THE local bourse will soon have one less sound company with high dividend yield. This time, it’s VADS Bhd.
Telekom Malaysia Bhd announced plans to take VADS Bhd private at RM7.60 per share.
Since its debut on the second board of Bursa Malaysia back in August 2002, VADS’ share price has risen 10 fold (post bonus issue and transfer to main board) and about 13 times taking into account the dividend payout.
However, through much of the time, between its debut up to late 2005, the counter hovered around the RM1 level.
Shortly after VADS issued up to 10% of new shares to eligible executive directors and other key management, VADS’ share price has been appreciating steadily. It closed at its all time high of RM6.80 on the Friday prior to its day-long suspension to announce its privatisation.
Earnings wise, VADS can be deemed a dream stock. Revenue and net profit have been registering a compounded growth of 198% and 20% respectively since listing. For the six months to June 2008, revenue was up 11.59% to RM252.35mil, while net profit jumped 26.72% to RM27.69mil.
Street estimates are for the company to make RM66.1mil for the financial year. As of the period, it has a cash pile worth some RM129.13mil.
“Although contributing less than 10% of TM’s pro-forma net profit of RM748mil in 2006 and RM771mil in 2007, VADS’ net profit on its own, has more than doubled from RM21.2mil in 2005 to RM54.1mil in 2007,” says Aseambankers Research.
So, TM’s rationale for the privatisation? To give shareholders an opportunity to realise their investment in VADS at a premium.
“TM wishes to reaffirm that its intention to privatise VADS is essentially to allow the TM group to streamline its businesses to maximise potential synergies from both revenue growth and cost savings perspectives. There are opportunities and strengths within VADS and other parts of the group that can be harnessed together, and this is expected to improve the business and operational performance of the TM group,” says its group chief executive officer Datuk Zamzamzairani Mohd Isa.
TM, which owns 63.3% of VADS, is taking VADS private with a selective capital reduction and repayment exercise. This means that only shareholders other than TM will receive the payment.
TM is offering RM7.60 per share in cash for the privatisation, in an exercise that will involve a capital repayment to minorities, after a proposed bonus issue to allow the full capitalisation of VADS’ share premium account and part of its retained profits.
The exercise is expected to take some 6 months for completion.
VADS will carry out a bonus issue, with 706.2 million new shares which will boost its enlarged share capital to RM422.3mil comprising 844.6 million shares, after which it will cancel RM417.3mil, or 834.6 million shares.
As a result, its paid-up capital will be slashed to RM5mil comprising 10 million shares from RM65.9mil comprising 131.8 million shares currently.
After the RM417mil exercise, VADS will become wholly owned by TM.
To facilitate the deal, TM will get a wholly-owed subsidiary to provide an interest-free advance of up to RM417.3mil to VADS to fund the exercise.
CIMB Investment Bank Bhd will be arranging the deal.
Zamzamzairani says that TM intends to leverage on realising planned synergies to maximise its returns.
For example, he elaborates, “TM would like to be able to bring information and communications technology (ICT) products and services to market faster and more efficiently, be more focused in meeting customer needs, and be able to offer its customers, particularly in the Enterprise segment, a richer portfolio of ICT services in which TM believes is a key segment for the Malaysian economy.”
Go for it …
Analysts are certainly not surprised by the privatisation, as talk of taking VADS private had been circulating in the market for months.
With liquidity constantly being a major issue for the stock, analysts have given the deal their nod.
The stock’s average fair value from six analysts compiled by Bloomberg stands at RM7.65.
The highest came from RHB Research, which is valuing VADS at RM8.51, while the lowest comes from Alliance Research, which has a fair value of RM7.
OSK Investment analyst Jeffrey Tan says the proposed privatisation price at RM7.60 per share, matches his target price for the stock, which values the company at 12 times financial year (FY) 2009 earnings per share (EPS).
Tan says VADS earnings are highly visible, thanks to strong recurring revenue from the managed network services (MNS) segment.
