Since I have been highlighting EAH, its only appropriate to follow up on the developments. Latest announcement showed that they have finalised the proposed terms:
EA HOLDINGS BERHAD ("EAH" OR THE "COMPANY")
I. PROPOSED ACQUISITION OF 1,275,000 ORDINARY SHARES OF RM1.00 EACH IN DDSB (M) SDN BHD ("DDSB"), REPRESENTING 51% EQUITY INTEREST IN DDSB FOR A TOTAL PURCHASE CONSIDERATION OF RM19,380,000 TO BE SATISFIED BY THE ISSUANCE OF 48,450,000 NEW ORDINARY SHARES OF RM0.10 EACH IN EAH ("EAH SHARES") AT AN ISSUE PRICE OF RM0.40 PER EAH SHARE ("PROPOSED ACQUISITION");
II. PROPOSED INCREASE IN THE AUTHORISED SHARE CAPITAL OF EAH FROM RM25,000,000 COMPRISING 250,000,000 EAH SHARES TO RM50,000,000 COMPRISING 500,000,000 EAH SHARES ("PROPOSED INCREASE IN AUTHORISED SHARE CAPITAL");
On behalf of the Board, OSK wishes to announce that the Company had, on 16 June 2011 entered into a conditional Share Sale and Purchase Agreement ("SSA") with Farisah binti Mohd Farid, Peter Ambrose Sequerah, Tan Soon Moi and Syed Shah Redza bin Syed Mohamed Redza (collectively referred to as "Vendors") for the proposed acquisition 1,275,000 ordinary shares of RM1.00 each in DDSB ("Sale Shares") representing 51% equity interest in DDSB. The total purchase consideration for the Proposed Acquisition is RM19,380,000 ("Purchase Consideration"), which will be fully satisfied by the issuance of 48,450,000 new ordinary shares of RM0.10 each in EAH ("EAH Shares" or the "Share") at an issue price of RM0.40 per Share ("Consideration Shares").
.... the Vendors' guarantee of the profit after tax before minority interest ("PAT") of DDSB that it shall be at least RM13,500,000 in aggregate for the two (2) financial years ending ("FYE") 31 December 2011 and 31 December 2012. Based on the following, this translates into an average PAT of RM6,750,000 per annum;
........ The value accorded to DDSB based on 100% equity interest is RM38,000,000. Accordingly, based on the average PAT per year of RM6,750,000, the purchase consideration represents a price-to-earnings multiple of 5.63 times.
...... The Vendors further jointly and severally agree, covenant and undertake to inter alia, as shareholders and/or directors of DDSB after the completion date of the SSA, to approve declaration(s) of dividends and endeavour to procure DDSB to declare dividends of not less than 50% of the profits of DDSB for each of DDSB’s FYE 31 December 2011 and 31 December 2012.
INFORMATION ON DDSB
DDSB was incorporated in Malaysia on 8 July 1999 under the Companies Act, 1965 as a private limited company under the name of Distinct Diversified Sdn Bhd. It was subsequently changed to DDSB (M) Sdn Bhd on 25 September 2001 and assumed its present name. DDSB is a Multimedia Super Corridor ("MSC")-Status company registered under the Ministry of Finance of Malaysia. It is principally involved in the provision of enterprise software services and solutions, which consist of enterprise resource planning solutions, mobile enterprise solutions and geographical information system ("GIS") solutions.
DDSB offers a range of products and services catering to both private and government linked companies. DDSB’s enterprise resource planning and human capital management solutions leverage technology to provide the platform for aligning and bridging the gap between organisation, business targets, people, process and technology. In addition, its mobile enterprise solutions allow businesses to manage its business relationships through a wireless technology platform and to improve efficiencies of its field crews. Lastly, its GIS solution business is a monitoring and management solution for large enterprises that have assets distributed over wide geographical areas.
DDSB has also developed its own niche solutions for managing remote assets based on the GIS mobile field force automation system ("MoFFAS") platforms. These solutions are capable of consolidating information and data of assets from all locations into a single database for easy retrieval, referencing and decision making.
Barring any unforeseen circumstances, the Board after having considered all the relevant aspects, including the aforementioned prospects of DDSB as well as the industry overview and outlook as set out in Section 8 of this announcement, is of the opinion that the Proposals are expected to contribute positively to the future earnings of the Group and to enhance EAH's shareholders' value in the long run.
(Source: Management of DDSB)
My take:
- Pure share issue purchase. Allows EA to conserve its cash reserves for other uses;
- The acq price is pegged at approximately 5.63 times the Profit Guarantee provided by vendors of DDSB of RM13.5 mil (portion attributable to EA RM6.8 mil). Shareholders of EA are guaranteed of PAT of RM6.8 from the DDSB acquisition;
- The Profit Guarantee is secured against the vendors shares;
- The issue price is at set at RM0.40 which represents a PE of 11.9 times vs the acq PE of 5.63 time. EA shareholders should be pleased that EA is buying a co for PE of 5.63 time vs issuing EA shares which is trading at 11.9 times. Earnings accretive as they say.
- The acquisition comes with a guarantee of min 50% dividend payment for 2 years (2011 and 2012).
- If one is to analyze this deal deeper, the company is buying something for RM19.38 mil, however with the aforesaid dividend of approximately RM3.4 mil, the net purchase price works out to only approximately RM16 mil. At RM16 mil the acq PE is only at 4.64 times which is savvy.
- The purchase is deemed earnings accretive. The current EPS based on the annualized earnings of EA is at RM0.043 , with the acq coupled with the additional shares issued to finance the acq, the EPS of EA is at 5.07 sens. With the similar current PE trading of EA of 11 times, the share price of EA should be fairly valued at 55 cents.
- There is no need to take into dilution of the warrants as the conversion price is close to 60 sen per share. Any conversion will boost cash per share and NTA of EAH anyway. Dilution effect almost immaterial.
NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
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