Excerpts from analyst's report

NRA Capital analyst: Liu Jinshu

ASVIDA 14.5Shocking S$50m Windfall (If Spin Off Succeeds)

♦ 
High return investment proposition. We see DeClout as an exciting high return/high risk investment opportunity. DeClout is seeking the approval of its shareholders to list its subsidiary Procurri and in the process reduce its effective stake from 69% to an assumed 40%.

Based on the assumptions in the circular to shareholders, we estimate that DeClout may enjoy a windfall of at least S$48.6m – an impressive sum equivalent to 42% of DeClout’s current market capitalisation! 

 

DeClout
Share price: 
18.8 c
Target: 
34 c

 Circular to Shareholders enhances visibility over gains. We have been monitoring DeClout for some time. The assumptions in the circular signal DeClout’s eventual stake in Procurri on a successful listing and provides us with the basis to estimate the gains, assuming an IPO market capitalisation of S$150m. The gains may be higher (or the dilution reduced) if a higher IPO market capitalisation is secured.

 Procurri may be worth S$141m to S$300m. Our review of comparable companies suggest that Procurri may be worth between S$141m to S$300m, with a similar sized company in France being sold at S$208m valuation in July 2015. Hence, the assumption of Procurri being listed at a market capitalisation of at least S$150m is reasonable.

 Signs of next vertical being created. We have also reviewed DeClout’s announcement on 25 April about the internal merger of two subsidiaries. The merged entity shall offer cloud, internet connectivity, hosting and telecommunication infrastructure services.

♦ Valuation pegged at S$0.34 per share
Liu Jinshu"Due to the size of the one-off gain (which is also the result of DeClout’s overall M&A strategy), we overlook the near term operating weakness. However, we emphasize that any such oneoff gain is conditional on the success of the IPO of Procurri.

"We are also mindful that DeClout’s current share price is equivalent to 17.4x P/E (narrowing to 7.9x using 2018 earnings forecast). Hence, a substantial portion of its valuation upside arises from its ability to meet projected growth forecasts."

-- Liu Jinshu (photo)

We are intrigued by this move, with the combined entity seemingly mimicking a telecommunication company, except for the fixed line and mobile services, thus paving the way for DeClout to pursue more telecommunication related business.

 But…near term performance may be weak. However, we caution that DeClout showed signs of slowing growth in 2H 2015, suggesting that growth from acquisitions is being muted by a general slowdown in business.

In our forecasts, we assume that DeClout will continue to invest in new businesses and we have been prudent to project an operating net loss in 2016, offset by the substantially larger one-off gain of S$48.6m. As a base case, we assume a rebound in 2017.

Full report here.


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