Ingens- a restricted offer to buy!

In the Sun newspaper today, there is an article entitled "Ingenuity's major shareholder to clarify issues on offerfrom Ninetology" which can truly test the readers intelligent. In an unbelievably audacious air, Chin Boon Long- one of the four substantial shareholders who received a seemingly generous offer by Ninetology to sell his shares in Ingens- promised to hold a press conference on Wednesday to explain his rationale to clear the air. In his words:

"Definitely I have something to reveal. Whether I want to sell my shares or not, I will explain. I will give the rationale on that day. There are too many questions being raised (about the proposed acquisition) in the newspapers which I don't want to prolong".

The burden the poor man has to shoulder. He further added:

"Over the weekend, I feel very bad. The 55 sen and 55th Merdeka Day made me sleepless. I don't want to be linked to (doing a) con job or any kind of (market) manipulation."

To be frank, I do not know what's so great about Ingens. Here I must share with you a bit of history of Ingens.

On October 20, 2011, Ingens bought Vistavision Resources Sdn Bhd ('VRR') for RM15.452 million. The purchase consideration was settled by way of 154.52 million shares of Ingens valued at RM0.10 each. Because this acquisition was only completed on February 21, 2012, the full benefit of the ICT Distribution business of VRR was booked in QE30/6/2012. See the table below.



What does the results for QE30/6/2012 tell us about Ingens? Remember, the play on this stock started just before the announcement of what looks like a fantastic performance by Ingens.

Firstly, we can see that the Enterprise Systems was suddenly profitable after a few years of poor performance. That segment made a pre-tax profit of RM2.25 million on lower revenue of RM4.0 million. Compared that with pre-tax losses of RM2.26 million & RM1.11 million in FY2012 & FY2011.

Secondly, the newly-acquired ICT Distribution business chalked up a pre-tax profit of RM1.83 million on revenue of RM126 million. This segment has the potential to contribute a full-year pre-tax profit of RM7.2 million. That would make the acquisition of that business at a price of RM15.452 million to be a steal! A master stroke by a perennial under-performer!

Suddenly, an offer to buy over the company's shares at a price of RM0.55 each surfaces. Before you go out & buy this stock, there is a caveat: The offer is good only if Ingens's 4 major shareholders (including the hapless Chin) agreed to sell their combined stake of 39.44% in the company. If that inconvenient condition is fulfilled, the offer will be unconditional. Why can't the offeror, Ninetology just make a simple conditional offer to buy 50% plus one share in the company? Why must the offer be conditional upon the existing 4 major shareholders selling out?

Here are some reasons why the Ninetology's offer is not a serious offer:
1. The offer which value the stock at RM0.55 each & presumingly the warrant at RM0.45 each, would value the entire company at RM381 million. That's rather rich when you compared the vaue of Ingens of RM48 million as at June 1, 2012 (based on stock & warrant price of RM0.075 & RM0.04 respectively)
2. The increased value of the company was due to its Enterprise Systems segment returning to profitability and the maiden profit from the newly-acquired ICT Distribution segment. While the latter is not a surprise, the strong performance of the former was highly suspicious.
3. If the results of the Enterprise Systems segment is a fluke, then the offeror would be valuing Ingens at a PE of 53 times (based on market value of RM381 million & net profit of RM7.2 million, ignoring tax).

So, my advice to Chin is that he should quickly accept the offer from Ninetology. He should do more than that: he should convince the other 3 major shareholders to accept the offer so that the minority shareholders can benefit. If you are like me and you think that the offer will vanish soon, you should seriously consider selling your shares in Ingens.


Chart 1: Ingens's weekly chart as at Sep 3, 2012 (Source: quickcharts)


Chart 2: Ingens-WA's weekly chart as at Sep 3, 2012 (Source: quickcharts)

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Ingens.