EQ03

CORPORATE STRATEGIC ANALYTICS I:

Essentials of Corporate Proposal Analysis

2nd November 2009

UTAR, Kampar

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Course Overview

• Using accepted analytical techniques,

learners will be able to evaluate the impact

of corporate proposals on investment

portfolios.

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Learning Objective

• Upon completion of this course,

participants will be able to have an

overview of:

– IPO, share buy back

– Understanding The Nature Of Business

Activities Related To Company Valuation

– Merger and acquisition

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Career Prospect

• Fund manager

• Analyst

• Remisier

• Financial planner

• Unit trust agent

• etc

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Financial Objectives

• Maximize the wealth of the ordinary

shareholder

• Shareholder’s return• Capital gain

• Dividends

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• Company Act 1965 together with

amendments in 2007

• Capital Markets Services Act 2007

• Bursa Malaysia Listing Requirements

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Reasons for Seeking a Stock

Market Listing (IPO)

• Access to wider pool of finance

• Improved marketability of shares

• Transfer of capital to other uses

• Enhancement of the company image

• Facilitation of growth by acquisition

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IPO

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IPO

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TASCO – IPO price RM 1.10

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TFP – IPO price RM 0.48

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3rd August 2009MAIN MARKET

profit 3 to 5 years > RM20 mil

last year > RM 6mil

NOW

Main Board

Profit 3 to 5 years > RM 30 mil

Last year > RM 8 mil

Second Board

Profit 3 to 5 years > RM 12 mil

Last year > RM 4 mil

ACE

Profit Sponsor

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IPO : Prospectus

• What to look out for in a prospectus ?

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IPO : Prospectus

• What to look out for in a prospectus ?

– About the company

– Competitive strengths

– Financial highlights

– Industry prospects

– Future plans

– Particulars of listing

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Type of Proposal and Rationale

• Public issue

• Offer for sale

• Tender

• Private placement

• SC introduces “green shoe” option and

price stabilization mechanism for IPOs on

11 January 2008

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“Green Shoe”

• The “green shoe” mechanism allows the

issuer to over-allot securities in excess of

the number of shares constituting the

original offer size to ensure that the

demand for shares in an IPO can be met in

an efficient manner and that price volatility

during the period immediately after listing

can be minimised.

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• The mechanism can be used for any IPO

where the total value of shares offered is

not less than RM150 million. It can

commence on the date of listing of the

issuer and continue to be carried out

during the first 30 days of trading from the

IPO date.

“Green Shoe”

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Resorts – Share Buybacks

No of share

buyback

Total amount paid for

Share Purchased (RM) Range

24/3/2009 2,000,000 3,993,140.00 1.99

12/3/2009 1,500,000 2,904,753.50 1.92 to 1.94

10/3/2009 1,200,000 2,387,050.70 1.97 to 1.99

Total 4,700,000 9,284,944.20

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Resorts – Share Buybacks

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Share Buybacks

• Why share buybacks ?

• Motivation ?

• Disadvantages ?

• Impact on share valuation ?

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Share Buybacks

• Share buybacks or share repurchases can be a method of capital reduction

• A share buyback occurs when the listed company uses its own funds to go into the open market and acquire its own shares.

• The shares may or may not be retained by the company.

• The company can choose to keep them as treasury shares, or choose to cancel them.

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Rules Involving Share Buybacks

• Any share buyback or resale of treasury stock must be effected only through the open market;

• May not exceed 10% of its issued and paid-up capital;

• The share buyback must be made wholly out of the company’s retained earnings and/or share premium account;

• A listed company may purchase its own shares on the exchange at a price which is not more than 15% above the weighted average price for the shares five market days immediately prior to the purchase; and

• The company undertaking the share buyback must make the necessary announcements to the stock exchange for the purchase, resale or cancellation of the shares.

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Motivation Behind Share Buybacks

• Underlying belief that their shares are undervalued.

