially announced the signing of S&P agreement with Zurich to Bursa Malaysia. All the pros highlighted will be realized should the sale go through namely:

Management aggressive buyback: Management has continued its share buyback spree by buying approximately 2.6 million shares from the open market at an average price of around 0.95 per share. This provided a strong support basis for the share price.

Favourable valuation obtained for sale of MAA Takaful – This is huge positive surprise as the sale price of RM393.75million for its 75% stake values MAA Takaful at Price to Book (P/B) ratio of 4.49 times, well above prevailing valuation of comparable M&A transactions.

Management unlocking share value via distributions – Management has proposed a special dividend amounting to RM0.35 per share should the deal goes through smoothly, which may take about 3 months or more.

Post disposal MAA will be a cash rich company. It intends to maintain its listing status, hence there may be room for management to hoard the cash pile since it is likely to avoid being a cash company. NTA after disposal is estimated to be RM2 per share after declaration of special dividend.

Yours truly once held MAA shares but had since been disposed for other utilization, hence missing the impending big gain when shares begin trading on 5 May 2016. There may be opportunity if the share price is right for some risk arbitrage gains, but subject to final computation of expected remaining cash pile per share held by the company and of course share price levels.

Final thoughts:

Pros: None. Subject to share price which may present some risk arbitrage opportunities.

Cons: Management hoarding cash or deploy in value destroying new core business.

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

 

Disclosure at time of publication: None.

 

Sapura Resources Bhd: Unlocking of shareholder value or value trap?

On 16 March 2016, Sapura Resources Bhd (Stock Code: 4596) listed on Bursa Malaysia had announced the signing of conditional share sale agreement to dispose several of its associate companies namely APIIT, APU, APIIT Lanka and APS to ILMU Education Group (linked to Malaysian Government private equity arm Ekuinas) for a total combined cash consideration of RM315million.

Post disposal of the above associate companies, Sapura Resources will be left with huge cash pile to focus on its remaining business segment ie property development and aviation services (charter of jets for air travel).

A simple computation as below would have shown a discount of share price to its net cash per share value as of writing (15 April 2016) upon completion of the share sale agreement and receipt of full cash balance:

Before any investor start drooling over the potential 28% discount to cash per share, as at to-date, management has not present any indication of a large one off distribution as the only distribution would be a one off special dividend amounting to RM0.05 per share.

The cash buffer may serve as a margin of safety for those who are interested in riding along the expansion of its property development business and aviation business.

Based on the estimation from its quarterly results, the property segment would make up the bulk of its income going forward as it is currently enjoying a healthy rental income from its stable of 3 properties as per disclosed in its annual report with >90% occupancy. Latest quarterly results had also showed a contribution of PBT amounting to RM10million. Future development may eat into its cash pile going forward as well.

The dark horse would be its aviation sector as it is currently showing a loss of RM3.5million per latest FY ended 31 Jan 2016.

Assuming an estimated cash burn rate of RM6million per annum (as implied by its latest operating loss), discount of cash balance would be completely narrowed to nil within 5 short (or long?) years.

Since the announcement of the deal, prices have started to drift lower from an intraday high of RM1.60 (one day after the announcement on the 17^th March 2016) to a current low of RM1.16.

Investor may use the current discount opportunity for entry should it be confident of its top management linked to Tan Sri Shahril bin Shamsuddin of SapuraKencana Petroleum fame.

Pros: Margin of safety for discount to net cash per share, healthy net rental income as cash flow buffer for future expansion

Cons: Adverse downturn affecting its current aviation business segment, unforeseen large losses on its aviation business segment.

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

Disclosure as at time of publication: None.