Lion Deal So Good?

• Corporate: Lion Diversified unlocks value
  By Siow Chen Ming

That was from the edge Weekly.

Unlocks value?

That above article does tells a lot.

1. Why this deal?

"LDHB's foray into the steel business has met with negative response from its minorities, who are in the company for its retail business. Now this issue has been addressed," says an industry observer.

See, look back at the past ( see here and refer posting dated on 22nd July).

Back as early as Oct 2004, when icap (less we forget the vested interest when icap had as early as then) first wrote on LionD, the intent from Lion Corp about its steel business via Megasteel was already there. See the problem is Megasteel was listed under LionCorp and if the LionD investors were bullish about the steel business, they would have purchased into LionCorp and NOT LionD. So it the announcement of LionD foray into the steel business was simply lacking in corporate governance. And less we not forget that the whole Lion Group restructured mainly because of too many complicated forays into too many businesses.

So they have to think of a new plan, right?

Well this is it. DO you like what you see?

2. So what's the deal?

• Under the proposal, LDHB has valued its interests in the Parkson retail operations at RM4.3 billion. The lion's share came from LDHB's 55.5% stake in the Hong Kong-listed Parkson Retail Group Ltd (PRG), which is valued at RM4.03 billion. The remaining RM270 million is the value attributed to Parkson Malaysia's operations as well as several Parkson franchise department stores in China.
  
  

LionD is valuing Parkson Retail operations at rm4.3 billion.

Ahem. Valuation is always complicated. However, in the stock market, more often than not, earnings do matter.

So how much is Parkson retail making? These are some of the notes mentioned in LionD announcement of this deal..

PRG Corporation:

For the financial year ended 31 December 2005 and the six (6) months ended 30 June 2006, Parkson Retail achieved a consolidated profit after tax and minority interest of RMB248.0 million (RM114.1 million) and RMB196.2 million (RM90.3 million) respectively.

Parkson Malaysia:

For the financial years ended 30 June 2005 and 2006, the Parkson Malaysia Group achieved a consolidated profit after tax and minority interest of RM24 million and RM20 million respectively.

Parkson Venture:

For the financial years ended 30 June 2005 and 2006, the Parkson Venture and Serbadagang Group incurred a consolidated loss after tax and minority interest of RM2 million and achieved a consolidated profit after tax and minority interest of RM2 million.

Sea Corral:

For the financial period from 25 January 2005 (date of incorporation) to 30 June 2006, the Sea Coral Group incurred a consolidated loss after tax and minority interest of RM7 million.

Firstly, why are they NOT giving a consistent set of earning dates? Some states a half year earnings, some full year, some more than a year earnings? Why the need for such complexity?

How about we look directly into LionD books and look at what they announced in Aug 2006 earnings? Quarterly rpt on consolidated results for the financial period ended 30/6/2006

Look under the notes worksheet, and we will see that the retailing from Parkson generated a sales revenue of 700 mil for the quarter, with a net profit of 53 million. So if we simplified it, we are looking at a business with an annualised profit of rm200 mil per year.

So based on earnings alone, LionD is hawking their Parkson group at a value of 4.3 billion.

Good SELL price for LionD isn't it? Yes?

Good BUY price for ACB, isn't it?

3. Now consider the 'as it is' balance sheet.

LionD has a net borrowings of 186.9 million and a piggy bank cash of 1018.196 million or a net cash of 831.296 million.

ACB? has debts totalling 110.215 mil and a piggy bank cash of only 2.941 million or a net debt of 107.274 million.

4. So what does the minority investor of LionD gets?

As an illustration, for one LDHB share, which currently trades at RM4.90, investors are getting 1.3 ACB shares, which works out to about RM5.10 (this is based on RM3.8 billion divided by 968.61 million shares in ACB, after ACB's capital reduction and reconstruction exercise, multiplied by 1.3). This assumption does not take into account the existing cash and liabilities of ACB.

Those comments were from the Edge article. LOL! See the last line?

Now there is such an illusion created in this picture. The bare essential one should instead focus on is that for one LionD share, the investor would get 1.3 ACB shares. But why am i saying it's such an illusion?

