Description

The write-up below is focused on an extremely illiquid stock that will likely be of little interest to institutional investors. Nevertheless, for those fortunate (or unfortunate?) enough to be unconstrained by the need to deploy large amounts of capital, we submit for consideration (in a basket of net-nets or negative enterprise value stocks) the shares of Singapore listed S i2i Limited. (SGX:BAI or Bloomberg ticker: I2I SP)  

Price: S$1.80

Shares Out (in M): 13.7

Market Cap (in M): S$24

Net Debt (in M): -S$23.3

TEV: -S$0   

Trading at S$1.80 per share, S i2i’s current market cap of S$24 million, is at net cash (~S$30 million) and a discount to NAV (~S$50 million).  Actions over the last year include:

• insider buying by the Chairman/controlling shareholder close to the maximum amount permissible (a threshold which, if exceeded, would trigger an immediate mandatory takeover offer);

• shareholder activism (see, for example, Phronimos Capital’s letter to the BOD at http://en.prnasia.com/story/139267-0.shtml); and

• a large dividend/return of capital equivalent to ~50% of the current stock price in response to the aforementioned activism suggest that the odds of unlocking shareholder value have greatly increased over the past year.   

More recently, the company appears to be focused on cash realization--as evidenced by the sale of non-core assets and positive free cash flow generation. Furthermore, the winding down of loss making business units resulted in positive EBITDA and net income over the past 18 months.  

Furthermore, we note that S i2i, owing, in part, to a sub-S$40 million market cap, was placed on the Singapore stock exchange’s (SGX) watchlist for potential delisting in March 2015. (For more detail see: http://infopub.sgx.com/FileOpen/WatchList.ashx?App=Announcement&FileID=337291). Consequently, we believe a hard catalyst to unlock shareholder value, could come to fruition in the form of a cash exit offer. Should the SGX decide to delist the company, S i2i will likely be required to provide shareholders a reasonable exit alternative.  According to SGX listing rules, an exit offer should normally be in cash and subject to a fairness opinion from an independent financial adviser. A cash exit offer at S$3.20 per share (which we note is ~75% higher than the current share price) for the non-controlling shareholders of S-i2i (who collectively own ~69% of the shares outstanding) would require the return of approximately $30 million. The ultimate liquidation value should proximate NAV of $50 million or ~S$3.65 per share.

Business Overview:

Historically, the company has operated in three segments.

1) Distribution of mobile operator products and services:

S i2i distributes mobile prepaid cards as an authorized distributor of some of the largest telecom operators in Indonesia, including: Telkomsel (whose market share in the airtime business exceeds 60%), PT XL Axiata, and PT Indosat in Indonesia. Form FY 2012-2014, EBITDA less capex and taxes has averaged between S$4-5 million per year. Going forward, we estimate EBITDA less capex and taxes to average between S$2-4 million per year as Telkomsel channels more of its distribution to a competitor (Tiphone) in which it acquired a 25% minority stake, partially offset by increased business from PT XL Axiata, and PT Indosat.  

2) ICT distribution & managed services

S i2i partners with the likes of IBM, HP and Cisco in the supply, maintenance and servicing of computer hardware and peripheral equipment, systems integration services and consultation. We do not ascribe any value to this segment, given that the operating EBITDA has totaled a mere S$1 million from FY 2012-2014 and thanks to recent cost cuts, we expect mgmt. to dispose of this business for a nominal amount.   

3) Mobile devices distribution & retail

This segment, which entails the procurement and sale of mobile devices and accessories, has been the primary source of the operating losses in years past. From FY2012-2014, segment EBITDA losses of ~S$130 million totaled more 10X the company’s current market cap.  By the end of 2015, the company was almost through winding down unprofitable stores and no further cash losses are expected.

Valuation

We estimate S i2i has ~S$23 million in net cash as of September 2016. We ascribe zero value to the “ICT distribution & managed services” and “Mobile devices distribution & retail” segments. Normalized Free Cash flow from the mobile pre-paid card distribution business should be in the ~S$2-4 million range and one does not need to make heroic assumptions to conclude that the NAV of S$50 million or ~S$3.65 per share is a reasonable proxy for liquidation value.      

Risks:

• We believe the primary risk for non-controlling shareholders (who hold 69% of shares outstanding) is the use of cash for potentially value destructive acquisitions. Previously, S i2i (formerly known as Spice i2i) raised ~S$290 million over the course of 2010 and 2011 to acquire mobile phone manufacturers, distributors and service providers in Indonesia, Thailand and Malaysia. Suffice it to say, subsequent to the acquisitions and capital raises, NAV declined ~85% from ~S$415 million (as of 9/30/11) to ~S$60 million (as of 9/30/16), owing in large part to goodwill impairment and operating losses stemming from the acquired businesses. Concerns about the group’s capital allocation skills combined with the illiquidity of the stock, probably explain, to a large degree, the massive discount assigned by Mr. Market to cash and NAV.        

• The Company signed a partnership agreement with BYD.  To the extent that this burns cash, it would

• A criterion for exiting the SGX delisting watchlist is a market cap in excess of S$40 million. This leaves open the possibility of a dilutive capital raise. Potential mitigants to dilutive capital raises or corporate tunneling activities include legal remedies such as minority oppression claims and a court-sanctioned wind-up or buy-out remedy. Furthermore, the reputational damage to board members could be a significant deterrent to a willful or egregious wealth transfer from minority/non-controlling shareholders. We note that:

• the lead independent director (Thomas Zilliacus) is also the chair of the Singapore listed Yuuzoo Corp (Bloomberg: YUZ SP); and

• Indian born, Singapore-based Dr. B.K. Modi (the Chairman and 31% shareholder of S i2i) is also the Chairman of Smart Global--a conglomerate with interests in sectors including telecommunications, healthcare and financial services. We’ve seen net worth estimates ranging from $615 million to $2 billion for Dr. Modi. Could a billionaire (or a half billionaire) attempt to nickel and dime minority shareholders out of S$30 million? Minority shareholder oppression certainly remains a possibility, but not rational--especially in light of Smart Global’s previous wealth management aspirations including this fund catering to wealthy Asian family offices. See: http://www.bloomberg.com/news/articles/2014-09-26/alibaba-success-spurs-billionaire-modi-s-cio-to-pre-ipo-fund   

Catalyst

Sale of the Company.

Action by the SGX.

Shareholder activism.