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I think Market should have already priced in some if not all of the 28cts Div. CSE price was trading around 85cts and is now 96cts.
PE based on last two quarters is probably about 9 times (rough estimate). Based on 9mth EPS of 7.07cts, simply uplift by 4/3 gives 9.43cts. Apply PE of 9 gives me back the 85cts. CSE UK contribute 1/3 to bottomline so with same PE of 9, expecting prices to settle around 57cts. But with 1/3 loss of income henceforth, will Market tag a lower PE to CSE?
Now 85cts to 57cts happened to be a diff of 28cts. But maybe not. 1/3 of that 9.43cts is about 3.1 cts. With a PE of 9, that is about 28cts. So rather than waiting for 9 years of 3.1cts EPS to turn into 28cts, CSE, made it happened quicker (a lot) for their shareholders.
Doing simply maths here with limited financial knowledge and Market experience.
Not a call to buy or sell.
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The issue clearly lies in the EPS and P/E one assumes. You might want to relook at the EPS number.
Separately, on the issue of P/E, it is curiously interesting that the UK market values a piece of the biz at 14x, when the SG market has, for most parts, valued it at single digit P/Es. So which is correct?
One could clearly argue till the cows come home on what is the right valuation. In the meantime, however, what is real and tanglble is this --- that you get paid a hefty cash payout because mgt was savvy enough to sell something at 14x when it has consistently been priced by the mkt at 8/9x. And if mgt is willing to sell a piece of its biz, partly because the price is right, may it not consider the entire biz if the price is right?
Food for thought.
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My observations:
1. Looking at Servelec alone, gross proceeds will be S$244.1mln, which is around 13.7x 2012 earnings or 15.3x 2013 annualized earnings. But investors are only getting S$144.5mln as special dividends while the remainder is used to finance CSE's debts. On special dividend alone, this is around 8.1x Servelec's 2012 earnings. Unless CSE is taking on more debts (after the debt payment) to increase EPS, the debt payment is negligible to minority investors. So, did we really get Servelec at 14x to 15x earnings?
2. How profitable will CSE ex-Servelec be? Looking at the separate financials of Servelec, they were margin-accretive in 2012 and 1H2013. If we extrapolate this, CSE ex-Servelec is actually less profitable. Why then did mgmt want to spin this profitable business away? I do not know but NPM has fallen in 2012 and mgmt is expecting more competition in 3Q15 with UK healthcare market opening up. Is mgmt expecting this and hence, decided to cash out early? (and also before any QE tapering actually happens)
3. Annualizing CSE ex-Servelec's 1H13 earnings will give S$34mln. If we tag it to an arbitrary 12x earnings valuation and add the S$0.28 special dividend, "fair value" would be S$1.07.
4. My main concern is I do not want to mask CSE's stagnant fundamentals with Servelec's spin-off. The market is hyped up with the special dividend and don't forget, earnings visibility is limited for a company like CSE and even the better-performing Boustead is at 9.4x TTM earnings. 12x earnings could be a fair valuation.
"Criticism is the fertilizer of learning." - Sir John Templeton
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15-11-2013, 12:47 AM
(This post was last modified: 15-11-2013, 12:50 AM by ARC.)
Maybe what is missing in the calculations is the value of its cash and the value of its debt headroom. If one just take ex-UK earnings x P/E + special dividend, you will most likely get a value +/- 10% of current price. But what happens if CSE take its cash and acquire a coy at 8x/10x/12x P/E tmr?
The fact of the matter is that Servelec was sold for 14x. To only capture the value of the portion you receive from the sale - i.e. special dividend - and ignoring the one that sits within the coy you own..that may be selling yourself short. How one choose to price/value/discount that cash pile is of course up to debate but a value of 0 may not be appropriate.
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Yah...reducing debt should contribute some 0.5 cents to EPS?
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(15-11-2013, 12:47 AM)ARC Wrote: Maybe what is missing in the calculations is the value of its cash and the value of its debt headroom. If one just take ex-UK earnings x P/E + special dividend, you will most likely get a value +/- 10% of current price. But what happens if CSE take its cash and acquire a coy at 8x/10x/12x P/E tmr?
The fact of the matter is that Servelec was sold for 14x. To only capture the value of the portion you receive from the sale - i.e. special dividend - and ignoring the one that sits within the coy you own..that may be selling yourself short. How one choose to price/value/discount that cash pile is of course up to debate but a value of 0 may not be appropriate.
Yes, I do agree there is a possibility for mgmt to use their balance sheet for another acquisition. But their cash pile isn't that much. Gross debt of S$99mln in 9M2013 and after paying down with the proceeds, the company still have around S$24mln in gross debt. Net cash will be S$57mln which is really just 11% of market cap - nothing fantastic.
But like what egghead suggested, there is some addition to EPS from a lower interest expense - my calculation shows it to be an additional S$0.01 to EPS?
Anyway, my point is what's after Servelec? The spin-off would have been a lot more attractive if Servelec is unprofitable since post-spin off, CSE will be more profitable.
"Criticism is the fertilizer of learning." - Sir John Templeton
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What's the real benefit of net cash? from a long term perspective, there is very little benefit. There are plenty of major companies in US with 0 or negative equity and large debt on the balance sheet. So is that a disadvantage? I don't think so.
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