LionD was traded at 4.90. And it closed yesterday at 5.30. So since when the market traded price becomes a fair value for a company's worth?

And look at ACB. The writer based ACB on the purchase price of 3.8 billion of Parkson Retail Group. And again, is Parkson worth that much?

Now consider from the earnings perspective. Parkson retail should make around 200 million or so. Remember the key point is that after this exercise, ACB will have some 968.61 million shares. Which means ACB will become a stock earning some 200/968.61 = 20.6 earnings per share. So what kind of earnings multiple do you think it is fair? 15x? Too high? Or too low? Whatever the fair value earnings multiplier, multiple it by 1.3 again. What do you get? Or is my annualised earnings of 200 million to low? No problem. Readjust it yourself to say 250 million or even 300 million. And then do the same multipliers.

Oh. Another thing. LionD valuation. Does the market traded price reflects the true value of the share? What if LionD is way overly priced?

See this point posted at the other posting: http://sahamas.net/view_topic.php?id=185&forum_id=5

Let me reproduce that one posting in the thread...

Lion Diversified posted its earnings today:

http://sahamas.net/view_topic.php?id=429&forum_id=28

This is what the company said:

• The Group continued to post satisfactory results for the financial year ended 30 June 2006 on the back of the strong performance recorded by our retail and computer businesses. Our property development project in Cheras also posted positive contribution despite the lower billings generated during the year.
  
  After accounting for a gain of RM422 million arising from the disposal and dilution of Parkson China pursuant to its listing on The Stock Exchange of Hong Kong Limited and the loss incurred by an associated company due to the low international prices for steel products, the Group recorded a marginally higher profit before tax of RM606 million as compared to RM597 million registered in the previous year.

So, if you minus 422 million, earnings = 475.717 - 422 = 53.717 million.

err.. that's how much LionD made its current fiscal year!

Well catch this... Lion Div as of today... has 692,528,111 million shares!!

So how much....

1. EPS how much?
2. Where is the growth?

5. How?

Think about why the need for the deal again. Look at the recent developments stated in the edge article.

Other developments
As at Sept 27, 2006, Lion Ind held a 23.89% stake in LDHB. Meanwhile, Cheng and nephew Datuk Cheng Yong Kim, in their personal capacity and through their private vehicles, have a 33% stake.
By having a direct exposure to Parkson, Cheng and Lion Ind will be in a better position to recapitalise and raise funds to beef up the group's steel operations.
Lion Ind, in particular, needs funds to meet its debt obligations. Recently, its 81%-owned subsidiary Lion Forest Industries Bhd increased a proposed cash distribution by 67% to RM420 million to channel more funds into Lion Ind (its share of the distribution is RM340.6 million) to pay off debts.
More interestingly, the demerger of the Parkson business from LDHB will help Lion Corp, which is seeking financing to expand its hot-rolled-coil steel operations, shed some of its burden. The cash-rich LDHB can now finance or undertake some of the steel projects. The RM641 million proceeds from its 10% sale of PRG could be utilised to fund the group's steel-related projects.
With the value-unlocking exercise, it is not surprising that Lion Corp's subsidiary Megasteel recently terminated a proposed undertaking to acquire the above-mentioned DRI plant from LDHB

See the game plan?

Now consider this statement...

• "The proposal sets to unlock value for LDHB shareholders. Shareholders will have a direct exposure to Parkson through ACB while continuing to hold LDHB shares. The market will give better valuations to ACB as a pure retail play rather than lumping Parkson with the other businesses of LDHB," says Tan Teng Boo, whose closed-end fund iCapital.biz holds shares in LDHB.

LOL!!!!

Truly incredible.

So honey.... do you think I should pawn my car wash business and lump it all into LionD?

how?

Demerger is such a fancy word hor.

How about flipping the business between subsidiaries?



So anyway, ultimately, LionD = LionD + 1.3 ACB.

Gooduh?

ps.. I think I read it somewhere that LionD should be worth 7.80 based on net assets. Based on net assets woh. Don't you wonder why they don't base on earnings? Does earnings not matter?