Yesterday evening, West Knighton launched a privatisation offer for Cityneon Holdings Limited‘s (SGX: 5HJ) shares. This article will take a closer look at the offer and determine if West Knighton’s deal is fair for Cityneon’s shareholders.
West Knighton’s deal is a mandatory conditional cash offer which values Cityneon at S$1.30 per share, or S$318 million for the whole company. The offer is unconditional and the offer price is final and will not be revised.
Cityneon’s announcement on the deal stated that the offer price is at a premium to the highest ever closing price of the company’s shares to-date; Cityneon’s share price closed at S$1.26 on 24 October 2018, before trading of the company’s shares was temporarily halted prior to the announcement of the takeover. Trading of Cityneon’s shares was resumed on the evening of 29 October 2018.
West Knighton, which is controlled by Ko Chun Shun Johnson and Tan Aik Ti Ron in an 80-20 ratio, intends to privatize and delist Cityneon, which means the company will no longer be listed on the Singapore stock exchange. Ko’s a Hong Kong-based entrepreneur and professional investor, and currently holds directorships in a few Hong Kong-listed companies, include Meitu Inc. Tan is the executive chairman and CEO of Cityneon.
At the time of the privatisation offer’s announcement, West Knighton was in control of 68.95% of Cityneon’s shares.
The offer’s valuation
In Cityneon’s latest earnings announcement which was released in August 2018, the company reported revenue of S$55.4 million and net profit of S$12.96 million for the first half of 2018. For that period, revenue growth was 14.4% while net profit was up a stunning 102.5% – Cityneon’s bottom line growth is a testament to its business model transformation over the last three years since it bought over Victory Hills LLC and Tan took over as CEO in January 2017.
If we annualize Cityneon’s net profit (assuming its profit accrues evenly throughout the entire year), we will obtain a total 2018 net profit of around S$26 million. With an issued share capital of around 244.6 million shares, this works out to earnings per share of S$0.107. The offer price of S$1.30 thus gives Cityneon a forward price-earnings (PE) ratio of 12.2.
Now let’s also look at the qualitative aspects of the company. As recently as May 2018, Cityneon had announced the acquisition of its fourth intellectual property – a licensing deal to produce travelling exhibits for the Hunger Games franchise from Lionsgate. In the same month, Cityneon also announced an agreement with Universal to build a second Jurassic Park: The Exhibition set, which is a follow-up from the acquisition of the Jurassic Park IP for US$25 million in August 2017.
Moreover, in Cityneon’s earnings update for the first half of 2018, the company had mentioned that it was in the process of negotiating for its fifth blockbuster IP and that the deal would be concluded “in the next few months.”
Is the Cityneon deal fair?
From what we can see about Cityneon’s recent business developments, it would appear that the company is on a tear, and is winning major IP deals from prominent studios around the world.
Considering Cityneon’s potentially bright growth prospects, the offer price seems to undervalue the company as the implied forward PE ratio is merely 12.2. A February 2018 DBS analyst report mentioned that Cityneon’s listed peers were trading at an average PE ratio of 18. If we apply the average PE ratio of 18 to Cityneon’s projected earnings per share of S$0.107, it means that Cityneon could be worth S$1.93 per share. Hence, I think West Knighton’s offer is undervaluing Cityneon.
Investors should not despair, however, if they still wish to participate in the growth of IP-related entertainment franchises and the growth of the MICE (meetings, incentives, conventions, and exhibitions) industry in Asia. Even if Cityneon is delisted and privatized, there is still Kingsmen Creatives Ltd (SGX: 5MZ), which is still listed and is also moving into the IP space. Kingsmen’s shares are also trading at a much lower PE ratio of 10.
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The Motley Fool Singapore contributor Royston Yang contributed to this article. Royston owns shares in Kingsmen Creatives.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore writer Chong Ser Jing owns shares in Kingsmen Creatives.