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Monday, January 22, 2007

Guthrie @ 41 cts ( Engineering & Property / Singapore ) 0 comments

Final Poll Results: 3:1

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

Main issues

1. High opportunity costs

2. Offer price may not be revised

I had received one or two comments that I have been writing less articles on my blogs nowadays, and to them my answer is: it's a bull market! Time to be more diligent in dynamically reconsidering each of my portfolio positions because buy-and-hold may not be valid when position sizes are rising so fast. Hence less time for literary writeups in my blogs. But nevertheless, it is still useful to articulate my thoughts. Several of my mega-wins have originated from such articulations leading to further research and subsequent position take-ups. I would strongly encourage fellow investors to do the same.

Guthrie is one of the stocks that I had traded in and out recently. It is one of the oldest companies in Singapore (since 1821) and is a mini-conglomerate with interests in property, leisure/hospitality and engineering. Although its engineering (M&E engineering) segment contributes >50% of the group revenue, it is the property segment which has contributed most to the bottomline in recent years, about >90% of EBIT (earnings before interest and tax).

The story surrounding Guthrie in recent weeks is the takeover offer by an investment company held by Guthrie chairman Putra Masagung and Salim group's Anthony Salim. The stock went up from the low-30s to the mid-40s on such takeover talk, but has corrected and stagnated subsequently on confirmation of the offer price --- a disappointing 39.5 cents. There is hope that the takeover price will be revised upwards, which is why the price has hovered above the proposed takeover price since then (though not by much).

There are several reasons why I think it may not be profitable to buy the stock. First of all, the opportunity costs are high. During the offer period, the market price is unlikely to go far above the offer price --- the latter now serves more or less as a mental anchor to the valuation of the stock. This was the primary reason why I traded out of it the moment the offer price was announced.

Secondly, the offer price may not be revised upwards. It is clear that the value of Guthrie lies in its property segment, in particular its stake in Jurong Point Shopping Centre. In addition, it also holds minority stakes in several heartland shopping malls like Hougang Mall, White Sands, Tiong Bahru Plaza and Century Square, via Asian Retail Mall Limited which is controlled by Prudential. The fact that Masagung and Salim bid a low price for Guthrie shares shows that they are not overly keen to secure the takeover, despite the various conspiracy theories being thrown around by vested investors. Investors also point to the per-share NTA of 46 cents as a baseline that a revised offer price should start from; this is such an obvious point that it cannot have failed to impress on Masagung and Salim in the first place; they are likely to have strong reasons why they are not willing to offer up to this price for the group. Note that the stock had already doubled from 20 cents since mid-2006, probably pricing in the value of the property investments held by the group.

Thirdly, the fact that the Executive Chairman (Masagung), an insider, is involved in the offer is disconcerting. It is true that investors will not want to sell out to the 39.5-cents takeover offer. However, circumstances may change to make them change their mind: opportunity costs of holding (as mentioned above), or a poor set of results (coming up in February), say. As it is, profit trends for FY06 point to a forward PE of >20X anyway, a rather high valuation in itself.

In the end, it may follow the way of the CK Tang offer. Holders were also reluctant to sell out at Tang Wee Sung's offer price of 65-70 cents per share as well (and it was a good price) on the basis of the perceived value the Tangs retail frontage on Orchard Road could fetch, but have become more receptive when it became clear that that offer price was as far as the Tang brothers would go, and that share price could just collapse should the offer lapse in an unsuccessful takeover attempt. Guthrie's baseline support in the near-term will be at 39.5 cents (and hence might be a defensive option for those who believe the current bull market is going to collapse any time soon), but given the abovementioned 20-cent pricing as recently as mid-2006, surely there would be some concern about price support should the takeover offer be withdrawn eventually. Maybe only those who believe fervently in the future of Jurong Point and the Centris next door would want to consider holding this irrespective of any takeover attempts.

Poll(please vote)
I agree that Guthrie is a hot-stock-not: Agree/Disagree




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