15-11-2013, 11:38 AM
(15-11-2013, 09:45 AM)dzwm87 Wrote: [ -> ](15-11-2013, 12:47 AM)ARC Wrote: [ -> ]Maybe what is missing in the calculations is the value of its cash and the value of its debt headroom. If one just take ex-UK earnings x P/E + special dividend, you will most likely get a value +/- 10% of current price. But what happens if CSE take its cash and acquire a coy at 8x/10x/12x P/E tmr?
The fact of the matter is that Servelec was sold for 14x. To only capture the value of the portion you receive from the sale - i.e. special dividend - and ignoring the one that sits within the coy you own..that may be selling yourself short. How one choose to price/value/discount that cash pile is of course up to debate but a value of 0 may not be appropriate.
Yes, I do agree there is a possibility for mgmt to use their balance sheet for another acquisition. But their cash pile isn't that much. Gross debt of S$99mln in 9M2013 and after paying down with the proceeds, the company still have around S$24mln in gross debt. Net cash will be S$57mln which is really just 11% of market cap - nothing fantastic.
But like what egghead suggested, there is some addition to EPS from a lower interest expense - my calculation shows it to be an additional S$0.01 to EPS?
Anyway, my point is what's after Servelec? The spin-off would have been a lot more attractive if Servelec is unprofitable since post-spin off, CSE will be more profitable.
Net cash can go into net debt just as it is now. So cash at disposal for acquisitions is really more than the net cash number post debt repayment. Whether they can deploy the cash in an accretive manner is the question.
If Servelec was unprofitable, one wonders if they could have sold it for 14x. My view is that Servelec was not any more spectacular a biz than the other parts. And I won't miss Servelec with all the issues that come with it.
Life goes on post divestment. Nothing changed. CSE will remain a boring, hard to model, hard to understand biz, with some amount of earnings cyclicality. But despite all that, it will continue to throw off a good amount of free cash and some of that will make it way back into your pocket. Growth will come organically, subjected to cyclicality, but primarily through acquisitions.
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One could of course value the coy on what it is now or on what it could be. The former could be (overly) conservative and the latter (overly) hopeful. Mistakes of omission are as bad as mistakes of commission. Perhaps the answer is somewhere in between.
The question remains wide open on what is the right valuation method/multiples to apply for the biz.
The most important question that matters though is this - can you potentially make more $ than what you could potentially lose?