Sim Lian Group Ltd’s Privatisation Offer: What Investors Should Know

The privatisation wave in Singapore’s stock market does not seem to be slowing down. On Monday night, Sim Lian Group Ltd (SGX: S05) announced that it would like to join the privatization bandwagon.

The construction and property development company revealed that its controlling shareholders – made up by the Kuik family, including Sim Lian’s founder and executive chairman, Kuik Ah Han – have offered to take the company private at a price of S$1.08 per share. This is 19.5% higher than the volume-weighted average share price of Sim Lian over the last three months. Sim Lian’s shares had closed at a price of S$0.94 each on Monday.

The offer price would value the whole company at slightly more than S$1.08 billion. At the date of the announcement, the controlling shareholders already own 80.36% of the company.

In its last fiscal year (the year ended 30 June 2015), Sim Lian sourced its revenue from Singapore, Australia, and Malaysia, with the first country accounting for the bulk of it. Over the last 12 months, the company has experienced a huge drop of 60% or more in both its revenue and profit. The good news is the company is still profitable and currently has a strong balance sheet with more cash than loans.

The controlling shareholders argue that the buyout is a great opportunity for minority shareholders of Sim Lian to cash out their holdings at a significant premium. Moreover, due to the low trading volume of Sim Lian’s shares and the lack of any need to raise additional funds from the public market, the Kuik family sees little reason for Sim Lian to remain as a listed company.

While the reasons given do hold water, it is worth noting the offer price for Sim Lian gives the company a trailing  price-to-earnings ratio of just 10. At a price of S$1.08, Sim Lian is also worth just 0.8 times its net tangible book value. Given the company’s strong balance sheet and consistent profitability (Sim Lian has been profitable over the past decade), the offer price does seem undervalued.

Yet, given the current lack of interest in the market for the company and in the property industry in general, there seems to be little chance for minority shareholders to see the company’s value being realised in the market – over the short-term, at least –  even if it remains listed.

Although Sim Lian’s minority shareholders might not be getting full value for their shares, I think the buyout offer still represents a win-win situation for both minority and controlling shareholders.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own shares in any companies mentioned above.