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Thursday, November 03, 2005

Mentor Media @ 61.5 cts ( Contract manufacturing / Singapore ) 4 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Limited upside given imminent takeover at 66 cents

Mentor Media operates integrated supply chain management and order fulfilment services mainly to technology MNCs operating in China; as it assembles customised country kits for manufactured goods such as PCs and consumer electronics, it covers the last mile in the supply chain and is closely integrated to the MNC customers' outsourcing operations, in particular HP with whom its management have long-standing ties. It is a play on outsourcing in China, a theme as valid today as anytime in the past.

The company has been achieving solid growth in topline and bottomline over the past three years, and from what I can see of its operations it is asset light and generates excellent cash flow. It is among the top order fulfilment players in China for PC desktops. In fact it was recently chosen by Forbes as one of the 200 most promising companies in Asia with topline under a billion dollars, one of only 11 companies on the SGX to receive the honour. So why am I advising against a buy here?

That's because an investment company has offered to buy over Mentor at 66 cents in September, and the management of Mentor Media, all key shareholders, have irrevocably agreed to sell their stake at this price. The stock has been consolidating at 61-63 cents since then, and the reward for holding is just not worth the opportunity costs incurred in the estimated 2-3 months to eventual fulfilment of the purchase.

There are hostile takeovers and there are amicable takeovers. UIC and UOL previously were bid up to high prices because the incumbent owner was not ready to let go of his strategic stakes in both companies. Mentor certainly does not belong to this category; indeed the deal appears to be all but tied up given that Wong Yat Foo, the key shareholder, has agreed to sell his stake.

Consider the possible scenarios. The due diligence process is completed probably in 1Q06, Mentor shareholders are paid 66 cents in cash; so whoever buys now gets a profit of 4.5 cents per share, a gain of <7% for 3 months of waiting. Not bad compared to bank interests, but could be put to better use in other stocks. Meanwhile in the meantime there is 99% probability that the price won't rise above 66 cents given the irrevocable undertakings by Mentor management. A second scenario: that the deal doesn't go through for some reason. The share price is more likely to trend downwards than upwards; shareholders would suspect that there is something wrong with Mentor that was revealed by the due diligence process; remember that Mentor had already been the subject of a proposed takeover in 2002 by Banta which didn't materialise. The third scenario would be what shareholders would hope for: that somebody else enters the fray and bids a higher price. There are no indications at the moment that this could happen; hope is not a strategy.

Given the scenario assessment described above, it just does not seem worthwhile to hold the stock. I am peeved myself because I bought the stock earlier hoping for a two-bagger but instead because of this takeover deal I have had to settle for 20-30% gains.




Anonymous Anonymous said...

Lucky I never listen to you on Cosco and sell it, otherwise I'll be crying today!!!

Singapore's Cosco Q3 profit jumps 400 pct
SINGAPORE, Nov 7 (Reuters) - Cosco Corp. , a bulk shipping and ship repair company controlled by China's biggest shipping firm, on Monday posted a five-fold jump in quarterly profits thanks to strong business in China.

The Singapore-listed company, majority-owned by China Ocean Shipping Co., said in a statement its third-quarter net profit was S$56.6 million ($33.4 million), up from S$11.3 million in the year-earlier quarter.

The profit jump comes after bumper earnings last year, when profits nearly trebled. According to the average of nine analyst forecasts compiled by Reuters Estimates, Cosco Corp. (Singapore) Ltd.'s net profit for the whole of 2005 is expected to increase 110 percent to around S$140 million.

The company owns 14 bulk carriers and has a 51 percent stake in ship repair firm Cosco Shipyard Group.

Shipping rates for dry bulk such as grains, coal and iron ore have recovered somewhat from their August low but are still less than half the level seen a year ago, adding to investor concerns about a slowdown in the global shipping industry.

But despite such fears, Cosco's share price has doubled in value this year thanks to the firm's fast-growing ship repair and conversion business in China, which analysts see as the main growth driver.

The Baltic Dry Index , which tracks bulk shipping rates, has fallen from a high of more than 6,200 points in December to less than 1,800 three months ago. The index stood just below 3,000 points on Monday.

11/07/2005 5:52 PM  
Blogger DanielXX said...

Ah well I give warnings on stocks on the basis of my perception of the risk-reward equation. At the time when I gave the warning, the earnings projections were too rosy such that any shortfall would have been disastrous on share price. Well looks like management have delivered. I have to eat back my words. :-)

11/07/2005 11:53 PM  
Anonymous Anonymous said...

sad to say your risk/reward "equation" is something wrong because if a person takes a bet on every single stock you warn about, his overall result is quite positive.

Maybe you should turn all your warnings to recommendations to buy.

11/08/2005 12:48 PM  
Blogger DanielXX said...

Thank you anonymous, you have just given me an idea for my next blog article. Read it at

11/08/2005 10:50 PM  

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