SMB United -- takeover bid by Boer

[portuser]

Boer has unveiled plan to take over SMB. The following from its offer document is noteworthy:
"According to the PRC’s “Twelfth Five-year Plan”, smart grid has been designated to be a key area of development in the new energy industry in the PRC and the PRC aims to establish a strong smart grid network by 2015. The Company noticed a similar trend worldwide as many developed countries, such as members of the European Union, the United States and Japan, are also making considerable investments in smart grid technology to establish full coverage of the smart grid network in those countries. The Directors believe that smart grid network will become the development trend in the electricity market both domestically and internationally. While continuing to focus on the development of the domestic market in the PRC, which the Directors believe will continue to drive the greater part of the future growth of the Company’s business, the Company also intends to identify potential acquisition opportunities that can also increase its global market presence, its product offerings and enhance overall competitiveness."

EDMI's smart metering system is well recognised by now, after establishing itself in New Zealand. With a long presence in the United Kingdom, the company is likely to have a reasonable market share when smart metering is rolled out in that country to meet the 2020 deadline.
The offer price of 32c valuing SMB at $160m is low.
EDMI made $9.7m last year on $98m sales. These figures are set to grow as more countries embrace smart metering to achieve energy efficiency.
If EDMI turns in $12m on $120m sales this year, ten-time profit will translate into a value of $120m. If the potential of high growth justifies a higher multiple of say 15, the value of EDMI is $180m, exceeding the $160m assigned by Boer for the entire SMB Group.
The smart grid network referred to by Boer encompasses smart metering system. It is not known whether EDMI's capability extends to smart grid. Has Boer gathered that EDMI has made sufficient progress in this new field?

[xlandjy]

Boer has unveiled plan to take over SMB. The following from its offer document is noteworthy:
"According to the PRC’s “Twelfth Five-year Plan”, smart grid has been designated to be a key area of development in the new energy industry in the PRC and the PRC aims to establish a strong smart grid network by 2015. The Company noticed a similar trend worldwide as many developed countries, such as members of the European Union, the United States and Japan, are also making considerable investments in smart grid technology to establish full coverage of the smart grid network in those countries. The Directors believe that smart grid network will become the development trend in the electricity market both domestically and internationally. While continuing to focus on the development of the domestic market in the PRC, which the Directors believe will continue to drive the greater part of the future growth of the Company’s business, the Company also intends to identify potential acquisition opportunities that can also increase its global market presence, its product offerings and enhance overall competitiveness."

EDMI's smart metering system is well recognised by now, after establishing itself in New Zealand. With a long presence in the United Kingdom, the company is likely to have a reasonable market share when smart metering is rolled out in that country to meet the 2020 deadline.
The offer price of 32c valuing SMB at $160m is low.
EDMI made $9.7m last year on $98m sales. These figures are set to grow as more countries embrace smart metering to achieve energy efficiency.
If EDMI turns in $12m on $120m sales this year, ten-time profit will translate into a value of $120m. If the potential of high growth justifies a higher multiple of say 15, the value of EDMI is $180m, exceeding the $160m assigned by Boer for the entire SMB Group.
The smart grid network referred to by Boer encompasses smart metering system. It is not known whether EDMI's capability extends to smart grid. Has Boer gathered that EDMI has made sufficient progress in this new field?

The control shareholder is the LEE FAMILY. SMB offered shareholders of EDMI at 0.36.5 a share to take it private under SMB. Now a HK Co is offering only 32 cents a share to take SMB (including EDMI) private. A real bargain.

[dzwm87]

Doubt the family will sell the business at such a cheap price...

SMB's re-rating potential lies in EDMI + 30% "free" re-consolidated earnings from EDMI when they acquired them early mid 2011. I strongly see Australasia & Europe as the key driver for EDMI's growth. Of course, you may ask why Europe when they are hit by the crisis. I went for the EGM last week & they reveal UK is the largest share of their Europe sales - around 80-85%. With UK roll-out being confirmed (only matter is when..), they mentioned that UK market potential is 20million smart meters, of which they are hoping to have a 20% of it (i.e 4million meters).

On the other hand, Boer itself is a company with potential. And hypothetically, if Boer acquires SMB, I think it will allow better market entry into China. I foresee Boer's growth to be supported by China's demand for smart grid networking. However, Boer is too expensive at around 8 P/E.

If anticipation of acquisition does not push Boer stock price too high up, then either outcome will be favourable. In fact, if Boer price don't hit up, I actually hope the acquisition will go through though at an offer price of S$0.32, it's going to be rare.

*vested in SMB*

---

Boer has unveiled plan to take over SMB. The following from its offer document is noteworthy:
"According to the PRC’s “Twelfth Five-year Plan”, smart grid has been designated to be a key area of development in the new energy industry in the PRC and the PRC aims to establish a strong smart grid network by 2015. The Company noticed a similar trend worldwide as many developed countries, such as members of the European Union, the United States and Japan, are also making considerable investments in smart grid technology to establish full coverage of the smart grid network in those countries. The Directors believe that smart grid network will become the development trend in the electricity market both domestically and internationally. While continuing to focus on the development of the domestic market in the PRC, which the Directors believe will continue to drive the greater part of the future growth of the Company’s business, the Company also intends to identify potential acquisition opportunities that can also increase its global market presence, its product offerings and enhance overall competitiveness."

