On Thursday, minority shareholders successfully blocked an S$183 million exit offer for homegrown IT retailer Challenger Technologies Limited (SGX: 573). The successful defence against the buyout came after Singapore-based fund manager Pangolin Investment Management, which has a 2.94% stake in Challenger, questioned whether the offer price was fair.
The exit offer was a cash offer of S$0.56 cents a share, which translates to S$183 million for the entire company. While the offer has already successfully been opposed, I wanted to find out for myself if shareholders made the right decision by blocking the sale.
Here are some things I took into consideration.
Revenue, earnings, and cash flow
A company’s valuation should be based on how much cash it can generate and return to shareholders over the foreseeable future.
To determine this, I took a look at the IT retailer’s income and cash flow statements over the last five years.
Source: Author’s compilation of data from SGX
As you can see, Challenger has generated steady sales and profit each year. Barring 2015, where there was an increase in working capital needs, Challenger has also been generating consistent free cash flow each year.
As of 31 March 2019, the company had a net asset value per share of 27.83 Singapore cents. It has a clean balance sheet, with S$66.2 million in cash and equivalents and no debt.
Adding it all together
Based on the offer price of S$0.56 per share, the company was valued at a price-to-earnings multiple of 9.8 times.
However, we need to take into account the cash Challenger is sitting on. As such, the enterprise value, which includes cash and debt in the equation, is perhaps a better metric to use.
The offer price of S$0.56 cents per share gave the company an enterprise value (EV) of S$117 million. That translates to a trailing EV-to-EBITDA (earnings before interest, tax, depreciation, and amortisation) of 4.2.
The offer price also represents a price-to-book value of around 2.
The Foolish conclusion
From my point of view, the offer price looks low. The S$0.54 per-share offer price gives it both a low P/E and a low EV-to-EBITDA multiple.
Although the offer price is above the company’s book value, a company with a high return on equity and consistent cash-flow generation, two things Challenger has, can usually command a premium to its book value.
On top of that, I calculated its fair value using a discounted cash-flow model. For my calculation, I input a conservative estimate of zero growth and a required rate of return of 10%. I used 2018’s free cash flow of S$13 million as a proxy for future free cash flow. The valuation generated using these conservative estimates was S$130 million. If we add the S$66 million in cash into the equation, that gives us a current company value of S$196 million, which is more than the offer price of S$183 million.
All things considered, I believe minority shareholders indeed made the right decision to reject the offer.
By all metrics, Challenger should command a higher valuation. Over time, I believe the market will eventually wisen up to this fact, and investors will be rewarded for refusing the offer tabled to them.
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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 contributor Jeremy Chia doesn’t own shares in any companies mentioned.