Pan-United Marine - The S$2.38 per share offer

It is with much shock, surprise and ultimately disappointment that I report this. Dubai Drydocks World LLC (DD) has, through HSBC, offered to purchase Pan-United Marine (PUM) at S$2.38 per share, valuing the company at S$647.7 million. As at the date of the announcement, 70.08% of the institutional shareholders had already accepted the offer; thus it is an upward task for minority shareholders to say "no". If DD obtains >90% of the company, they have to make a compulsory takeover offer for the remaining shares and delist PUM from the SGX-ST.

A little bit of history first....PUM was initially one of the companies which fell into my radar for value investment. My research began about 6 months ago (around Dec 2006) when a fellow shareholder of Ezra (whom I met at the Ezra FY 2006 AGM) recommended this jewel of a company. He told me he had bought shares at $1.30 and was also a value investor (incidentally, he also recommended Amtek to me, which was trading at 55 cents at the time and which is also subject to a takeover offer at $1.10 per share). My curiousity was piqued as I had also seen announcements from time to time on SGXNet of the company securing ship building and ship repair contracts of significant value. In addition, I knew it had a very generous dividend policy as well. At the time, the stock was trading in the range of $1.20 to $1.30.

Subsequent to the Ezra AGM, I began my research in earnest. I looked at every financial announcement made by the company since 2005 through to 2006, and read the annual reports, visited the website and examined its competitors such as Labroy Marine and ASL Marine. I did an extensive review of the numbers, its prospects, current yards (Singapore and Batam) and also read the chairman's MD&A. Everything seemed to point to a good investment as the company had a lot of latent potential and its intrinsic value was perceived to be much higher than the current market price as the PER was only about 7-8x at the time. In addition, it was growing its order book very quickly and was aiming to expand capacity by building another yard in the near future. Net margins and ROE were also healthy as compared to sector peers.

However, I made the mistake most value investors make, which is a mistake of omission. Not being confident enough of my analysis, I hesitated to buy with the reason that its competitive advantage could not be sustained. However, in time to come, PUM would clinch major deals including the S$98 million deal to build the world's first 30,000 bhp AHTS offered by none other than Ezra (what an irony !) as well as other contracts to boost their order books further past S$500 million. A simple calculation would yield a forward PER of only about 10-11x base on their burgeoning order book.

Which brings me to my next point: that DD is offering a ridiculously low price for PUM ! With the growth rate experienced by PUM and the fact that it can capture such significant contracts, this means that it has a strong competitive edge in snaring such contracts. Surely DD could give the Management more "face" and offer a much better price of at least S$2.80 to S$3.00 ? Offering S$2.38 values the company at close to 11x forward PER, and assuming PUM is able to capture more contracts, forward PER can easily fall to 7-8x again. This, coupled with a generous dividend policy, good ROE and earnings growth, is more evidence that the offer is under-valuing the company. My suggestion is that minority shareholders should reject the offer and wait for a higher bid, though with 70.08% acceptance level, I am not sure if this can work. Will any reader care to enlighten me ?

The lesson to take away from here is: have confidence that you did enough research and identified a potential gem, and make sure to establish that it is being offered by Mr. Market at a significant discount to intrinsic value to offer a good margin of safety. I corrected this mistake of omission in Feb 2007 by analyzing and promptly purchasing Swiber after doing a review and intrinsic value estimation for it (i.e. after it announced the Brunei Shell contract).

Pacific Andes FY 2007 results and End-May 2007 Portfolio Review

As of May 29, 2007, Pacific Andes has yet to release its FY 2007 results. This is rather uncharacteristic of the company as it usually releases results by the second last week of May. Last year, results were out by May 23, 2006. As tomorrow is the final trading day of May 2007, I will be doing my twice-monthly portfolio review and commentary. However, if Pacific Andes announces results tomorrow, then it will take precedence over the portfolio review, which will then be postponed to Vesak Day on May 31, 2007.

Wishing everyone a Happy and Prosperous June 2007 !