EDMI's smart metering system is well recognised by now, after establishing itself in New Zealand. With a long presence in the United Kingdom, the company is likely to have a reasonable market share when smart metering is rolled out in that country to meet the 2020 deadline.
The offer price of 32c valuing SMB at $160m is low.
EDMI made $9.7m last year on $98m sales. These figures are set to grow as more countries embrace smart metering to achieve energy efficiency.
If EDMI turns in $12m on $120m sales this year, ten-time profit will translate into a value of $120m. If the potential of high growth justifies a higher multiple of say 15, the value of EDMI is $180m, exceeding the $160m assigned by Boer for the entire SMB Group.
The smart grid network referred to by Boer encompasses smart metering system. It is not known whether EDMI's capability extends to smart grid. Has Boer gathered that EDMI has made sufficient progress in this new field?

Will think Boer knows it already. They stated that they have been watching SMB for a while.

Besides, don't think Boer style is towards offering gung-ho acquisition price. They are quite conservative, having acquire another company (Wuxi) earlier this year at 3+ P/E & 1.2 P/B

[portuser]

DZMW87
Yes, Lee family should be disinclined to selling at 32c given EDMI's strong fundamentals.
On the same day Boer showed its cards, stating that the takeover is conditional upon four conditions, one of which being that SMB should not issue new shares, SMB promptly snubbed the suitor by issuing new shares to buy out the remaining stake in Quantum Automation.

If EDMI gets 4m smart meters in the United Kingdom, its profit should soar, for the whole of last year, it sold just 0.5 million meters for a profit of $9.7m. I do not think the company is boastful. EDMI's leadership was dogged in its pursuit of developing residential smart metering system many years ago, when the prospect was of unclear then. The company can relish the fruit of its hard work now that residential smart metering system has become a catchword in the field of energy management.
Has the company applied the same doggedness in developing smart grid technology, which Boer is craving for?
One should note that EDMI is adding production capacity and building up inventory, in anticipation of better sales.

The Lee family is vulnerable as its stake in SMB is small, and support from friendly parties may not matter much.
Boer's timing is good as jittery shareholders, not knowing the stong fundamentals of EDMI, see the the 32c offer hard to resist. Over these years, the company has overlooked showcasing its smart metering system. It could be the result of modesty, maintaining confidentiality or whatever.
But the moment has come for the Lee family to rally small shareholders if it believes that on its own, it can deliver better shareholders' value than Boer would.

[dzwm87]

portuser
Yes, however, as much as smart metering roll-out will go on for the euro, I think there are still some down-side for the UK catalyst. I am hoping that the roll-out be delayed rather than spread out over longer period. For now, EDMI has mentioned that the roll-out has been pushed to 2013-14, over a time span of 5 years. If that's the case, proportionately, we will see 0.8 million meters each year from UK market alone. If they spread it out over a longer period of time, then earnings each year might not be that substantial & it might not be that strong of a catalyst. Of course, the above forecast is based on some assumption that EDMI managed to secure the 20% market sales.

On the other hand, for Boer, I agree that they might not have the same doggedness but I got to say Boer management has a certain level of quality as well. For 1H FY2011, Boer was hit by low margins sales for its EDS business (conventional electrical distribution system) and it actually shifted its business strategy to its iEDS & EE division which command higher yield & has stronger economic moat in these business. Its shift allowed 1H FY2011 performance to be rather close to 1H FY2010 & even achieve better margins. Of course, the market thinks otherwise and have sold down to HK$2+ from its HK$7 IPO prices. However, Boer, like I mentioned earlier, is still expensive at 8+ P/E

With all that saying, back to the acquisition, the only concern now is whether when Lee & Goh family stand united with their fragmented shares. I don't think their worry is in losing the ENTIRE SMB but more of losing control since minority shareholders might sell off without understanding the true potential of SMB - via EDMI.

*vested in SMB*

[Sfsh12]

There is a risk that the Lee family may lose control of SMB. If Boer buys up enough SMB shares in the open market, it may wrest control even though it does not have a majority. What can the Lee family do to mitigate this risk?

SMB will announce its 3Q results on 11 Nov. When trading halt of SMB shares is lifted (say tomorrow), can the Lee family buy SMB shares during the blackout period?
Is the Lee family required to mount a counter-bid, if it wants to conteract the buying of SMB shares in the open market by Boer?

[dzwm87]

Sfsh12:
Not sure but SMB must release a document within the next 2 weeks (14 days) of the release of offer announcement.
Lee family might not need to buy up shares if under their document release, they are able to convince that S$0.32 is too little of a price and that SMB has potential to hit more than S$0.32.

*vested in SMB*

[portuser]

dzwm87
You have pointed out that delay in the roll-out in UK may be desirable as smart meters will be installed over a shorter period, and profits will be concentrated within this shorter period.
However, market recognition of EDMI will be correspondingly delayed. An early roll-out will also enable EDMI to ramp up production more gradually (since last year's sales vol was 0.5m meters only), as well as provide the company more time to solve whatever operational problems that may arise before 2020.
As for your response to Sfsh12, I think if Lee family does not act swiftly, Boer is likely to build up a sizeable stake in SMB, eclipsing Lee family; and possibly gains management control after unseating members of the Lee family from the Board in an EGM.

[dzwm87]

portuser:
Think you might have misinterpreted what I have said. SMB has already mentioned that Euro roll-out has already delayed. However, they did also say that the roll-out will happen, only matter is when.

Of course, subjected to the above, I will rather the roll-out be delayed rather than it be executed but spread over longer period of time (lesser earnings each FY) or both (delayed & spread out over longer period of time).

Whether the Lee family act swiftly or not, is not under our control. What's more important, I feel, is to consider every opportunity available. In this case, it might not be that bad if Boer acquire SMB (assuming the market does not ramp up Boer's price in anticipation of this acquisition). becuase with Boer + SMB, there is a lot of catalysts available for a re-rating of Boer + SMB under HKEx.

*vested in SMB*

[cif5000]

Why should the stock trade at 0.305/0.31?