Posted by: donmihaihai | June 28, 2008

Midsouth seeking delisting at the right time.

I believes that Midsouth has been long unhappy with the performance of it share price and that was the reaction that I got at last year investor fair where they had a booth. During that period, equity was having one of the best run in recent years, more so for China stocks, be it in China, HK or Singapore. But somehow Midsouth had not join in the fun not because the company was performing poorly, in fact Midsouth is doing superbly well, it is just somehow the market refused to push Midsouth share price higher.
So the management and funds team up, having shareholdings of just over 75% of to ensure that the success of this delisting will be higher with an offer of $0.80 per share which is a premium to the share price in the market. While the offer price of $0.80 per share is not at some rubbish low valuation, it is certainly not at a price that represents fairly to the valuation of Midsouth.

At $0.80, Midsouth is being valued at 10 X earnings and 2.5 X book value. With its above average ROE and bright future for its products and company, Midsouth should worth much more. What more after the completion of huge capital expenditure which started in 2005 and end in 2007, Midsouth does not require alot more Capex in order to gun for higher revenues in next few years. And since lesser Capex is required, the strong cashflow that Midsouth is generating become mostly free which can be use for paying dividends and reduce its little debts that Midsouth owned. In short, Midsouth is going to become a much bigger company even with the pressure of raw materials.

My initial reaction was not to accept the offer when it come even knowing that the outcome is they are likely to able to take it private and list it elsewhere. But the situation is different because the boring market of 2007 has become a buying market in 2008. There are many companies selling at a much cheaper valuation, some at a valuation just half of Midsouth. If not for the delisting offer, share price of Midsouth will follow the market and drop. So I think the right decision is to accept the offer and make a swap.

It is about weighting the opportunity cost and when I find another company with an even brighter future and selling at a very depressed valuation at the moment. I need to weight the opportunity cost of holding on to accept the price of $0.80 with no transaction cost at an unknown date with an unknown price of my new target or even other company or to selling at the market price of 1 to 2 cents lesser cum transaction cost but with a more certain price of the new company. The depressed valuation is good enough for me to make the switch especially with the recent drop in share price, together with the rest of the market.

Is it so hard to buy?
The headline news is bad and getting worse. While STI is not significantly lower of say, by another 500 to 1,000 points, there are many non-index stocks that are way lower which mean there are pocket of opportunities available in the market. That means this is a buying period rather than being scare of the possible recession and inflation. And one should not try to hedge the coming inflation shock by buying commodities related stocks now as it is usually late to the party by the time everyone know about it. That mean buying those that are directly affected by headline problems because of the depressed price as speculator sell them at the time of fear. Despite hundred of years of evolution, Hunter-gathering kind of reaction to fear in human is so deeply rooted in our system that it become so hard to buy those stock. I would bet that even for buyers who know “being greedy when other is fearful”, many are doing it with some or much uneasiness.

 

 

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