Thursday, 16 October 2014

OSK: A Lopsided Proposal?

OSKProp & PJDev are two excellent mid-size property development companies.

If both of them combine to form a large cap property developer, that will be good.

If both of them combine and are also given a considerable amount of shares in the country's largest bank, then it will be even better.

As we know earlier, Tan Sri Ong Leong Huat and his related parties are major shareholders in OSK Holdings (OSKH), OSK Property & PJD.

Previously Ong LH has hinted that OSKH which has sold its core business to RHB, will choose property development as its new core business. 

So people are guessing whether OSKP or PJD will be injected into OSKH. In the end, it is both of them.

History has suggested many times that Ong LH is not generous enough in offering takeovers.

This is one of the reason why I chose Huayang over OSKProp to invest in.

Sometimes learning from history is important...

I am not an expert in the field of business. I just picked and chose part of the announcement and try to understand it. I might misunderstand the proposal and give wrong opinion.

OSKH has agreed to acquire all of Ong LH & related parties' shares in OSKP (73.6%) and PJD (31.7%) for RM2.00 and RM1.60 per share respectively.

OSKH will offer to acquire the remaining shares of OSKP & PJD from other smaller shareholders at similar price offered to Ong LH.

All OSKP and PJD's shareholders must be very upset with this proposal I guess.

Just before this announcement, OSKP closed at RM2.27 while PJD closed at RM1.67. However, just 2 months ago, OSKP and PJD were traded at RM2.85 & RM2.25 respectively.

OSKP shareholders can choose to get cash at RM2.00 per share or get one OSKH share per OSKP share.

PJD shareholders can choose to get cash at RM1.60 per share or get 0.8 OSKH share per PJD share.

OSKP warrant holders are offered RM1 per warrant, while PJD warrant holders are offered 60sen per warrant.

However, both warrants holders can convert the warrants to mother shares if they want to.

Meanwhile, current OSKH shareholders will get one free warrant for 4 OSKH's shares, and a special dividend of 15sen per share.

This seems bad for current OSKP & PJD shareholders, especially those holding their warrants.

For OSKH shareholders, it is good news as it will acquire 2 good companies at a significant discount price, besides getting free warrants and special dividend.

Nevertheless, OSKH is valued at only RM2.00 in this deal. OSKH's share price reached RM2.55 in Aug and closed at RM2.08 yesterday.

So if you have 1,000 OSKP's shares, you can convert them into 1,000 OSKH's shares valued at RM2.00. If OSKH at RM2.00 is undervalued, then it's not too bad for OSKP & PJD's shareholders I guess.

The question is, what is the fair value of OSKH after the proposal goes through?

According to OSKH's announcement, the enlarged numbers of paid-up shares may increase to 2,067.5 million in maximum scenario if all OSKP & PJD warrants are exercised, and all OSKP & PJD's shareholders choose to take up OSKH shares, and all new free OSKH warrants are exercised.

Anyway, not all OSKP & PJD warrants will be exercised, though it seems attractive to do so if OSKH is trading at far above RM2.00.

Similarly, not every OSKP & PJD shareholders will want to get OSKH's shares instead of cash.

Excluding the new warrants, I assume the total shares of the newly born OSKH to be 1,700 million as an average.

I roughly guesstimate OSKH, OSKP & PJD profit after non-controlling interest to be RM200mil, RM100mil & RM80mil respectively for current financial year. This will make up a total of RM380mil. 

So the non-diluted guesstimated EPS of OSKH will be 22.3sen, with a PE ratio of roughly 9.0x at share price of RM2.00.

This is only my rough estimate base on PE method. I don't include the positives to OSKH from the recent proposed merger between RHB, MBSB and CIMB as I don't follow its news closely. It seems like this deal benefits RHB and OSKH thus OSKH might be valued higher.

It looks like OSKH at RM2.00+ is a good investment to make, unless one is very pessimistic of property sector in the near future. 

Anyway, PJD's minor shareholders might not accept this proposal, but its major shareholders might start to accumulate its shares from open market.

This proposal is expected to be completed by the third quarter of 2015. So does this mean that we will probably see OSKP & PJD traded at RM2.00 & RM1.60 respectively for about a year?

If OSKH's share price go far above RM2.00, for example RM2.30, this means if you buy one OSKP's share at RM2.00, you can get one OSKH's share worth RM2.30.

Will OSKH's share price advance far from RM2.00 in the next one year?

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