Wednesday, November 9, 2016

Ekovest is for the long term

Yesterday, Ekovest came out with a long well crafted filing for its sale of 40% of DUKE Expressway, and when I asked my dealer on whether there are any analysts that provide report based on the filing made - I guess most analysts went home early, more interested into deciphering the US election than looking at the long-winded filing(please read them if you can) made by Ekovest. Ironically, the dealer of mine passed me an article and that article is this. I did not know they follow me too. Hence, I decided to write another one.

In deciphering the entire purpose of the company and what they intend to do, I would say Ekovest's management have been very fair to its shareholders, thus far. This is in considering that it is the type of management that is able to get into Iskandar Waterfront and Bandar Malaysia projects. They have done well in this respect.

What's important in this filing?

(Again: I request you to read yourself, even though can be tough -

  1. Special Dividend of 25 sen per share;
  2. Split share of 2 into 5 shares of Ekovest - hence par value will reduce from RM0.50 to RM0.20 per share
  3. IRR guarantee - The way the agreement between EPF and Ekovest is drafted, it is with a purpose (I would say) for a listing of the highway business within 5 + 2 years from the completion of this deal
1. Special dividend - 25 sen

I guess I do not have to explain this much but upon completion of the deal with EPF, Ekovest will pay 25 sen per share of dividend to its shareholders that hold the parent share (now RM2.35). This includes those warrant holders that have exercised the shares into parent within certain allowable timeframe.

Few things to note, based on below (if I am not wrong), even if you hold the warrant the warrantholders will not lose out as its exercise price will be adjusted accordingly after the dividend payment. Also the share split which I will discuss in the next point, the warrants will be equally split as well.

Proposed distribution means the special dividend distribution
Do also take note that from the sale valued at RM1.13 billion, RM244 million will be distributed as dividends while RM400 million to repay borrowings. The rest are for working capital and other purposes such as fees.

Details as follows:

2. Share split

As usual, the share split is to make the shares more tradeable - nothing significant but I guess the number of tradeable shares will increase to about 2.44 billion shares (inclusive of the converted warrants). The dividend will be paid first then only the shares will be split from 2 into 5 shares. As mentioned, the warrant holders will not be prejudiced. If I am not wrong, assuming the warrants exercise price is RM1.35 and after the dividend payment of 25 sen - it will be adjusted to RM1.10 before the split. (Do let me know if I am wrong.)

Proof of additional warrants to be issued

3. Exit via IPO, trade sale etc.

This item 3 is the most important and one which we have yet to see prior to this. (I DO expect good dividends, prior to this announcement).

To cut things short, basically there is a guarantee of 10% IRR to EPF for the next 5 + 2 years. (EPF has protected itself well - so everyone thats working should be happy). If Ekovest does not achieve the intended target, it will have to pay EPF the difference through the monies that are allocated under the escrow account (RM149 million). The whole negotiation as I see it is to find another place for the highway asset - most probably IPO (see below).

I would say that itself will allow shareholders of Ekovest to benefit from the dis-entanglement exercise. Most shareholders, I presume would prefer a direct exposure to the highway assets as compared to now park under Ekovest, the holding company.

For me, this is the most important element in the entire filing as it inherently explain the intentions of the organization in discussion with EPF.

I have mentioned of the intrinsic value of Ekovest. It depends on whether the management will want to surface them and allow shareholders to participate. In some events (cases like Tradewinds Plantations, old Maxis, Mamee example), the major shareholders wanted to take most of the value by privatising their controlled companies.

Seriously, I was concerned that it could have done that as the shares was trading at around RM1.00 - RM1.30 for some time.

With this exercise, I am convinced of the company even more, I should say.


cs said...

I am not sure about the warrant price to be adjusted. I think it is more like they will adjust the price after the split I think? I am not sure as well :D I hold quite a bit of ekovest wb and mother as well.

felicity said...

It will be adjusted fairly

money sifu said...
This comment has been removed by the author.
money sifu said...

Special cash dividend of 25 cents will not dilute the value of Ekovest warrant.

Based on previous practice of declaring special dividend by other companies (Sunway Bhd & Tanjong Offshore), the exercise price of the warrant will be adjusted accordingly.

Based on my calculation & existing prices of mother (RM2.50) & warrant (RM1.37) shares, the new exercise price will be RM1.22, revised from RM1.35.

After taking into adjustment for special dividend on both mother & warrrant, it should look like this:

Mother share less 25 dividend = 2.50 - 0.25 = 2.25
Warrant + Exercise price = 1.37 + 1.22 = 2.59
Premium = 15.1%

Let's take a look at the recent month's premium records:

When Ekovest was RM2 & Warrant was RM1
Warrant + Exercise price = 1 + 1.35 = 2.35
Premium = 17.5%

money sifu said...

Formular for Exercise price adjustment for Special Dividend=

Exercise price x [(current price - special dividend) /current price ]

1.35 x [( 2.50 - 0.25 ) / 2.50 ] = 1.215
rounding up, the exercise price will be RM1.22

felicity said...

Thanks, Money Sifu. I guess I am wrong. Thanks a lot.