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Lion Asiapac traded as low as 9.5 cents in March this year

LION ASIAPAC Limited (LAP) (Bloomberg: LAP SP) is a holding company with diverse business lines. Currently chaired by former minister Othman Wok, it has been listed on the SGX since 1981.

LAP is now engaged in the manufacturing of electronics and automotive components and limestone processing. Limestone is used as a catalyst in the process to extract iron from iron ore.

What distinguishes LAP from other companies is its strong balance sheet. It is clean and has little liabilities, and presently has a net cash position.

More interestingly, LAP is in the process of disposing its 6.16% stake in Anhui Jianghuai Automobile (AJA), which is listed on the Shanghai Stock Exchange (SHA: 600418). Management is committed to disposing the AJA shares at a price above the floor of RMB7.50 per share.

Given that global equity markets have been buoyant, LAP has been able to dispose a substantial portion of the AJA stake. As of 1 Oct, LAP has disposed approximately 2.71% of its 6.16% stake in AJA. The sales netted total consideration of Rmb265.45 million.

 

The value of Lion Asiapac (LAP) in a nutshell
:

* LAP has disposed its 2.71% stake (out of its 6.16% stake) in Shanghai-listed
Anhui Jianghuai Automobile (AJA). The sales netted total consideration of Rmb265.45 million.

* Net cash per share should have increased to S$0.26 per share (assuming the AJA shares were all conservatively sold at RMB7.50 each).

* If the rest of AJA stake were to be disposed at recent market prices, LAP’s net cash per share would rise to at least S$0.41 - way above the recent stock market price for LAP at S$0.31 a share.

 
 

By our estimates, the net cash per share on the balance sheet should have increased to S$0.26 per share (assuming the AJA shares were all conservatively sold at RMB7.50 each).

Given that AJA closed strongly at RMB8.57 on last Fri (9 Oct), we expect LAP to continue to make good progress on the AJA disposal program.

Completing the entire disposal program means LAP would have net cash per share of at least S$0.41, which is way above the recent market price of S$0.31 a share for LAP.

LAP was recently in the news after its plans to set up a property joint venture in the Chinese city of Changsu was shot down by dissenting minority shareholders.

They had objected to a proposed US$18 million investment for a 30% stake in Changshu Lion at an extraordinary general meeting on 25 September 2009.

Target: Aussie mining company

Shortly after this proposal was rejected, LAP and its major shareholder - William Cheng - teamed up to launch a A$78.6 million (S$97.7 million) takeover bid for Australian listed mining firm Polaris Metals. Tan Sri William Cheng, dubbed "Steel King" in Malaysia is the the chairman of the conglomorate Lion Group.

This new joint venture with Cheng, called Lion-Asia Resources, has offered to buy Polaris at 60 Australian cents a share, at a 19% premium to the implied value of a scrip bid by Mineral Resources in August 2009.

The attempt to take over a mining company is a good move towards vertical integration of the Lion Group's business. If they succeed in controlling Polaris, they would be able to share expertise on how to bring the iron ore asset into production in a cost effective manner.

LAP's proposed investment in Lion-Asia Resources to partake in the takeover requires approval from minority shareholders. Compared to the earlier proposal, more shareholders may throw their weight behind this plan.

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Snapshot of Lion Asiapac's financials

After all, this is a more measured bid given that Cheng is already familiar with Polaris as Lion currently holds a 25.4% stake. To back that, Cheng is prepared to fully front  the bid using his own private vehicle if LAP's shareholders approval is not obtained.

In addition, this is also a strategic move as countries such as China are aggressively attempting to secure their future by hoarding commodities or taking stakes in natural resource companies.

At the current market price of S$0.31 a share, investors who buy into LAP are buying into a company that is trading at 32% discount to its NAV of S$0.46 (audited figure disclosed as at 30 Jun 2009).

Should the entire disposal of AJA shares take place according to our estimates, an entry now would be at a 24% discount to the net cash value of the company.

It flies against the face of all efficient market theories that LAP should be trading at such a steep discount to its highly realizable net cash position.

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Declining profit for Lion Asiapac

Special dividend please…

To crystallize value for their investment, minority shareholders has been asking for an increased dividend at every possible meeting with management.

Even if a special dividend does not materialize, LAP has a track record of rewarding shareholders with regular dividends. It is currently trading cum-dividend (1 cent a share has been declared for the last financial year).

Even if the Polaris bid goes through, LAP should have sufficient cash to raise the dividend in this financial year. In the base case of LAP maintaining its 1 cent dividend, shareholders would be receiving at 3.2% yield on their investment.

A 1.5 cent and 2 cent payout raises the dividend yield to 4.8% and 6.5%, respectively.

In view of the above, we like the LAP's risk reward payoff characteristics at current prices. Investors have their downside protected by going in at a reasonable yield and at a steep discount to the NAV and potential net cash position. 

Should LAP trade up close to the net cash position, investors would be looking at a 32% gain.

Value Investor is a NextInsight reader, a shareholder of LAP, and a professional in the investment community. Readers are welcomed to send in articles on stocks. Email: This email address is being protected from spambots. You need JavaScript enabled to view it.


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