PCI’s takeover offer could drive re-rating of small-cap manufacturing stocks: UOB

PCI’s takeover offer could drive re-rating of small-cap manufacturing stocks: UOB

PC Lee
09/01/19, 10:29 am

SINGAPORE (Jan 9): UOB KayHian says the takeover offer of PCI last Friday at an attractive premium could lead to a re-rating of deep-value manufacturing stocks.

UOB is re-iterating its ‘buy’ on deep-value manufacturing names trading at below-industry EV/EBITDA backed by high cash balances and stocks offering high dividend yields.

“Our top picks are Fu Yu (2019F EV/EBITDA of 2.9x and yield of 8.7%) and Valuetronics (2019F EV/EBITDA of 2.7x and yield of 6.3%). Assuming 5.5x EV/EBITDA, both stocks could offer about 80% upside,” says analyst John Cheong in a Wednesday report.

Last Friday, PCI announced that it had received a takeover offer from Platinum at an offer price of $1.33 per share, a premium of 60.1% over the volume weighted average price of the shares for the 12-month period up to the last undisturbed trading day of Sept 17 2018.

Cheong says the valuation metrics of 5.5x TTM EV/EBITDA based on the offer price appears to be 19.6% higher than small-cap manufacturing peers’ 4.6x 2018F.

After the announcement, the share prices of several small cap manufacturing names shot up on Monday. These included Fu Yu which was up 2.7%, Valuetronics which was up 2.2%, Sunningdale (+2.8%), Memtech (+4.6%), and Hi-P (+12.2%).

“We think that the deal could serve as a reminder of good value in Singapore’s small-cap manufacturing space,” says Cheong.

He believes deep-value names with a high margin of safety have room for further re-rating, especially in the current uncertain macroeconomic environment which faces risks of trade war and slower growth. Companies with high cash reserve and dividend yield can also eather any downturn better than their peers.

UOB’s top picks are Fu Yu and Valuetronics which are the only “buys” among small-cap manufacturing companies under its coverage.

“Their valuations remain attractive and investors could receive generous dividend yield while waiting for any catalysts, including takeovers, cost rationalisation and huge order wins,” says Cheong.

Fu Yu trades at at 2.9x 2019F EV/EBITDA and 2019F ex-cash PE of 6.0x. Net cash has continued to increase to $75.3 million, or 52% of its market cap. The company is diversifying to a more stable business model and is optimising as well as turning around its loss-making operations.

Meanwhile, Valuetronics trades at 2.7x 2019F EV/EBITDA and 2019F ex-cash PE of 4.0x. Its net cash has continued to increase to $152.7 million, or 51% of its market cap. Valuetronics continues to see good demand for connectivity modules used in the automobile industry.

As at 10.23am, shares in Fu Yu and Valuetronics are up 0.5 cent at 20 cents and 1 cent at 70 cents respectively.

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