Boustead Holdings (HLIB)

Target: RM7.71/7.01 (ex bonus)

Price: RM5.93/5.39 (ex bonus)

Div in Specie, Offer for Sale & Part Divestment of Pharma + Bonus Issue

News:

 To meet Pharmaniaga (Pharma) public shareholding spread, Boustead proposed: 1) dividend in specie of Pharma shares on basis of 1-for-57.5. Shareholders with less than 5,750 shares will get cash (total RM1.7m); 2) restricted offer for sale of Pharma shares to shareholders (excluding LTAT) on basis of 1-for-24; 3) divestment of 5.5m, 4m and 8m Pharma shares to LTAT, Boustead directors and employees and other investors (not identified yet); 4) Pharma will undertake a bonus issue of 1-for-10 after completion of the above; and 5) Boustead will also undertake a bonus issue of 1-for-10.

 Pharma shares will be priced at RM5.75 or at Boustead’s entry cost (vs. current price of RM5.90). Exercise slated for completion by end 2011.

Financial impact:

 Upon completion, Boustead’s stake in Pharma will reduced from 97.8% to 51.3%. Thus, FY12-13 EPS will reduced by circa 6% in view of lower stake but P/E still single-digit.

 Pharma will be sold at cost, thus, no profit or loss. Inflow of RM194.2m will reduce net gearing by circa 4.5%-point. Net asset per share will reduce by 10 sen to RM4.40 (before bonus issue).

 Bonus issue has no impact but may improve liquidity.

Pros / Cons

 Mildly positive as shareholders get yield pick-up of 1.69% from dividend in specie.

 Pharma is priced at 9.6x annualized 1QFY11 earnings. Boustead intends to expand Pharma business to meet requirements of the armed forces and private hospitals as well as venture into halal drugs and herbal supplements (via research capabilities of its 60-owned University of Nottingham Malaysia). Thus, shareholders will benefit from decent entry level.

Risks:

 Lower than expected revenue contributions from different divisions and/or margins falling short of expectations as well as relatively high gearing and potential dilution from cash call. Forecasts  FY12-13 EPS cut by circa 6%. RNAV cut from RM8.74 to RM8.56 largely to reflect lower BHIC shares price.

Rating: BUY

 Positives – Still undervalued (single-digit P/E), high and quarterly net dividend yield, double-digit FY11 earnings growth and market yet to fully appreciate the hidden values. Will benefit from sustained consumption (banking, property and pharmaceutical divisions) and government land deals.

 Negatives – Relatively high gearing and complicated group.

Valuation:

 Target price cut from RM7.87 to RM7.71 based on 10% holding company discount to estimated SOP of RM8.56.