“The focus on the business process outsourcing (BPO) space unlocks a strong revenue stream and is expected to spearhead earnings growth going forward.”
Tan projects EPS growth at a healthy 25% on average per annum going into FY10.
He agrees that the privatisation will undoubtedly remove a jewel whose track record is difficult to emulate.
“We advise minorities to accept the offer as it is a good exit strategy to unlock the value of a stock that has been plagued by liquidity constraints and trading at an unwarranted discount to its global BPO peers,” he says.
Overall, Aseambankers views the privatisation as mildly positive for TM, as it allows VADS to consolidate its network service business and potentially create synergistic value enhancement.
Kenanga Research is positive on the deal, given the strong track record for the managed services and call centre division.
It believes that the consolidation and privatisation will enable VADS to divert more management attention and resources to the business which is expected to enter into a more exciting phase
Kenanga adds that financing should not be an issue given TM’s balance sheet strength, (which has a net gearing of 12%).
“We are maintaining our forecast for TM given the minor reduction in minority from the privatisation exercise. HOLD with target price of RM4,” says Kenanga Research.
Impact on TM
Meanwhile, with the completion of the privatisation, Aseambankers estimates the potential earnings impact to TM to be a small addition of 1.6% and 3.2% to its 2009 and 2010 net profit forecasts respectively.
Zamzamzairani says that, in view of TM already consolidating a significant proportion of VADS’ consolidated profits in proportion to TM’s holding in VADS, and that the privatisation is expected to be completed in the first half of 2009, the proposal is not expected to have a significant effect on TM’s earnings in the immediate future.
“Going forward, TM expects to capture synergies arising from the streamlining of the businesses within the TM group which as a result is expected to translate to higher earnings to the TM group in line with TM’s long term strategy for growth and efficiency,” he says.
Aseambankers says VADS’ core MNS and Systems Integration Services (SIS) both compete with various units within TM.
“As VADS secures more and more government-linked companies and government agency contracts, its continued growth is a threat to TM’s fully-owned divisions. Thus, privatising VADS could allow better shareholder returns for TM by consolidating these separate businesses under TM,” says Aseambankers.
“Our outlook for TM is strengthened as we view this move as much a defensive move (keeping in mind VADS competes with TM in certain areas), as a move to grow its bottom-line,” says Aseambankers.
Zamzamzairani points out that TM already holds 63.3% equity interest in VADS and hence, already directly benefits from VADS business.
Meanwhile, Aseambankers adds that with the advent rolling out of the national High Speed Broadband (HSBB) plan, there will be more growth opportunities for VADS, through which a privatisation will better allow TM to maximise potential returns.
However Zamzamzairani says taking VADS private is beneficial and independent of the HSBB.
“The privatisation of VADS and the HSBB plan complement each other well as both support TM’s vision of becoming a leading new generation telecommunications provider. Focusing on providing ICT services to its customer is a natural evolution for a telco like TM in view of the infrastructure that TM already has.”
The business model
VADS was established to provide MNS to multinational companies. Today, its business spans three sectors: MNS, which is its main revenue source, but it has since diversified into business process outsourcing (BPO) and system integration services (SIS).
Its MNS business provides local connections in Malaysia for global service providers. VADS also manages the wide area network (WAN) for companies, where it buys bandwidth from telco operators like Telekom and then manages the network for its customers for a fee.
Meanwhile, BPO is an important growth area for VADS moving forward. Revenue from this segment is mostly generated from call centre services.
The company aspires to be the largest call centre service provider in Asean and is looking to expand its services to South East Asia. Presently, Telekom is its main customer and makes up 50% of its revenue.
It provides call centres to deal with customer queries and complaints for Streamyx and TM Retail.
As for the SIS business, it is mainly project-based whereby VADS helps companies install and implement their server and storage system. Growth prospects are strong as more companies install new servers or replace old ones.
VADS is looking to increase the recurring revenue from this division through maintenance fees and the management of storage devices.