WHEN A NextInsight reader asked me to stand in as his proxy at Esmart Holdings' EGM on Tuesday (Dec 28), little did I expect to be representing 20 million shares, more than 3% of its S$12.26 million market cap.
I later learnt that the reader had purchased the shares at 2 cents apiece via a married deal about 2 months back, around the time NextInsight broke a story on Esmart’s reverse takeover by KLSE-listed Atlan.
At Orchid Country Club on Tuesday, Esmart shareholders approved the restructuring that will result in Atlan holding a 96.24% stake in Esmart and its name change to Duty Free International.
Every 20 Esmart shares will be consolidated into one Duty Free International share. The company will be injected with assets worth S$317.6 million as follows:
1) 74.7% in KLSE-listed DFZ Capital, which operates 36 duty-free outlets throughout Peninsular Malaysia. Other than duty-free retail at airports, DFZ is the largest duty-free trading group in Malaysia.
It has 20 years of operating track record and a strong presence in all leading entry and exit points on the peninsular.
DFZ Capital closed yesterday at RM 3.55 and has a market cap of RM 745.4 million (S$312.8 million).
With DFZ Capital injected into Esmart, the former will be able to be marketed easier to fund managers in Singapore and elsewhere. Currently, DFZ Capital faces challenges generating investor interest in Malaysia as Islamic funds do not invest in alcohol-related businesses.
2) ZON Johor Bahru. One of Malaysia’s largest duty-free zones with a gross floor area of about 1.6 million sq ft, this piece of commercial real estate is worth some RM 200 million (S$83.9 million).
It has a hotel, convention halls, shopping areas and a multi-storey car park. It also has a customs and immigration checkpoint, office building and ancillary buildings spread out over 14 acres of prime waterfront land.
The entire complex is sublet to DFZ Capital.
Stock suspension for up to 2.5 months
Esmart closed at 2 cents yesterday, and is expected to be suspended for up to two and a half months.
According to the indicative timeline in Esmart's circular to shareholders, the suspension could start from next Tuesday (4 Jan) and end on Mar 19, during which period the public float has to be restored to at least 15%. (Update: Esmart announced on Dec 30 evening that suspension of the stock trading will start at 9 am on Jan 7 and end, as an indicative date, on Mar 19.)
The circular stated that it is expected that the mandatory general offer to be undertaken by Esmart will restore the necessary public spread as required under the Catalist Rules when public shareholders of DFZ in Malaysia accept new shares of Esmart.
In the event that the mandatory general offer does not result in meeting the necessary spread requirements, Esmart shall undertake the necessary compliance placement to restore the 15% public spread to be held by at least 200 public shareholders as required under the Catalist Rules.
Will more shares be issued to restore the public float?
If not, Duty Free International will have 1.155 billion shares outstanding when it resumes trading.
This works out to 27 cents apiece based on the market value of its 74.7% stake in DFZ Capital and Frank Knight’s valuation of ZON JB as at Jun 2010.
Undervaluation, good prospects and strong cash flow
When asked why he was willing to pay 2 cents apiece (or 40 cents for 20 shares), the reader, who declined to be named, cited undervaluation, good prospects and strong cash flow as investment merits of the stock:
1) DFZ Capital's PE of 9 times is relatively conservative compared to TCM retailer Eu Yan Sang's 18.5 times.
2) Appreciating real estate values pending SMRT’s linkage to ZON JB’s vicinity
3) The outlook for Southeast Asian tourism is bright, and he expects positive spillover effects from Singapore’s integrated resorts
4) The duty-free business is monopolistic and a cash cow
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