takeout - is this happening too cheaply?

We are posting this from England, where there are still shareholders from the time when E-Pay Asia was quoted on London on the stock market. We used to research the company in its London days. Are we the only people to feel that this company is worth rather more than the 23c a share being offered by Mr. Loh?

This company has assets per share of 19.8c. Of that, 17.4c gross is cash; the net cash, stripping out debt, tax due and the dividend payment due to Euronet, is 4.8c. The only other significant asset in the balance sheet is pre-paid airtime top-ups, which is a solid enough asset. Strip out the cash and the working capital, Mr. Loh is actually suggesting paying next to nothing for the company.

How about its trading? This is pretty good. The Moore Stephens report issued on 27 February calculates EBITDA as $3.35m. We calculate a lower figure, $3.14m, and even though Moore Stephens is now closer to this business than us, let us take our “low ball” EBITDA for a moment.

Enterprise Value is $8.4m (the $13.1m takeout price minus the $4.7m net cash). So on our calculation, the co is being taken out at 2.7X EV/EBITDA. On the Moore Stephens number, the EV/EBITDA takeout falls to 2.5X. Now, this is cheap by any measure. The Moore Stephens report itself says the EV/EBITDA multiple should be in the range of 3.5 to 4X. To quote Moore Stephens again, the peer group p/e ratio is a whopping 7.7X.

The historic p/e ratio on takeout is only 10.7.

E-Pay Asia appears to be in pretty good shape. Last year’s sales revenue drop was entirely because of currency movements. In Malaysian Ringitts, rather than Australian Dollars, it seems to us that sales revenues actually rose. The company is forecasting (page 17 of the document) that sales revenues and gross profit will both rise in the current year.

Last year’s 21% fall in profits was exaggerated by currency movements. Also there were a pile of extra costs in the 2011 accounts. Advertising spending was up by $0.5m – 40%. “Other Corporate/unallocated” costs (whatever these are) were up by $0.3m – 74%. If spending on these two items had been held back, profits would have been up, even in Australian Dollars.

Mr. Loh’s own Chairman’s Statement in the Preliminary Results Announcement talks of “continuous growth in prepaid mobile subscriber”, and that the board “look forward to greater achievements in the next year”.

We know there are negatives. The move to data has affected pre-paid in other countries, and also 2012 will be the first year of a full Malaysian tax charge. But it does seem to us that E-Pay Asia is a fine company, and worth rather more than this.

Are there any Australian shareholders who agree, or are you all just glad to be getting your money back?
Roger Hardman
Hardman & Co