Singapore has become a hotbed for the privatisation of listed companies. This year alone, there has been an average of two delistings a month. According to a variety of investment analysts and news outlets, the trend may not be changing anytime soon.
The Singapore stock market has suffered from persistently low valuations, with the Straits Times Index one-year forward price-to-book ratio of 1.13 lagging behind the 1.71 for the MSCI Asean Index.
Technically, this should encourage institutional investors or competitors to swoop in to take advantage of these low valuations. While arbitrage investing can be a risky business, picking up shares before a privatisation offer is announced can result in high returns over a short time frame. With that said, here are two companies that could be potential privatisation targets.
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The luxury watch industry has seen a quick rebound following the slowdown in demand between 2015 to 2017. This has resulted in luxury watch retailers reporting higher earnings and strong cash flows over the last 12 months.
Hour Glass Ltd (SGX: AGS), in particular, has done exceptionally well. In the 12 months ended 31 March 2019, revenue and net profit increased by 4% and 40%, respectively. The company also generated S$46.9 million in free cash flow and paid off around S$35 million of its loans. All of this has resulted in its net cash position swelling to S$166 million.
Despite the recent run-up in its share price, Hour Glass’s net cash position still makes up around 30% of its entire market cap. The luxury watch retailer has also been one of the most consistently profitable companies.
The Tay family, who currently owns 67% of the company, has been buying shares in the open market. With the company valued at just 8.4 times its trailing earnings and with a price-to-book ratio of 1,07, it may make sense for the family to make a privatisation offer now.
Moreover, even if a privatisation offer does not materialise, investors who pick up shares now will be buying into a cash-generative company that continues to benefit from the rebound in luxury watch demand. Swiss watch exports are estimated to grow at around 3% in 2019, with much of the growth coming from the increasing demand in Asia.
Hour Glass also increased its dividend by 50% in 2019, to S$0.03 from S$0.02 in 2018. On top of that, the retailer has plenty of room to continue increasing its dividend, considering its huge cash position and that its dividend payout ratio still stands at just 30.3%.
Stacked with cash
Fu Yu Corporation Ltd (SGX: F13) is a small-cap plastics component manufacturer. With a market cap of around S$170 million, Fu Yu perhaps suffers from a low valuation because of the lack of analyst coverage and institutional interest.
Based on its current price of S$0.22 per share, its stock trades at 13.8 times its 2018 earnings and a price-to-book ratio of around 1.
That looks cheap for a company with a rock-solid balance sheet that is flush with cash. As of 31 March 2019, the 30-year-old company has S$82.8 million in cash and zero debt. Its net cash position alone makes up close to half of its entire market cap, which makes it an attractive privatisation target.
On top of that, the group generated S$23.3 million in operating cash flow in 2018. As a cash-generative business, Fu Yu can continue dishing out those sweet dividends to shareholders.
The group increased its dividend from 1.5 Singapore cents in 2017 to 1.6 Singapore cents in 2018, which represented 100% of its net profit. This is perhaps a sign that the group sees itself in a strong financial position with little need for extra cash. The two charts below show the group’s recent profit and dividend history.
Source: Fu Yu Corporation Ltd 2018 annual report
Even if a privatisation offer does not materialise, the company’s steady dividend will provide decent cash flow for shareholders. Management may also decide to distribute some of the unused capital to reward patient shareholders.
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 owns shares in Hour Glass Ltd.