• Company is able to control, to some extent, the trading of the shares in the open market, and ensure that the price of the share is stabilized and supports the fundamentals of the company.

• Available dividend payment is spread between fewer shares, so the dividend per share is higher for the remaining shareholders. This also means that the net profit is spread over fewer shares, thereby raising net EPS and increasing value for existing shareholders.

• If shares are kept as treasury shares, they may be paid out as stock dividends to existing shareholders. Can choose to sell shares which are purchased and kept in treasury at a higher price in the future resulting in capital gains to the company.

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Disadvantage

• Reflects that the management can think of

nothing better to do with company money than

buy its own shares

• This could result in a reduction in the financial

resources of the company

• May increase the risk of the company having to

forego profitable investment opportunities in the

future.

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Impact on Share Valuation

• Hence, a share buyback is usually welcomed by

existing shareholders as a positive corporate action to

enhance shareholder valuation

• A tax efficient vehicle to minimize tax liabilities of

investors.

• Usually when companies announce intentions to buy

back own shares, investors perceive that the

company’s share price will be well supported, hence

resulting in a subsequent rise in share prices.

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Restructuring Exercise

Case Study 1 – UEM World

• New organization structure

– Why ?

– Future development ?

• Options

– Good or bad ?

• Existing shareholder

– What to do ?

– etc

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Session Two

Understanding The Nature Of Business

Activities Related To Company

Valuation

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Nature of Business Activities

– Who are their competitors

– Industry study

– Risk associated with the business, its merits

and demerits – systematic risk, beta, barrier

to entry & exit

– Track record

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Industry Study / Porter’s 5 Forces

The industry

boundary

Buyers

Substitutes

Suppliers

Entry

Actual competition

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Nature of Business Activities

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Nature of Business Activities

• Refer to research report <Plantation> by

HDBS – 13 January 2009

• Refer to research report on <Public Bank>

by HDBS – 21 January 2009

• Refer to research report on <Telco> by

OSK – 12 January 2009

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Financial Analysis [EQ02]

• Ratio analysis

• Trend analysis

• Segmental analysis

• Cash flow analysis

• Notes to the account

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Company Valuation

– Comparative analysis

– Target price (fair value)

– Quality of sector PE

– Market PE

– Discount/premium etc.

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Company Valuation(DCF method - TM by ecmlibra - 13 March 2008)

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• Key questions

• Why merge?

– What benefit?

• Centralization of management

– Good or bad?

• Impact

– % in KLCI?

– Influence on Bursa

– Possible of take over smaller company?

Case Study 2 – Synergy Drive (SIME)

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Reasons for M&A

• Operating economies

• Management acquisition

• Diversification

• Asset backing

• The quality of earning

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Reasons for M&A

• Finance and liquidity

• Growth

• Tax factors

• Defensive merger

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Reasons for M&A

• The aims of a M&A should be to

make profit in the long term as

well as the short term.

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Rules and Regulations

• Malaysian code on Take-Overs and

Mergers 1998

• Capital Market Services Act 2007

• Company Act 1965

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– What would the cost of acquisition be

– Would the acquisition be worth the price (what

is the highest price that it would be worth

paying to acquire the business?)

• Value of a business could be assessed in term of:

– Its earning

– Its assets

– Its prospects for sale and earning growth

– How it would contribute to the strategy of the “predator

company”

Factors in a Takeover Decision

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• Other factors

– Would the takeover be regarded as desirable

by the predator company’s shareholders and

the stock market in general?

– Are the owners of the target company

amenable to a takeover bid? Or would they be

likely to adopt defensive tactics to resist a

bid?

Factors in a Takeover Decision

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• Other factors

– What form would the purchase consideration

take ?

– How would the takeover be reflected in the

published accounts of the predator company?

– Would there be any other potential problems

arising from the proposed takeover, such as

future dividend policy and service contracts

for the key personnel?

Factors in a Takeover Decision

Thank You