ENG (FV RM2.00 - BUY) Company Update: Revised Offer Price Still Appealing

Stock Name: ENG
Company Name: ENG TEKNOLOGI HOLDINGS BHD

Research House: OSK

Price Call: BUY

Target Price: 2.00

Engtek's  boardannounced on Bursa that the financiers of TYK Capital SB have completed duediligence on the company and deemed the initial offer price of RM2.50/shareunjustifiable given the impact of last year's Thai floods on Engtek's operationsand financial position. Nonetheless, the financiers  have agreed to back  the privatizationat a revised RM2.00/share. We are now aligning our fair value to RM2.00,premised on 1.2x FY12 P/NTA, and think that this new privatization initiative may just materialize. Hence we upgradeour recommendation from SELL to BUY.

Still attractive atRM2.00/share. We find  the newlytabled  offer  attractive since Engtek's operations were severely scarred  by  theThai floods. Compared  to its peers underour coverage, the privatization offer price at 1.2x FY12 P/NTA represents a 37%discount to JCY's 1.9x FY12 P/NTA given Engtek's relatively smaller scale of operations,but is at 9% premium to Notion's 1.1x FY12 P/NTA, based on yesterday's closingprices respectively. On a standalone basis, the company historically traded ata 5-year average of 0.9x P/NTA, representing a 25% discount on the offer price.

Deal may just squeezethrough. We  are of the viewthat  the only  hurdle that may scuttle the deal may be thenew condition requiring Engtek to have a net cash balance of not less thanRM20m as at 31 March 2012. Note that the cost of  replacing the 400 damaged computer numericalcontrol (CNC) machineries amounted to RM90m and as at 31 Dec 2011, Engtek wassitting on net cash of RM42.1m. Assuming a conservative 50% insurance coverage,the company is looking to recover some RM45m from the loss of assets. Thus,this should bolster the company's net cash to RM87.1m, which would cover theasset replacement cost of RM90m. As for the RM23m shortfall in meeting the deal'snew requirement, we think that Engtek may be able to cough out this amount by executingmore cash transactions and shortening its sales outstanding collection period. Asat 31 Dec 2011, Engtek had inventory and receivables totaling RM131m.

Upgrade to BUY.We see Engtek's share price tracking  closer to the offerprice of RM2.00/share. We advise  thosewho own  shares  in the company to accept the  new offer price as its valuation is stillattractive, or dispose of the shares should the market price  get close to RM2.00/share. Hence, we are pegging our fair value  at RM2.00, premisedon 1.2x FY12 P/NTA. Given the 13% upside to its last closing of RM1.77, we areupgrading our call from SELL to BUY. Note that our previous cautious stance wasin view of the potential of the entire exercise collapsing. With the latest revised offer, we are of the view that theprivatization initiative may just materialize.

Source: OSK188