ENG (FV RM1.52 - SELL) Corporate News Flash: Revises Offer Price

Stock Name: ENG
Company Name: ENG TEKNOLOGI HOLDINGS BHD

Research House: OSK

Price Call: SELL

Target Price: 1.52

THE BUZZ

An announcement was made on Bursa yesterday,  stating that TYK Capital is still negotiatingwith its financiers to fund the privatization of Engtek. We understand that theoffer price will likely be adjusted to a value not exceeding RM2.00/share,instead of the earlier proposed RM2.50/share made prior to the Thai floods,depending on the outcome of the due diligence exercise scheduled to becompleted by 19 March.

OUR TAKE

Definitely below RM2.00/share or no go. In our 4QFY11results review note, we noted that Engtek posted a net loss of RM42.9m,  arising from the recognition of asset impairmentsand write-offs amounting to RM45.6m. We also highlighted that the company islooking to replace 400 damaged computer numerical control (CNC) machines with300 new generation CNCs costing approximately RM90m, in order to restore itsproduction capacity back to pre-Thai flood  levels (with  half of the new machines already delivered). Thus, we believe that the revisionof  the offer price to RM2.00/share  orbelow  is highly likely but the final price will be determined by TYK Capitalalong with its financiers.

Nod from majorshareholders? As PNB and LTH have a combined 23% equity interest in Engtek(held since early 2000), their decision on whether to accept the revised offer pricemay prove crucial in sealing the privatization deal. Based on our estimates, PNB and LTH's average costper share amounts to between RM1.40 and RM1.80. Assuming that the offer priceis now RM2.00/share, there is an upside of 10%-45% compared to 35%-75% based onthe previous offer of RM2.50/share. Given the scenario is as such, we  think that there is  still a  high chance that both entities will givetheir consent, especially with the HDD segment now facing long-term headwinds arising from: (i) the proliferation of smartphones and tablets which hassapped the demand for PCs, and (ii) the slow but  steady transitionto  solid state drives (SSD) as theprimary medium of storage. However, any offer price below RM2.00/share coulddiscourage PNB and LTHfrom participating in the proposed privatization.

Downgrade to SELL.We are not making any changes to our fair value of RM1.52 on Engtek, premisedon 0.9x FY12 P/NTA, but we are downgrading our recommendation from NEUTRAL toSELL due to the fluidity of the situation. We advise investors to cash out fromEngtek as we see better trading opportunities for both Notion (TRADING BUY,FV:RM2.43) and JCY (TRADING BUY, FV: RM1.80) which have a better product mix andeconomies of scale respectively. Moreover, the potential new offer price ofRM2.00 for Engtek would only provide a rather limited upside potential of 12% from the current market price.Being a HDD component  maker that isseverely affected  by the Thai floods,Engtek's short- to long-term outlook is undoubtedly murky.

Source: OSK188