• Beyonics’ takeover offer at 26 cents or more than 30% above its last traded price was a surprise to us as the company’s fundamentals is at its weakest state since listing (made its first ever loss) and is expected to remain weak for the foreseeable future due to the weak state of the hard disk drive & PC market, continuing cost pressures, volatile raw material and forex rates and continued execution issues at its base plate business.
• On the other hand, these continued difficulties could also be a reason why the company’s founder and Chairman Chay KS and CEO CP Goh who together owns close to 20% of the company have decided to vote in favor of the takeover offer despite being priced at only 0.5x price to book compared to the average of 2.9x for the other hard disk drive players who were bought out in the past few years (Unisteel, Seksun, Amtek and MMI). However, we note that Unisteel, Seksun, Amtek and MMI were all very profitable and generating ROEs between 12-29% compared to Beyonics’ loss making situation.
• Past takeover situations suggest that the higher the ROE, the higher the buyer was willing to pay on price to book basis. For example Amtek was bought out at 1.5x price to book versus its ROE of 12% then while Unisteel’s ROE was 29% and its buy out price to book was 4.9x.
• While the business of Beyonics is expected to remain challenging due to continued cannibalization of the Nand-flash market as tablet computers and smart phones use it instead of the hard disk drive and consolidation of the major hard disk drive players, the private equity player SKP how is proposing to buy the company is very experienced in restructuring Asian manufacturing companies to help them cut costs and improve operating efficiencies. One of the founders of SKP was involved with turning around Flextronics’ Asian manufacturing operations in the past.
• The other hard disk drive related players include Broadway (currently trading at 0.6x price to book), Cheung Woh (0.6x), Miyoshi (0.6x), Armstrong (1.2x) and Adampak (1.2x).
• While we would not rule out further takeover situations in the sector, we also note that the major hard disk drive players such as Seagate and Western Digital which used to trade at 4-5x price to book during their heydays in 2007-2008, have been derated to 1.1x for Western Digital and 1.7x for Seagate currently due to cannibalization of the Nand Flash market.
• As a result of the above, we do not believe that potential buyers would be as generous as in the past, but those players who are trading below book values would likely have better chances.
• We are however staying Neutral on the sector (despite low valuations) given the sector’s weak outlook going forward.
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