Privatisation candidates from CIMB

Privatisations in vogue again?
Many privatisation exercises were mooted around the middle of last year after a sharp downturn in the market following the disastrous 8 Mar general elections. However, the flow of such proposals ebbed when global markets took a turn for the worse in Oct on mounting fears of a potential global economic recession. Privatisations are starting to make a comeback this year, with the ones drawing the most attention being IOI Corp’s proposed privatisation of IOI Prop and Tan Sri Halim Mohammad and Puan Sri Mazmin Noordin’s privatisation of the company that bears their names.

• Typical privatisation candidates. Companies that are being privatised typically have most, if not all, of the following features
1) share prices have fallen substantially,
2) they are deeply undervalued, and
3) they usually enjoy strong cashflows or have solid balance sheets.
The offer price for IOI Prop is at a 34% discount to NTA and 58% discount to RNAV. IOI Prop is one of the most profitable property companies on Bursa and its dividend yield of 6-8% is one of the highest in the sector. The offer price for Halim Mazmin is at a 29% discount to NTA and 39% below net cash per share. Its 2007 dividend yield was 6%.

• Screening turns up interesting candidates. Going through the list of companies under our coverage and screening for net cash levels, sustainable dividend yields, P/Es and P/BV, we came up with a list of 10 stocks that could be candidates for privatisation. Several of these stocks have attracted privatisation speculation in the past while others have become potential privatisation candidates because of a collapse in their share prices. Also on the list are stocks such as Bursa which are unlikely to be privatised though their strong balance sheets and tanking share prices make the odds less remote. Ironically, several of the stocks that pop up on our radar are those that we rate underperforms.

• Good hedge against weak market. Privatisation candidates could offer investors a good hedge against weak market conditions. Potential privatisation targets that we like, i.e. companies with decent fundamentals and have seen steep share price falls, for instance Resorts, Eksons and Wellcall, are trading closer to their floor price of cash per share and should be more resilient. For investors with a higher appetite for risks, we identify Proton, which is the only stock trading below its net cash per share because of fears that new model development costs will deplete its cash board. While AirAsia and Pelikan may not be in net cash positions, we believe their major shareholders could be tempted to take the companies private due to their depressed valuations. We maintain our NEUTRAL weighting on Malaysia and our end-09 KLCI target of 1,013 points.