This article first appeared in The Edge Malaysia Weekly on February 24, 2020 - March 1, 2020

ATLAN Holdings Bhd has put plans to spin off its automotive subsidiary and list it on the Hong Kong stock exchange on the backburner, according to people familiar with the matter.

Sources told The Edge that if the company went public amid the current weak investment sentiment — owing to uncertainties caused by the long-drawn-out US-China trade conflict, protests in Hong Kong and the Covid-19 outbreak — it would fetch a much lower valuation.

They say Atlan was hoping to secure a “high teen” earnings multiple valuation for the subsidiary’s initial public offering (IPO). In July last year, Atlan announced that it was exploring the possibility of listing United Industries Holdings Sdn Bhd (UIH) on the Growth Enterprise Market of the Stock Exchange of Hong Kong.

It is understood, however, that Atlan was advised that investors may be unwilling to accept its high valuations for UIH with the current market conditions.

“Basically, the stock valuation given to UIH is not attractive enough. Therefore, it doesn’t make sense for the company to go ahead with the IPO,” one source tells The Edge.

Atlan declined to comment for this article.

It is worth noting that last Tuesday, Atlan had signed a share purchase agreement (SPA) to buy back an 8% stake in UIH from Cremorne Capital Fund Management Ltd for RM8 million cash.

Upon completion of the shares transation, which is slated by end-March, Atlan will hold 100% equity interest in UIH.

Cremorne Capital — a fund manager licensed by Labuan Financial Services Authority — was supposed to be the pre-IPO investor of UIH. The firm provides fund management services, investment services, corporate advisory and underwriting of securities and placement.

“With Cremorne Capital out of the picture, it looks like Atlan will not be proceeding with the IPO of UIH. That is unless it can find another pre-IPO investor who doesn’t mind floating its shares at a less demanding valuation. But then again, what’s the point?” says another source.

So far, Atlan has yet to file an announcement with Bursa Malaysia on whether it will go ahead with its planned IPO of UIH.

Recall that the duty-free retailer had on June 18 last year signed an SPA to divest an 8% stake in UIH to Cremorne Capital for RM8 million cash. Following the completion of the disposal a month later, UIH became a 92%-owned subsidiary of Atlan.

Fast forward to January this year, Cremorne Capital requested to exit from its equity-related investment in UIH, citing that it had “adjusted its investment philosophy”.

“With the exit of Cremorne as a strategic investor of UIH, the company will be able to explore for new strategic investors who will be able to contribute their expertise, and together with the company, explore new growth and corporate exercise opportunities for UIH,” Atlan said in its filing with Bursa last Tuesday.

Given that the purchase consideration is exactly the same as that received pursuant to the disposal — RM8 million — it essentially means that Cremorne Capital is getting its money refunded from the pre-IPO exercise.

UIH is an investment holding company and its subsidiaries are principally involved in the manufacturing, marketing and distribution of automotive component parts. The company manufactures and supplies metal fuel tanks, exhaust systems, screw jacks, brake and fuel component parts, and clutch tubing, as well as other related automotive production and assembly parts.

Last July, Atlan said the details of the proposed listing were yet to be determined, but that it was envisaged that the group’s automotive division would continue to remain as its subsidiary upon completion of the listing.

At the time, Atlan had said the proposed IPO was to build and enhance the visibility and reputation of its automotive business by obtaining its own listing status.

The exercise would also enable UIH to gain stand-alone and direct access to the Hong Kong capital market for future expansion or fundraising for its automotive business.

Furthermore, the proposed listing was seen to enhance UIH’s capital base and strengthen its financial position to achieve its long-term objectives and ensure sustainable development of its automotive business.

Atlan had appointed Cinda International Capital Ltd to evaluate and advise, as well as act as sponsor for the proposed listing in Hong Kong.

For its financial year ended February 2019, UIH posted a net profit of RM12.04 million on revenue of RM185.8 million. As at ­end-February, UIH had total assets of RM140.58 million, total liabilities of RM58.26 million and retained earnings of RM32.77 million.

When Atlan sold its 8% stake in UIH to Cremorne Capital for RM8 million in June last year, the deal essentially valued UIH at RM100 million.

A back-of-the-envelope calculation shows that UIH was fetching a price-earnings ratio (PER) of 8.3 times.

In comparison, UIH’s peers such as locally listed New Hoong Fatt Holdings Bhd and APM Automotive Holdings Bhd are trading at a trailing 12-month PER of 13 and 11 times respectively.

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