Friday, 9 March 2012

PNB, LTH decision crucial over Engtek privatisation offer

KUALA LUMPUR (March 9): Pemodalan Nasional Bhd (PNB) and Lembaga Tabung Haji (LTH), which hold a combined 23% stake in Eng Teknologi Bhd (Engtek), will be the deciding factors in the privatisation of the hard-disk drive components manufacturer.

According to OSK Research’s estimates, both PNB and LTH, have held the Engtek stake since 2000 and their average cost per share was between RM1.40 and RM1.80.

“Assuming that the offer price is now RM2 a share, there is an upside of 10%-45% compared to 35%-75% based on the previous offer of RM2.50 a share,” it said on Friday.

However, OSK Research also pointed out that any offer price below RM2 a share could discourage PNB and LTH from participating in the proposed privatisation.

On Thursday, Eng Tek announced that TYK Capital was still negotiating with its financiers to fund the privatisation of the company.

OSK Research said it had come to understand that the offer price would likely be adjusted to a value not exceeding RM2.00 a share, instead of the earlier proposed RM2.50 a share made prior to the severe floods in Thailand late 2011. However, this would hinge on the outcome of the due diligence exercise scheduled to be completed by March 19.

The research house also said there was still a high chance that PNB and LTH would give their consent, especially with the hard-disk drive segment now facing long-term headwinds.

The factors affecting the HDD market were the proliferation of smartphones and tablets which has sapped the demand for PCs, and the slow but steady transition to solid state drives (SSD) as the primary medium of storage.

OSK Research said it was not making any changes to its fair value of RM1.52 on Engtek, based on 0.9 times FY12 price-to-net tangible asset, but it was downgrading its recommendation from Neutral to Sell due to the fluidity of the situation.

“We advise investors to cash out from Engtek as we see better trading opportunities for both Notion (Trading Buy, FV: RM2.43) and JCY International (Trading Buy, FV: RM1.80) which have a better product mix and economies of scale respectively.

“Moreover, the potential new offer price of RM2 for Engtek would only provide a rather limited upside potential of 12% from the current market price. Being a HDD component maker that is severely affected by the Thai floods, Engtek’s short- to long-term outlook is undoubtedly murky,” it said.

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