Berjaya Corp’s takeover of Singer deemed expensive

BERJAYA Corp Bhd’s (BCorp) proposal to take over Singer (Malaysia) Sdn Bhd from Berjaya Retail Bhd (BRetail) and its largest shareholder, tycoon Tan Sri Vincent Tan Chee Yioun, at 19 times price-to-earnings ratio (PER) is deemed expensive.

The announcement elicited a mostly muted reaction from investors to shares in BCorp the following day (June 3). Its share price hardly moved that day, settling unchanged at 19 sen.

Investors whom The Edge spoke to expressed scepticism about the deal, especially the RM536 million purchase consideration being offered. At 19 times PER, they say, BCorp could have acquired stakes in other retail companies that give out better returns.

An investor who declined to be named believes Singer will not be a good investment, as it is no longer a strong brand like before.

A check with the Companies Commission of Malaysia shows that Singer’s net profit grew 66.6% year on year (y-o-y) to RM31.6 million in the financial year ended Dec 31, 2018 (FY2018).

Investors are questioning the strong profit growth, however, pointing to Singer’s revenue, which grew only 3.5% y-o-y to RM321.96 million during the year.

“Revenue did not double during the year, so there must be something else that contributed to the almost doubling of the profits. I think margins in this kind of business are not very high,” another investor tells The Edge.

Over the last five years, Singer’s net profit dropped from RM34.63 million in FY2014 to RM18.95 million in FY2017. FY2014 recorded the highest revenue during that time, at RM492.5 million.

On June 2, BCorp said it had entered into a memorandum of understanding (MoU) with BRetail and Tan for the acquisition of Singer for a net payment of RM388 million, after set-off of the intercompany debts of Singer of RM148 million against the purchase consideration of RM536 million.

The acquisition will involve the issuance of new BCorp shares at 33 sen each, representing a premium of 14 sen, or about 74% to the stock’s closing price of 19 sen on May 29.

Under the proposal, BCorp will issue 1.18 billion new shares for the net payment of RM388 million. In addition, Tan will provide BCorp with a profit guarantee that Singer will achieve a net profit of RM20 million a year for the financial years ending Dec 31, 2020 and 2021.

Based on net payment of RM388 million for the 100% stake in Singer, this profit guarantee of RM20 million a year will translate into a net PER of 19.4 times, the announcement says.

As at press time, BCorp had not responded to queries by The Edge.

Investors’ scepticism of Singer’s profit margins is not unfounded. A comparison of Singer with Bursa Malaysia-listed manufacturers and distributors of electrical appliances such as Khind Holdings Bhd and Pensonic Holdings Bhd shows a wide net profit margin gap.

In FY2019, Khind reported a net profit of RM1.81 million on revenue of RM363.2 million. This translates into a net profit margin of only 0.5%. Meanwhile, Pensonic reported RM3.65 million in net profit on revenue of RM217.7 million for the nine-month period ended Feb 29, 2020, giving it a net profit margin of 1.7%.

In comparison, Singer reported a net profit margin of 9.8% in FY2018.

Khind traded at a trailing 12-month (TTM) PER of 4.73 times as at last Thursday. At RM1.74 a share, the company has a market value of RM70 million. The counter is thinly traded, with the highest volume year to date (YTD) being 51,200 units on June 1.

Pensonic traded at a TTM PER of 7.17 times as at last Thursday. At 27.5 sen a share, the Penang-based manufacturer has a market value of RM36 million. The counter has been on an upward trajectory since hitting the YTD low of 19 sen on March 23.

Given the vast differences in PER between Khind and Pensonic on the one hand and Singer on the other, investors are sceptical about who will benefit from the deal. The market’s muted response to BCorp’s share price indicates that it is doubtful that the group will benefit.

BCorp’s profitability in the 14-month period ended June 30, 2019 was affected by a RM417.3 million impairment charge on the value of its gaming rights. Excluding the impairment charges, BCorp recorded a net profit of RM125.72 million on revenue of RM9.78 billion.

The profit guarantee of RM20 million a year for two financial years does not seem to be exciting enough for investors to pick up BCorp’s shares. Based on a net profit of RM126.72 million and the 5.22 billion shares issued, BCorp’s earnings per share (EPS) was 2.4 sen.

With an additional RM20 million coming from Singer, and assuming that the group’s net profit stays flat in the 12-month period to June 30, 2020 (FY2020), along with the additional 1.18 billion new shares, BCorp’s EPS would be slightly diluted to 2.3 sen.

BCorp’s outlook for FY2020 so far is bleak. In the six-month period ended Dec 31, 2019 (1HFY2020), BCorp recorded a net loss of RM133.5 million on revenue of RM4.15 billion.

The losses in 1HFY2020 were due to finance costs of RM180.2 million, which more than offset BCorp’s operating profit of RM114.5 million during the period. This means its earnings are more likely to be lower this year than in 14MFY2019, as the remaining six months would have been affected by the Covid-19 pandemic, especially the April-to-June quarter.

The deal also raises questions about what will happen to Berjaya Media Bhd, another listed subsidiary of BCorp. In late 2019, Singer was supposed to be the white knight for BMedia as the latter sought to regularise its operations from Practice Note 17 status.

Without Singer to rescue BMedia, it is unclear whether the latter will be delisted from Bursa Malaysia.