Armstrong Industrial Corporation

UOBKayhian on 9 Jul 2013

Valuation

• Offer seems fair. We view the offer of S$0.40 as fair as it implies 1.7x 2013F P/B and 16x 2013F PE. Our last recommendation was a HOLD with a target price of S$0.28, pegged to the 3-year historical average PE of 11.0x. 

What’s New

• Armstrong announced that AGP Asia Holding Pte. Ltd. (the Offeror) is seeking to voluntary delist the company and provided an exit offer of S$0.40 for all the shares it does not already own. AGP Asia Holding is 65% owned by Gilbert Investment Corporation Pte. Ltd. (GCPL) and the remaining 35% is held by Polyfoam Asia Pte. Ltd. (Polyfoam). GCPL is in turn owned by the Ong family, who collectively hold an approximate 46.54% of the total number of issued shares.
• Polyfoam is incorporated in Singapore and is a wholly-owned subsidiary of INOAC Corporation (INOAC). The INOAC group of companies is headquartered in Japan, engaged in the development and supply of materials based on urethane, rubber, plastic and synthetic materials.

Our View

• We see a high possibility for the delisting to go through. The Offeror has already obtained irrevocable undertakings from the members of the Ong Family, whom represent 46.54% of the total number of issued shares to vote in favour of the offer. The offer also implies 1.7x 2013F P/B and 16x 2013F PE. This is attractive compared to the sector PB of 1.0x and PE of 10.4x.
• Challenges in Armstrong’s data storage business. Sales in the Data Storage segment fell 10% yoy in 2012 to S$43.1m due to weaker global HDD demand. Their customers are also lowering their guidance for 2013. The only silver lining we see is in the automotive segment as the group secured new automotive customers such as Chang’an Mazda, Hino Motors, GAC motors, etc.
• The Offeror sees significant synergies between INOAC Group and Armstrong by sharing manufacturing facilities, collaborating R&D, and consolidating their sales and marketing efforts. Privatising the company will give the management flexibility to explore such opportunities. Trading in the stock has also been relatively thin with average daily traded value for the last three months at S$1.0m.