Friday, October 14, 2011

ENG, a promising buyout play

Eng Tecknologi Holdings Bhd ('ENG') dropped 21 sen to close at RM1.79 in the morning session. You may recall that the major shareholder of ENG had proposed to acquired the entire business & undertaking of ENG for an amount equivalent to RM2.50 per share in July this year (here). The offer was duly accepted by ENG's Board of Directors in August (here). In the recent market selldown, ENG's share price dropped to about RM2.00-2.10 as investors were worried that the deal might be aborted. I personally feel that the major shareholder, who is carrying out the privatization deal, is fair reputable & is not the type that would walk away from a deal just because of a pricing issue. Even then, I thought ENG is a pretty good stock to buy for a quick return of 25% for a holding period of 4 months (assuming you buy it at RM2.00 & then accept the offer at RM2.50).

The stock broke below RM2.00 yesterday on news that its Thai operation was shut down due to flooding (here). To wit:
We regret to announce that the Company’s wholly-owned subsidiaries, Engtek (Thailand) Co., Ltd. (“ETCL”) and Altum Precision Co., Ltd. (“APT”), both located at Ayutthaya, Thailand had temporarily shut down their operations due to severe flood condition in Ayutthaya, Thailand.

The Company and its management team are in the process of determining the extent of the damage which the management believes are adequately covered by its insurance policies. The management team is currently working out alternative plans to minimize disruptions to their customers.

They say trouble comes in threes. Yesterday, ENG announced that the buyer is asking for an extension of the Due Diligence & Funding Confirmation date by 45 days (here). To wit:

Separately and independent of the floods in Thailand, on behalf of the Board of Directors of ETHB, HwangDBS Investment Bank Berhad wishes to announce that, on the due date of the Due Diligence Period and prior to the due date of the Funding Confirmation Period (i.e. on 6 October 2011), TYK Capital has sought to extend both the Due Diligence Period and Funding Confirmation Period by forty five (45) days which has subsequently been agreed by ETHB (i.e. on 7 October 2011). The extension of time is to provide TYK Capital’s financiers more time to complete the Due Diligence.

As mentioned in the Update Announcement, the floods in Ayutthaya, Thailand has resulted in the temporary shut down of the group’s Thai operations on 8 October 2011. As the Thai operations contribute approximately 40% to the ETHB Group’s revenue for the financial year ended 31 December 2010, the Company and TYK Capital are working together to assess the flood situation, the impact on the financial position and prospects of the ETHB Group (once there is clarity on the flood situation) and how this may affect the terms and conditions and/or the viability of the Proposals.

My take on the flooding issue is that ENG is likely to be well-insured against damages from the flood and possibly against losses from business shutdown. The delay in the completion of the business buy-out is not unusual. As such, I believe the market is over-reacting to these negative development.

From the technical perspective, ENG has just broken below a strong horizontal support at RM1.90. The next strong horizontal support is at RM1.75 & then at RM1.60 (see Chart 1). From the weekly chart (Chart 2), we can see that ENG's intermediate uptrend line support is at RM1.77-1.80. As such, the stock may find support at the current level (of RM1.75-1.80) and recover.

There are two possible scenarios:
1) If the deal is aborted, the stock may drop to RM1.60. You may suffer a loss of 19 sen (assuming you have bought the stock at RM1.79); or
2) if the deal proceeds as announced, the stock can be sold to the major shareholder at RM2.50 in 4 months' time. You would make a profit of 71 sen.
Based on this, I think ENG is worth buying.

Chart 1: ENG's daily chart as at Oct 14, 2011_12.15pm (Source: Quickcharts)

Chart 2: ENG's weekly chart as at Oct 14, 2011_12.15pm (Source: Quickcharts)


cheer said...

HI Alex

How u rate UOADev purchase at this moment ?


leslieroycarter said...

Hi Alex:
Based on general market assumptions,ENG will succumb to more negative news than otherwise as the profit derived from Thailand operations r great in terms of percentage exposed. only the daring lots will take this calculated risks. hope your prediction is right..Good luck 2 all...

cherng said...

Hi Alex, will have any possibilities that the buyer cut down the offer price after due dilligence?

Unknown said...

Last 2 quarters EPS dropped substantially, pressure from profit margin as well as USD as claimed by the management.

Looking at latest development, Flood and Results, RM1.80 may still expensive and likely "Take Over" may be over.

Alex Lu said...

Hi This is the day!

The buyer cut down the offer price after due diligence is a possibility.

Alex Lu said...

Hi Chong Kong Hui

Cancellation of the deal is possible but not very likely. The hurdle is bank financing and that should not be a major obstacle as bankers are flushed with cash.

I still believe that the major shareholder is a gentleman who will standby his initial offer or in the worst case scenario, reduce the buying price.

Alex Lu said...

Hi cheer

UOADev could be a good buy at RM1.35-1.40.