CAL cautions investors despite Softlogic’s fair cash offer

"It is still uncertain as to how Pathirage will re-structure Odel going forward with this massive cash pile. He could either retire the entirety of the existing long and short term debts amounting to Rs.1.3 billion (as of June 30) or invest that in the business given the significant synergies within the two groups as claimed in offer document"

Though the mandatory offer price of Rs.22 per share for Odel PLC (Odel) shareholders is a fair price, an investment bank has cautioned investors over its highly subjective nature and the valuation being entirely based on historical figures.

According to Capital Alliance Partners Limited (CAL), even to justify this Rs.22 share and to hold the share for a reasonable period of return, it requires Odel’s earnings to grow significantly during FY 2015 and 2017.

CAL’s recommendation to ‘accept’ the offer is purely based on the Net Asset Value (NAV) and historical Price Earnings Ratio (PER) and company earnings but an ideal valuation is offered through forward earnings and discounted cash flows which demonstrate the company’s future potential.

Odel’s NAV per share as of June 30, 2014 was Rs.17.10 and CAL said the offer price relating to the NAV was preferable.

Odel’s net profits had been declining during the two years to FYE 2013 before it increased by 22.44 percent to Rs.192.55 million (71 cents a share), but
revenues and the gross margin were growing continuously.

On September 12, Ashok Pathirage-led Softlogic group acquired 45 percent of Odel in a Rs.2.6 billion deal, with Otara and her two siblings completely divesting stakes.

On October 15, Softlogic group—Softlogic Holdings PLC (SHL) and Softlogic Retail (Pvt) Ltd (SRL) announced a mandatory offer on Odel which was accepted by Parkson Retail Asia Limited to dispose of its 47.46 percent stake booking an estimated capital gain of Singapore dollars 601, 000— approximately Rs.61.3 million.

Further, Odel’s valuations become subjective as there are no close Colombo Stock Exchange listed substitutes.

Even though a substitute could be searched based on Odel’s consumer peers which include Cargills (Supermarkets), Richard Pieris (Arpico Stores, manufacturing plus plantations) and Singer (consumer finance and white good sales), they are quite different from one another and are substantially larger than Odel.

“Thus point valuation relative to peer group does not express an accurate picture,” CAL stated.

Further Odel operates with Rs.2.0 billion worth of unutilized assets of which majority is cash. However CAL believes it is unusual for a company with a going concern to sit on a massive cash pile

without re-investing on revenue generating assets.

As of June 30, 2014 Odel had Rs.1.3 billion worth of cash and Rs.800 million worth of property which were not utilized. It is still uncertain as to how Pathirage will re-structure Odel going forward with this massive cash pile. He could either retire the entirety of the existing long and short term debts amounting to Rs.1.3 billion (as of June 30) or invest that in the business, given the significant synergies within the two groups as claimed in their offer document.
Softlogic has also mentioned they would ‘evaluate developing the existing property at Kannangara Mw and Ward Place, Colombo 7 in to a multi-story high end department store.

“While CAL believes these are plausible value added strategies and synergies which could improve Odel’s share price.CAL also believes that it may take a reasonable length of time for benefits to materialize,” CAL stated.

Following Odel acquisition, Fitch Ratings Lanka Limited downgraded SHL by two notches to BBB- and left the rating watch on ‘Negative’ due to the aggressive investments and capital structure and weaknesses in SHL’s liquidity profile and financial metrics.

“SHL’s recent acquisition of a 45 percent stake of Odel, as announced on September 11, 2014, is expected to further increase its debt levels, at least in the near-term,” Fitch stated.

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