Dissection of the Circular of WBL Corporation Limited by KMPG

My writing intention is to discuss about the said circular over its recommendation on whether WBL shareholders and convertible bondholders are to accept Straits tradings offer. This article is meant to get the reader to have better idea of how much both stocks should be worth. I am regretful if there is some degree of deviations from actual results due to unforeseen future circumstances. You, the reader, have your own responsibility to perform due diligent before you make a decision to buy stock. If you have any opinion or clarification on this piece of article, you are welcome to email me at tonydelpiero10@hotmail.com

I refer to the Business Times newspaper article dated 15th February 2013 titled Financial Adviser Rejects STC's Offer for WBL. In that article, the writer of the article summarised my suggestions from my last article (Follow Up Stock Analysis on Three Companies: WBL, Straits Trading, and UE) to my readers in his own words. That pretty sum up the rationale of UE and STC acquiring WBL. WBL hires KMPG as independent financial adviser on somewhere close to 21st February 2013. It has released its analysis and findings to WBL and WBL subsequently mailed the circulars to WBL shareholders on 13th February 2013. I personally received it on 15th February 2013. The circular is very comprehensive and additional information which is useful and is not found in standard WBL annual report. KMPG arrived the same conclusion as mine regarding STCs offer. STCs offer is too low for WBL shareholders. Our conclusion is to reject STCs offer. Once UEs shareholders authorise UEs proposal to buy WBL shares, STC chairman, Ms Chew may be forced somehow to raise the offer price. Right now, the market participants are toeing on WBL shares in anticipation of the responses of STC and UE. That may explains why the price trend of WBL is like this for past two weeks. The takeaways from the circular are as follows: 1. WBLs property business in China has large revaluation gain. The circular shows that every property in China has positive gain. The analysts at local brokerage houses think highly of this property business. Given my reservation towards Chinas economy data which may be inflated, such revaluation gains may be reasonable for given location and China governments movement to manage the property market earnestly. It is much easier to manage than exports movement. 2. Automotive division has the second highest valuation after property division. It is one of crown jewel for WBL that generates cash. Very luxurious business in South East Asia. 3. Technology division has the third highest valuation due to two public listed companies. They can take care of itself, which is attractive to any management who has hands full on the company internal and external matters. 4. There are two independent directors on WBLs board of directors. They are Kyle Lee Khai Fatt and Benjamin C. Duster, IV. 5. On the WBL board of directors, there are three camps. Mr Lai Teck Poh is the director of OCBC and so he is probably acting for OCBC. Dr Peter Eng His Ko is part of the Lee Group according to the circular. Mr Mark C. Greaves is the senior advisor to the chairman of the STC offeror. Mr Norman Ip Ka Cheung is familiar with UE and STC it is highly probable that he is acting in the interests of both UE and WBL shareholders.

There will be big fight once UE is empowered and STC wants to protect its interest to acquire WBL. I agree the following valuation methods used by KMPG: 1. Valuing automotive division using EV/EBITA multiple. Automotive division largely depends on its earning power. 2. Valuing property division using net asset value (NAV) approach. It is reasonable given that properties can be sold quite close to its valuation estimated by professional property valuers. 3. Valuing technology division using marked-to-market approach. Two subsidiaries are listed and it is reasonable to do that using the assumption that the market is efficient. However, if we think the market is not efficient, I would suggest to value the intrinsic value of these two companies based on its earning power because they have expertise to make unique stuffs for technology products. 4. Valuing corporate services divisions using NAV approach. It is fair since the corporate services itself cannot be easily retained and thus valuation based on earnings power is not suitable. However, engineering, manufacturing, distribution, and others divisions should not be valued using NAV or Relative NAV approach. As long as there is sufficient understanding in these divisions, we should value them based on earnings power. If this is done, the price should be slightly higher on normal state of economy over the range of the intrinsic price of WBL share. Disclosure: I have long position on WBL and STC.