Be fair to AP Land minority shareholders

Tuesday October 25, 2011

Commrnt by Rita Benoy Bushon

SHAREHOLDERS of Asia Pacific Land Bhd (AP Land) will convene in an EGM today to vote on a proposal first announced on Jan 11 this year: that substantial shareholder Low Chuan Holdings Sdn Bhd (the family-owned company that started AP Land half a century ago, and which is related to three of the executive directors), proposed to acquire the entire company, including all of the assets and liabilities.

The offer price is 45 sen. This is an 8% premium to its closing price of 41.5 sen before the announcement was made, but a 57% discount to the adjusted audited net assets per AP Land share as at Dec 31, 2010.

Notably, only a simple majority (or 50% plus one share) of non-interested shareholders' approval is required for the proposed privatisation, since the offer came before the amendments to the listing requirements (which raised the threshold for shareholder approval to 75%, where a listed company is disposing all, or substantially all, of its assets, resulting in it being no longer suitable for continued listing on Bursa Malaysia). Thus, it has been more than six months since the company's announcement and the 75% Rule kicking in.

When we first responded to this proposal, we noted that many reasons could exist for the deep discount to the company's net tangible assets (NTA), including the fact that much of the value of its assets, mostly backed by landbank, has not been unlocked, and that the company has not enjoyed a stable history of profits since it has lost money in seven of the last 10 years. Nor has it paid any dividends in this period.

Since then, other related views have been sought, including that of the non-interested directors, audit committee, and independent advisers.

First, the non-interested directors. Their opinion was that the proposed disposal was fair and reasonable, after taking into consideration the advice of the principal and independent advisers.

From a financial point of view, the audit committee thought otherwise, since the offer price was at a discount to NTA and would result in a loss on disposal. However, they added that there was an element of reasonableness, after taking into consideration the company's historical market price and trading volume, the trading multiples of other comparable listed property companies and comparative premiums offered in previously similar transactions on Bursa.

Lastly, MIDF Amanah Investment Bank Bhd, the independent adviser, said the proposed disposal was not fair, mainly because of the discount to NTA, though it was reasonable for reasons similar to that stated by the audit committee.

What do we think? Our answer comes in the form of several observations:

● Revenue at AP Land is on a healthy growth trend: rising every year since 2006, and in fact more than doubling to RM125mil in FY2011. Our calculations show revenue growth at an average compounded rate of 67.58% per annum.

● That it has a sizable and well-connected landbank in Rawang. AP Land has 492ha in an area where other major and established developers have already built their own projects; is suitably near to retail chains and will enjoy improved road connectivity with the recent opening of LATAR expressway, as well as the possible direct linkage to LATAR via Bandar Tasik Puteri.

● That AP Land might well have stable income from its oil palm plantations in East Kalimantan. It has a total of about 9,130ha as shown in the circular to shareholders against about 12,800ha shown in the company's FY2010 annual report.

● That the independent adviser's suggestion that share trading is illiquid may not reflect its shareholding structure: the FY2010 annual report and the independent adviser's circular show that the free float of shares is 66% of the total shares issued (excluding treasury shares) and that all the free float shares are held by minority shareholders.

● That management and the board have not been able to create value for shareholders for at least the last decade. AP Land's share price has traded below the offer price of 45 sen per share except for the period between early 2007 to early 2008.

Volatile market

Smaller property companies will often suffer from a poor valuation. Diminished liquidity (often exacerbated by a dominant shareholder) and a crowded property sector with little to distinguish one from the other has contributed to the situation.

Moreover, many of these property companies have not attained the minimum market capitalisation needed by institutional funds to invest. What's more, sentiment in the property market has been inextricably linked to the fortunes of the stock market which is very volatile currently.

Our only response, as always, is to be fair.

Minority investors, who are the same men and women who believed the story of the major shareholders. Thus it is only right that major owners do right when the time comes to part.

Our advice to minority shareholders of AP Land is vote wisely. With your small but influential ownership (10 lots and less) you already make up 90% of the total number of shareholders. Most of the 66% of shareholders eligible to vote on the proposed disposal are minority retail shareholders. (Please refer to our detailed analysis at www. mswg.org.my )

●The writer is chief executive officer of Minority Shareholder Watchdog Group.

http://biz.thestar.com.my/news/story.asp?file=/2011/10/25/business/9762404

A quick look at Tongher 2009

Tong Herr Resources Berhad Company

Business Description:
Tong Herr Resources Berhad. The Group's principal activities are manufacturing and selling stainless steel fasteners. Products include nuts, bolts and screws and all other threaded items. It also operates as an investment holding company. Operations are carried out in Malaysia and Thailand. The Group distributes its products to Asia, Europe, North America and other countries.

Wright Quality Rating: LAC0





A quick look at Tongher
http://spreadsheets.google.com/pub?key=tfz75IeJ7n6inThzlEPxfMg&output=html

This is a cyclical stock.  Its industry is down with the poor economy.  However, its balance sheet is strong.  It has turned in profits for the last 2 quarters.  It has cash equivalent of RM 155.331 million and this equates to cash of RM 1.22 per share.

Shares Outstanding:  127.43 million
Closely Held Shares:  77.320 million




With so many shares closely held, this company is little different from a private limited company.  No wonder it is traded at a steep discount.

Why does this company keep so much cash unproductively employed?

Beware of buying Private Limited Companies

Wednesday January 13, 2010
Beware of buying Private Limited Companies (PLCs)
Personal Investing - By Ooi Kok Hwa

SOME investors are concerned over the shares that they own in some private limited companies (companies that are registered as “Sdn Bhd”).

Most are just minority shareholders, owning about 10%-20% of the companies’ shares, and they have not received much dividend from the companies over the past few years.

