Liquidity makes small, mid-cap firms easy takeover targets

The smaller listed companies are not seeing enough liquidity in their stocks for capital appreciation, according to VP


Small and mid-cap companies, which have seen their market capitalisation torn to shreds due to the general economic downturn, would continue to be takeover targets, said analysts.

Vincent Lau

However, Lau says small-cap stocks will still find interest from investors and retailers (Pic by Muhd Amin Naharul/TMR)

Rakuten Trade Sdn Bhd research VP Vincent Lau said the recent spate of takeover offers of small-cap and penny stock companies were due to liquidity challenges, small market capitalisation, unexciting earnings and relatively clean balance sheets.

“Dwindling market capitalisation makes these companies vulnerable targets as economic health and confidence returns to the market.

“The smaller listed companies were not seeing enough liquidity in their stocks for capital appreciation, which could explain the takeover moves,” Lau told The Malaysian Reserve.

He said small-cap stocks will still find interest from investors and retailers.

“Penny stocks are often retailers’ and investors’ favourites, and many small-cap businesses eventually grow up into mid-cap or large companies. They are both risky and mighty,” he said.

In the last two months, a record seven small and mid-cap listed companies have become takeover targets, mostly by the companies’ existing major shareholders.

Johan Holdings Bhd, Hovid Bhd, Willowglen MSC Bhd, Yi-Lai Bhd, Wang-Zheng Bhd and KUB Malaysia Bhd have seen takeover offers by their major shareholders.

Dataprep Holdings Bhd and Goh Ban Huat Bhd saw their major shareholders selling their stakes and exiting the company.

“Some of the takeover offers are way below the market price,” Lau said.

For instance, KUB and Wang-Zheng’s independent advisors have suggested that minority shareholders reject the takeover bids as they are deemed not fair and not reasonable.

KUB — which was trading around 57 sen before the unconditional mandatory general offer from Anchorscape Sdn Bhd — was advised to reject the takeover offer at 35 sen a share.

The takeover offer received by Wang-Zheng was also below the market price then, as the offer price of RM1.14 per share was lower than the RM1.46 trading price.

Lau said the increase in takeover offers are likely due to the potential of these small and mid-cap stocks, particularly the companies with a strong potential upside.

Another analyst, who has been observing the takeovers recently, said some smaller listed companies were not seeing enough liquidity in their stocks for capital appreciation.

“Of course, takeover activity is another example of businesses being confident about the future.

“But more importantly, the premium prices being paid demonstrate a huge disparity between current share prices and the value trade buyers place on some businesses.

“For instance, the takeover of Data- prep was at 16 sen per share — and that is 23 sen below its share price of 39 sen on the last trading day prior to the offer,” he said.

On the other hand, pharmaceutical company Hovid stands out for the rather high condition its offerors have imposed.

Major shareholder David Ho Sue San, working with private equity firm TAEL Two Partners Ltd, has made a general offer for Hovid shares at 38 sen apiece in a bid to take the company private.

The offerors, however, did not indicate the rationale for the privatisation. “The performance of some of the companies on Bursa Malaysia clearly indicates that investors are not convinced about their attractiveness and it would be cheaper to maintain them as private entities,” the analyst said.

Most recently, Hovid had slipped into the red in its financial year ended June 30, 2017.

The company posted a net loss of RM1.53 million from a net profit of RM17.9 million, against a 10% drop in revenue at RM169.94 million from RM189.03 million.

It has RM15.9 million in cash, with debt of RM65.6 million as at June 30, 2017.

The analyst said some shareholders may feel it is expensive to maintain compliance for smaller companies to maintain its listing.

“So, they are willing to lose the advantages of being a listed entity,” the analyst added.

Other Takeover Offers

Willowglen had received an unconditional takeover offer of the remaining shares it does not own at 80 sen per share from New Advent Sdn Bhd on Sept 12, 2017.

However, the 80 sen per share cash offer is 40% below the previous day’s closing price of RM1.34. New Advent is owned by the family of Willowglen group MD Wong Ah Chiew.

The takeover was triggered after New Advent’s stake in Willowglen increased to 55% from 32.08%, as a result of the firm acquiring a 22.92% equity stake from six other vendors.

Meanwhile, Johan Holdings chairman Tan Sri Tan Kay Hock via Mustika Manis Sdn Bhd has acquired an additional 2.41% stake in the former for RM3.75 million and triggered a mandatory takeover offer.

Kay Hock or Mustika Manis, which previously owned 45.76% in Johan Holdings within the last six months, has offered to acquire the remaining shares at 25 sen per share — a 1.96% discount from the last traded price of 25.5 sen.

Mustika Manis said it aims to maintain Johan Holdings’ listing status.

On another note, Yi-Lai directors Aaron Tan Jian Hong and Wendy Kang Hui Lin have raised their stakes in the ceramic and tile manufacturer to 33.01% — triggering a mandatory takeover offer.

Yi-Lai said it had received a take- over offer from Boundless Vigour Sdn Bhd for 78.5 sen per share. Boundless Vigour is a unit of Hampton Capital Pte Ltd, which in turn is a unit of Capital Global Ventures Ltd. Aaron and Kang own 50% each in Capital Global. The offerors did not intend to maintain the listing status of Yi-Lai.

Goh Ban Huat has received an unconditional mandatory takeover offer from Paragon Adventure Sdn Bhd. Paragon Adventure offered to buy each Goh Ban Huat share at RM1.40, which was a 2.1% discount to its last traded price of RM1.43.

Paragon Adventure said the takeover offer includes its warrants, which are priced at 40 sen a piece after having considered the exercise price of RM1 per warrant.

Paragon Adventure intends to maintain Goh Ban Huat’s listing status on Bursa Malaysia’s Main Market.