Daylight Robbery! That was my immediate reaction when I saw the announcement from Full Apex that the management is seeking delisting of Full Apex at the price of $0.18. No, I am not going to sell at $0.18. But what about the other? This is a hard call, or even guess. Since my holding is almost non-existent, I try to see if the 2nd largest shareholder and independent director Mr Chng Hee Kok are going side on the management or sell. My initial assessment was no. I seriously doubt Mr Chng will agree and sell his shares since all his shares were purchased way above the offer price and anyone who is not drunk, with some understanding of business and valuation will come with the same conclusion of not selling. The spotlight fall on Pope Asset management who hold 5.56% of Full Apex at the time of announcement.
Checking back the movement of Full Apex Share price and the date where Pope Asset Management holding crossed 5%, their average cost must be over $0.18. So this provides the 1st dis-incentive for them to sell. Next From their website, it shows that Pope Asset Management is a fund using value approach. And from their two investment in “S – Chip”(it’s happened that I followed these two companies), I easily concluded that they buy stock at dirt cheap level but it is the selling that I concerned. So when the filling on 23/11/09 appeared, I know the fight is on because they increased their holdings from 5.56% to 6.39% at around delisting price.
A side notes on Pope Asset Management other investment. That stock is United Food. One of my ex-holdings, I had made a loss on this one and up to today, it is still my biggest losses when I cut and sell everything away at over twenty-something cents few years back. United Food continues to be badly managed and left with a commodity business of crushing soya bean. But the beauty of buying below $0.10 is that it is below 0.3X of the Book Value. If the share price doubled and trade at say $0.20, investor will get 100% return while it is still trading at around 0.6X Book Value. As long as the management doesn’t make big mistake, destroying huge amount of value at one go, the chances of double or triple the share price is actually very good. What more, this is in a commodity business where profit will swing and with years of public available information show that despite being badly managed, it doesn’t use leverage and their financial statement is actually being drawn up prudently. Ex-shareholders selling at this level (or to Pope Asset Management) ignored one of the most important aspect of investing — “price”.
Full Apex is not United Food in a way that while its profitability has been decline since listed, shareholder value actually being created and of its three businesses, the biggest two operate in industry where competition is low. The businesses of selling PET bottle and PET chip are like leeches, more so for the former. Once a PET bottle plant installed in or beside their customer facilities, competitor will find it hard to supply to the same facilities- think about low price per unit and the cost of transportation. It is also leeches-like in the sense that this business suck up the capital intensive part of the whole soft drink value-chain or rather the part where the two giant soft drink sellers doesn’t want to appear in the balance. Over a long period of time, this businesses of manufacturing PET chip and bottle must be reasonable profitable because giant soft drink sellers are not going to be suck on by walking dead.
The profitability of Full Apex since listed strongly supports my assumption. If Full Apex operate in a competitive environment and with soft drink giants as their end customers, the rise of crude oil from 20s to 150 then slumped to 40s to the current 75 to 80 bucks will basically crashed this company and the double of NBV since listed will not happened. And it is achieved through the old fashion way — earned it. After spending hundred of million of RMB building PET plants and PET chip plant, Full Apex has been doing what is most sensible and with the support of their cashflow by reducing debts. And it is not a wild guess that going forward, debts will be easily repay so either cash goes up or dividend increase or another huge Capex is coming soon.
For a company like Full Apex, the minimum fair value should be at least at BV and how much higher depend on how well the company is being managed. So with this alone, exit price of $0.18 is just 0.6X of what I think is the minimum. And at this current moment, after spending massive amount of capital expenditure for the last few years, their plants should be operating at best 60% utilisation. Utilisation will increase when China keep growing which means that earnings will keep growing even without expansion as long as China keep growing.
That mean I think Full Apex NBV is realisable in the sense money will pour out from operation. How much will flow into shareholder hand is another issue but it is not like “some company” where shareholders demand delisting at NBV or using revised NBV by comparing other property in the area. The biggest flaw in using NBV in that case is that operating cashflow doesn’t support it so the only way to realise its “value” is through addition infusion of capital to transform the property or sell it. Whatever it is, it is a losing battle if the assumption is wrong in the first place.
With Pope Asset Management clearly understand theirs business and I believe many other minority investors like me understood it too, the offeror will not get > 90% of the shares( I hope).