Now that they intend to sell their shares, they do not know the right price to sell. In this article, we will look at two main key issues related to owning private limited companies’ shares, namely

• lack of marketability discount (LOMD) and
• lack of control discount (LOCD). 

Assuming two similar size companies, one public listed and the other a private limited company, the discount on the LOMD is as much as 35% (based on Mergerstat Studies in the US).

Comparing a major shareholder of a public listed company (Position A) and a major shareholder of another similar size but not listed company (Position C), the discount on LOMD is about 35% ((RM100-RM65)/RM65).

Many investors do not realise that there are big differences between owning controlling interest and non-controlling interest shares. In general, if we own 50.1% of a company’s shares, we should be in a controlling position.

From the table above, whether you are in Position B, which is the non-controlling interest of a listed company or position D, which is the non-controlling position of a non-listed company, the LOCD can be as much as 35% (based on Mergerstat Studies in the US).

For example, if you own 49.9% of a private limited company (you are in Position D) and your partner is the major shareholder of the company with 50.1% interest (he is in Position C), which is 0.2% higher than you, his shares are worth RM65 each, but your shares will only worth about RM42 each, which is at a LOCD of 35% ((RM65-RM42)/RM65).

The main reason for this LOCD is that your partner, having the controlling interest, he can pay himself with very high salary, high director’s fee and enjoy all other benefits from the company.

Since you do not have the controlling position of the company, you have no control over a lot of company’s major decisions. Given that it is not a listed company, your return will depend highly on the dividend payments from the company.

If your partner does not want to share company’s profits with you by not paying out any dividend payments, you will not receive any returns for holding this company’s shares.

Nevertheless, if you own 49.9% of a listed company, which is in Position B, even though your shares is still subject to about a 35% LOCD compared with Position A ((RM100-RM65)/RM100), given that it is a public listed company on Bursa Malaysia, you can easily dispose of your shares in the open market.

The worst case is if you are holding a minority interest and it is a private limited company (Position D), your shares’ value is only at 58% discount ((RM100-RM42)/RM42) compared with a controlling interest in a public listed company (Position A) as your shares are subject to discounts due to lack of marketability and lack of control.

Therefore, when position A is worth RM100 per share, the value per share in Position B and Position C is about the same at RM65 per share.

Hence, if you intend to invest in any private limited companies, you need to be in the controlling position of the companies. Otherwise, if you are just a minority shareholder, it is more advisable for you to invest in listed companies.

Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

http://biz.thestar.com.my/news/story.asp?file=/2010/1/13/business/5458529&sec=business

Why private companies tend to be valued lower than public firms

Valuation of Private vs. Public Firms
Why private companies tend to be valued lower than public firms

By Loraine MacDonald | July 03, 2001


Q: Why are public companies in my industry valued so highly, often times at price/earnings multiples of more than 20, when a recent valuation of my privately held business says I'm worth only four to five times my earnings?

A: There are a number of factors that are considered differently in the valuation of privately held vs. public companies-even those that are in the same industry-making a direct comparison for valuation purposes difficult. In some cases, it's like comparing apples to oranges. Following is a list of some of the issues that may result in differences between the valuations of public and private firms:

1. Market liquidity. A lack of market liquidity is usually the biggest factor contributing to a discount in the value of companies. With public companies, you can, if you choose, switch your investment to the stock of a different public company on a daily (if not more frequent) basis. The stock of privately held firms, however, is more difficult to sell quickly, making the value drop accordingly.

2. Profit measurement. While private companies seek mostly to minimize taxes, public companies seek to maximize earnings for shareholder reporting purposes. Therefore, the profitability of a private firm may require restatement in order for it to be directly comparable to that of a public firm. In addition, public-company multiples are generally calculated from net income (after taxes), while private-company multiples are often based on pre-tax (and many times, pre-debt) income. This discrepancy can result in an inaccurate formula for the valuation of a private company.

3. Capitalization/capital structure. Public companies within a specific industry generally maintain capital structures (debt/equity mixes) that are fairly similar. That means the relative price/earnings ratios (where earnings include the servicing of debt) are usually comparable. Private companies within the same industry, however, can vary widely in capital structure. The valuation of a privately held business is therefore frequently based on "enterprise value," or the pre-debt value of a business rather than the value of the stock of the business, like public companies. This is another reason why private-company multiples are generally based on pre-tax profits and may not be directly comparable to the price/earnings ratio of public firms.

4. Risk profile. Public companies usually provide an assurance of continuing operations above that of smaller, privately held firms. Downturns in the economy or a change in the environment (such as an increase in competition or regulatory changes) often have a greater impact on private firms than public firms in terms of performance and market positioning. That higher risk may result in a discount in value for private firms.

5. Differences in operations. It is often difficult to find a public company operating in the same niches as private firms. Public companies typically have operations spanning a broader range of products and services than do private companies. In addition, even if the products and services are the same, the revenue mix is often different.

6. Operational control. Although private companies are more likely to receive valuation discounts than public companies, there is at least one area where they may receive a value premium. While the sale of a private company usually results in the purchase of the controlling interest in the business, ownership of public-company stock generally consists of a minority-share ownership-which may be construed to be less valuable than a controlling-interest position.

Given all these examples, you can see how the valuation of private companies is complex and often cannot be determined through the direct application of public company price/earnings ratios. Due to the complexities involved, I'd advise you to find yourself a professional well-versed in private-company valuations to help you with this task.

Loraine MacDonald is director of advisory services at USBX, an investment banking firm specializing in the mergers and acquisitions of small to midsized businesses. She has been involved in the valuation and sale of privately-held businesses for over ten years.

http://www.entrepreneur.com/growyourbusiness/sellingyourbusiness/article41972.html