Cosmosteel’s shareholders should “accept” the offer made by 3HA Capital, says the independent financial adviser (IFA), Asian Corporate Advisors in a circular released in the evening of June 19. The recommendation comes after the IFA deemed the 20-cent offer to be “not fair” but “reasonable”.
3HA Capital is made up of a group of investors including a wholly-owned subsidiary of Cosmosteel’s controlling shareholder, Hanwa Co, IHH Group, Bursa-listed AYS Ventures Bhd and Thor Capital. The 20-cent offer was announced on May 15.
Offer is ‘not fair’
The offer is “not fair” due to several reasons.
First, Cosmosteel is on a “recovery track” with the company posting a net profit of $2.3 million for the 1HFY2025 ended March compared to the losses it registered in the same period the year before. Cosmosteel also noted, in its 1HFY2025 statement, that it expects to see better revenue in the FY2025.
The company’s higher borrowings for six months ended March 31 was mainly to fund its revenue growth, the IFA points out in its letter to shareholders.
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Furthermore, Cosmosteel’s financial position remains “strong and healthy” with its net current position improving to $62.6 million as at March 31, from $60.2 million as at Sept 30, 2024. Cosmosteel’s equity base also expanded to $76.6 million as at March 31 from $74.3 million as at Sept 30, 2024, due to the plough back of earnings.
Next, 3HA Capital’s offer price of 20 cents represents a discount of about 31.8%, 46.8% and 47.8% from Cosmosteel’s net asset value (NAV) and/or net tangible assets (NTA), revalued net asset value (RNAV) and/or revalued net tangible assets (RNTA) and adjusted RNAV and/or adjusted RNTA per share respectively.
As at March 31, Cosmosteel’s NAV per share stood at 29.31 cents while its RNAV per share was calculated to be 37.6 cents after taking into account the market value and/or the fair value of the company’s appraised assets.
Third, the offer price implies an “unfavourable comparison” of Cosmosteel’s valuation in terms of P/NAV against both the median and simple average for the selected non-privatisation transactions as well as the selected successful privatisations. The transactions were selected based on the offeror’s stake and its concert parties, which is lower compared to the other transactions at the beginning for each of these transactions.
The selected non-privatisation transactions and successful privatisations refer to selected recently completed mandatory and/or voluntary general offers for Singapore Exchange(SGX)-listed companies announced since Jan 1, 2022, to the latest practicable date, which is June 5.
Some of the names mentioned include Keong Hong Holdings, Procurri Corporation, No Signboard Holdings, Nera Telecommunicationsand HG Metal Manufacturing.
Fourth, the offer came up unfavourably compared to the takeovers of fellow steel companies such as HG Metal, Sin Ghee Huat Corporation and Hupsteel Limited. Cosmosteel’s offer came up to be lower and less favourable in terms of its P/RNAV and P/revenue, opines the IFA.
Fifth, the IFA notes that 3HA Capital’s offer is lower than the range of Cosmosteel’s estimated values per share and adds that there is no indication that 3HA Capital’s offer price is final.
But offer is ‘reasonable’
However, the offer was deemed to be “reasonable” given that the offer price had a substantial premium of about 48.1% over the last-transacted price for Cosmosteel’s shares on the last trading day before the offer was announced.
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The offer price also implied a premium of 57.5%, 61.3%, 70.9%, 75.4%, and 72.4% over the volume weighted average price (VWAP) for the shares for the one-, three-, six-, 12- and 24-month periods prior to the last-trading day.
Furthermore, the offer price implies a premium of approximately 48.1% over the highest transacted prices for the Shares for the 24 months before the last trading day.
That said, the IFA notes that the historical premiums may have been affected by Cosmosteel’s Watch-list status. The company was placed on SGX’s watch-list since June 5, 2018, as it recorded pre-tax losses for its three most recently completed financial years and had an average daily market capitalisation of less than $40 million. At the time, Cosmosteel’s latest six-month average daily market capitalisation came to $36.3 million.
As such, the offer compares favourably among the selected non-privatisation and privatisation offers made previously as the implied premiums were “within the range” and “more favourable” than the median and the simple average premiums.
The IFA also pointed out that Cosmosteel was suffering from low liquidity in terms of average daily trading volume and frequency of trading before the offer announcement and that the offer was a “generally fair comparison” against the valuation of selected comparable companies including SGX listcos Annaik Limited, Asia Enterprise Holdings, BRC Asia, HG Metal and Union Steel Holdings.
The valuation does not account for the values of the appraised assets, with and without the proposed building expansion for Cosmosteel’s Senai property.
In addition, no other third party has made a firm offer for Cosmosteel’s shares and the company has not carried out other fund raising exercises since it listed on the Mainboard, except for a private placement conducted on Sept 17, 2009 and a share subscription by Hanwa on Dec 1, 2014.
Cosmosteel also had not declared dividends for the FY2024 and 1HFY2025, although the company explained, in its annual report for the FY2024, that its dividend policy seeks to “maintain a balance between meeting shareholders' expectations and prudent capital management with a sustainable dividend policy”.
Finally, IFA notes that the company has not been able to exit from SGX’s watch-list since June 2018. Even though Cosmosteel was not asked to delist on June 4, following the interim arrangement under the Singapore Exchange Regulation’s (SGX RegCo) consultation paper on removing the watch-list, Cosmosteel may be directed to delist after the conclusion of the public consultation.
Accept the offer, but sell shares in open market if opportunities arise
Even though the IFA recommended Cosmosteel’s shareholders to “accept” the offer, it is also recommending shareholders to sell the offer shares in the open market if Cosmosteel’s shares trade above the offer price of 20 cents.
The IFA adds that the transacted prices for Cosmosteel’s shares after the offer was announced, have “always been higher” than the offer price, even if it was caused by transactions made by a “certain director” of the company. Since the offer was announced, Cosmosteel’s CEO Jack Ong Tong Hai has been increasing his stake in the company by buying shares in the open market.
The offer price also represents a discount of about 11.1% over the last transacted price of 22.5 cents per share as at the latest practicable date being June 5.
As at 9.23am, shares in Cosmosteel are trading flat at 22 cents.
