Is privatisation on the cards?
▊ Share price volatility and enlarged trading volume of late have caught the attention of many investors. It is now harder for earnings to make any meaningful impact in the next two quarters and its bombed-out valuation and change in ownership suggest that the stock is no longer well owned. We think that the new shareholder, CITIC, could seek to enhance its investment value through more active participation, potentially even taking the company private. We keep our EPS estimates and SOP-based target price. We also keep our contrarian Add rating, which hinges on the instant success of product launches, regulatory approvals and M&A accretion.
After CITIC group backed CB Medical, took over from Shandong Weigao as the substantial shareholder (S$1.05/share for a 21.7% stake in BIG) in late Nov 13, BIG’s share price has seen unusual volatility on the back of rising liquidity.
What We Think
Volatile share price movements aside, we reiterate our view that PE investors tend to explore various options where their companies have successful franchises but trade below market multiples. There could be a rethink about whether to keep BIG listed or, at a later stage, whether to relist BIG in another market, where there is better appreciation of a medical platform company. What can cash do? Based on the latest reported financials, BIG still has S$238m in net cash and, more importantly, US$512m in cash. Granted that a large part of US$274m in loans are from the MTN (US$240m at a 4.875% fixed rate due in 2017), BIG has yet to reach its ceiling of US$800m. Given that working capital needs are typically in the US$10m range, there is really not much need for cash at the moment. At its current share price, US$500m represents c.43% of BIG’s market cap. From a financing point of view, this means that both its PE investors are very capable of funding a privatisation deal on BIG, especially given the potential of upstreaming the cash hoard. The only unknowns then are, in the event of a take-out play, price and timing. (see page 2 - recent transactions of Chinese medical companies).
What You Should Do
We urge investors to Add. BIG’s valuation has only priced in its near-term challenges, not a potential earnings lift from the commercialisation of new products in FY15. Other products are gaining ground with various regulatory authorities and a soft launch of BioFreedom remains a source of excitement.