Highlights

Largest SPAC in Malaysia… Reach Energy  (REACH)  is the fourth  oil  and  gas  special  purpos e  acquisition  company (SPAC).  It  is  also  the  largest  I PO  for  a  SPAC  by  its fundraising size of RM750m  with  overwhelming response  as IPO was oversubscribed  by 42  times.  

IPO price of RM0.75:  The IPO price of the stock was 75 sen with a free warrant  (exercise price:   75 sen) which last closed at 61.5  and 15.5 sen respectively,  or a total of 77 sen.

Better  investor’s   protection…   To  note,  REACH  has   the safer  SPAC  criteria  among  the  four  listed  SPACs  given stricter guideline.  REACH has placed 94.75% of its funds into an  Islamic  trust  account  instead  of  90%  required  by  the SPAC  guideline.  In  addition,  REACH’s  management  have invested  a  total  of  RM20m  into  the  company  ve rsus  others SPACs  which  range  from  RM1m  to  RM3m .  Moreover,  the management only be  allowed to c ash up after one  full year of audited operating  revenue  post completion of QA.

How  it  works:  Once  a  qualifying  asset  (QA)  is  found,  an EGM  to  vote  on  the  worthiness  of  the  QA  will  be  held. Shareholders of REACH who vote against the acquisition, will receive  94.75%  of  their  funds  back, 7 market days after the completion of a  QA. Hence a base case return for  REACH  is 71  sen  (94.75%  of  75  sen  IPO  pric e)  if  investors  votes against.  The  IPO  funds  are  in  an  interest  bearing  account . The  warrants  CAN  NOT  be  exercised  before  the  qualifying acquisition  is  made,  hence  there  will  be  no  dilution  to  the base case return for  dissenting shareholders.

Comments

Opportunity  emerges   a s  share  price  trading  well  below cash value… REACH and its warrant price reached peak s of 76.5 sen and 29 sen res pectively in the first day of  listing, or total  of  RM1.055  (implied  return  of  41%  from  IPO  price  of RM0.75).  Thereafter,  share  price  corrected  due  to  heavy profit  taking  activities.  With  current  share  price  of  61.5  sen which  is  13%  below  cash  value  of  7 1sen,  we  see  value emerge.  In  the  worst  case  scenario,  where  a  QA  not executed in 3 years time, inv estors could get back ~77.5  sen including  3%  interest rate earned  which    implied 26% return over  3 years period  or 8.7% pa which  is  higher  than FD rate.

Succe ssful  completion  of  SPAC  could  provide  better upside…Based  on  the  implied  cash  value,  we  believe  the market has mispriced the security due to misunderstanding of the  SPAC structure. Hibiscus traded at a low of 52 sen and is currently  trading  at  RM1.46  after  s uccessful  completion  of qualifying  asset.

Current  weak  oil  price  environment  provides  better bargain  power…SPACs  are  cash  companies  looking  for oilfield assets  and  should potentially be able to negotiate  for better pricing especially in the declining  oil price environment.

Risks 

• Identification  of  qualifying  asset  takes   >  3  year;  Further market mispricing;  Plunged  in oil price.

Valuation  

• Share price should be  underpinned by the cash  backing  per share  which  is  71  sen.  The  stock  should  trade  over  and above  this  value  to  factor  in  the  likely  probably  of  finding  a value  accretive  qualifying  asset.

Source: Hong Leong Investment Bank Research - 14 Oct 2014