This article first appeared in The Edge Malaysia Weekly on February 24, 2020 - March 1, 2020
IN the early part of this week, all eyes will be on businessman Datuk Thong Kok Khee and his flagship Insas Bhd.
On Tuesday, at the close of trading at 5pm, Insas’ warrants — which are already suspended — will lapse and cease to be valid for any purpose, if not exercised.
As announced by Insas to the local stock exchange, “the Warrants 2015/2020 will be removed from the official list of Bursa Malaysia with effect from 9am on Feb 26, 2020”.
To recap, Insas’ warrants came about from a proposal in July 2014 as part of a cash call, when the company issued 138.7 million redeemable preference shares (RPS) at RM1 apiece on the basis of one RPS and two warrants for every five shares held. In a nutshell, Insas raised RM138.7 million, and the warrant was a sweetener to the cash call.
Insas’ warrants closed at 0.5 sen on its last trading day on Feb 7 while the strike price of the derivative is RM1. But Insas’ mother share had only traded above RM1 from March to October 2014 (the time of the cash call), and for a short spell in November the same year and in mid-2017. It closed last Thursday at 86 sen, a 14% discount to the strike price of the warrant.
What has garnered much interest is that Kok Khee and his related parties could end up making an offer for Insas’ shares they do not already own.
An October 2014 circular to Insas’ shareholders says that should Kok Khee and any of his related parties “exercise their warrants such that their shareholdings in Insas increases to more than 33%, whether [or not] on an individual basis, Kok Khee and/or any of his related parties is obliged … to undertake a mandatory offer for all the remaining Insas shares not already held by them after the exercise of the warrants”.
This is a requirement under the Malaysian Code on Takeovers and Mergers.
Kok Khee has a 25.05% stake in Insas, held directly and via M & A Investments International Ltd, Immobillaire Holdings Sdn Bhd, Baktihan Sdn Bhd, Winfields Development Sdn Bhd and Montprimo Sdn Bhd while his brother, Kok Yun, holds 11.19%, via his spouse, Titan Express Sdn Bhd, Perak Traders Holdings Sdn Bhd and Baktihan Sdn Bhd.
Thus, collectively the brothers have 36.24% equity interest in Insas. As at end-June 2019, Kok Khee had 83.41 million or 31.45% of the warrants issued while Kok Yun had 29.34 million or 11.06% of the warrants issued, which indicates that they would trigger a general offer if the securities were converted to shares.
While it was speculated previously that they may seek a waiver to undertake a general offer, there has been no such announcement to the local bourse. An associate of the Thong brothers says there could be a rights issue or some cash call, which will dilute their shareholding to prevent a general offer, but there seems to be little time left for such an announcement.
It is also noteworthy that while Insas’ shares have not performed, the company’s net asset per share as at end-September last year was RM2.65, which would be a compelling reason for the brothers to trigger a general offer and privatise Insas.
A back-of-the-envelope calculation shows that based on its net asset per share, Insas should have a market value of almost RM1.84 billion, as opposed to its current market capitalisation of RM596.3 million, which indicates that there is value to be unlocked in the company.
It is also worth noting that Insas is cash-rich and not dependent on the warrant conversion to pay off the RPS.
In its first quarter ended September 2019, Insas chalked up a net profit of RM17.86 million on revenue of RM39.18 million. Compared with the previous corresponding quarter, its net profit was down by a third while revenue dipped 4%.
As at end-September 2019, Insas had deposits with licensed banks and financial institutions amounting to RM506.76 million and cash and bank balances of RM98.27 million. On the other side of the balance sheet, it had long-term debt commitments of RM253.48 million and short-term borrowings of RM20.18 million.
Considering Insas’ share base of 693.3 million shares, its cash works out to 87 sen per share, or a sen more than its close last Thursday.
The company’s finance cost for the first three months of FY2010 was a mere RM5.45 million.
While Insas’ shareholding is diverse, its jewel in the crown is the 19.08% stake in electronic manufacturing outfit Inari Amertron Bhd. Last Thursday, Inari Amertron ended trading at RM1.68, translating into a market capitalisation of RM5.44 billion. This would mean that Insas’ 19.4% stake in Inari Amertron has a market value of RM1.05 billion.
Other companies that Insas has interests in include M&A Securities Sdn Bhd, Insas Properties Sdn Bhd, Insas Pacific Rent-A-Car Sdn Bhd and The Melium group (a 43% stake) — which is a fashion retailer and owns the DÔME Café chain. Insas also has interests in moneylending and project financing outfit Insas Credit & Leasing Sdn Bhd.
Also under its belt is software outfit Omesti Bhd (a 10.17% stake), which closed at 63.5 sen last Thursday and had a market capitalisation of RM303.9 million; furniture company SYF Resources Bhd (8.4%), which ended trading last Thursday at 16.5 sen, translating into a market value of RM97 million; and computer software and hardware consulting company Diversified Gateway Solutions Bhd (25.48%), which finished last Thursday at nine sen, valuing it at RM67.1 million.
Omesti owns 42.14 million shares, or a 5.65% stake, in Diversified Gateway Solutions, 61.53% equity interest in software company Microlink Solutions Bhd and 13.29% of construction player Ho Hup Construction Co Bhd.
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