Description
Kim Eng Holdings (KEH) is Singapore’s largest independent stockbroker and third largest overall. The company trades at significant discount to intrinsic value which is supported by recent M&A activity in its home market and by the value of its majority stake in Thai-listed subsidiary (Kim Eng Securities Thailand, or KEST). Recently a third-tier Singapore broker, GK Goh, announced that it was to be acquired by a Malaysian company for a 35% premium to brokerage NTA excluding net cash. KEH trades at near stated book value and is cheap just on that basis. However, after adjusting for the market value of its Thai subsidiary, KEH trades at a steep discount to its adjusted book value. It can be argued (and I do!) that KEH should transact at a premium multiple given its market position versus GK Goh. KEH’s largest shareholder is Taiwan-based Yuanta Securities. That company’s chairman was recently quoted in the local press expressing his desire to increase the firm’s 28% position in KEH. Any material increase in shareholdings (especially via share purchases of shares owned by the founders) would subject Yuanta to mandatory take-over laws in Singapore. Of course there is no guarantee that Yuanta will make a bid but it is hard to deny the appeal to Yuanta as it expands its regional broking ambitions. It also makes sense to Kim Eng’s shareholders for it to be a part of a larger more internationally focused group. The main reasons are explained by GK Goh in its rationalization for selling to CIMB:
“…going forward, the Directors believe that a much broader business footprint will be needed to remain competitive. The stock markets of Southeast Asia individually risk being marginalised in the eyes of global asset managers as countries like China and India increasingly open up to foreign investment. To remain competitive in regional institutional broking, significant investments would have to be made to broaden the Asian coverage of the Stockbroking Businesses. Further capital would also be required to enable the Stockbroking Businesses to participate effectively in the growing markets for equity derivatives and bonds, and to compete for large-scale underwriting and placement mandates…”
With the resources of Yuanta available to them, Kim Eng would find it much easier to expand into Malaysia and of course China. Its overall appeal to institutional investors would also increase as it gained expanded research and trading capabilities. Yuanta, on the other hand, would overnight become one of the largest Singapore brokers and the largest in Thailand and Indonesia as well. There is little-to-no overlap between them. A combination seems to make a lot of sense, a sentiment that the founder/chairman of Kim Eng agrees with.
In terms of valuation, there are various ways to approach it.
I arrive at my intrinsic value estimate as follows.
(1) KEH group ’04 Book Value S$780mn
(2) KEST Book Value S$170mn
(3) KEH non-Thai BV S$610mn (3)-(2)
(4) Net cash ex/ KEST S$220mn (consolidated net cash less KEST net cash, after special dividend)
(5) KEH Sing Broker Net Assets S$390mn (3)-(4)
(6) KEH Sing Intrinsic Value S$805 (1.5x (5) + (4))
(6a) KEH Sing IV per share S$1.34
(7) KEST Market Value S$620mn
(8) KEH’s stake S$397mn
(8a) KEST value per KEH share S$.66 (8) divided by KEH shares oustanding
Total KEH Group Value/share S$2.00
That’s the ‘reward’ side of the equation. In terms of limiting one’s risk there is likely a floor value for KEH around $1.15/$1.20. This is for three reasons. First, $1.15 would value KEH at the same multiple as GK Goh, which is too punitive in my opinion, while at the same time valuing the Thai business at 0. Second, the company bought back 3 million shares at $1.23 on the day of the press article quoting the Yuanta chairman. These guys recognize their own value and will sop up any excess liquidity that appears, especially if the price drops. Secondly, with net cash per share of 37 cents and 66 cents of KEST, it is unlikely that the market would price KEH Sing at less than zero. With KEST at current prices, anything below $1 would do just that.
In the end, there are two ways to look at this. Compared to the S$1.27 quote, I either get the Thai business for less than nothing or I get the Singapore business at a huge discount to private market value. And either sounds good to me!
Catalyst
Yuanta makes a bid in the next 18 months.