Yesterday, V.S Industry (VS) proposed to acquire up to 224.9m shares in Hong Kong’s V.S International Group (VSIG). It also offered to buy up to 250.7m outstanding share options and 17.7m bonus warrants granted by VSIG. The deal is expected to be completed by end-2013. Maintain NEUTRAL, with a lower MYR1.54 FV, pegged to a 9x CY13 PE after adjusting for the finance cost arising from the proposal.

Details of the purchase. As of 26 March, VS held a stake of about 38.1% in VSIG. The proposed acquisition of 224.9m VSIG shares, representing 17.2% of the company’s existing share base, is at the price of HKD0.355 (~MYR0.142) per offer share in cash. The number of share options and bonus warrants under the option offer and warrant offer are up to 250.7m and 17.7m respectively. The offer price per share option is derived from the offer price less the exercise price of the share option of HKD0.169, while the offer price per bonus warrant is based on the offer price, less the exercise price of the bonus warrant of HKD0.12. The proposal is not conditional upon any minimum level of acceptance for the offer shares.

Generating synergies through consolidation. The rationale for the proposal is to consolidate VS’ position in the regional electronic manufacturing services (EMS) sector, by generating synergies through leveraging on both parties’ core competencies. We believe this will benefit VS in the long run as the economies of scale and operating synergies arising from the consolidation should boost its operational efficiency.

To use internal funds, borrowings. VS plans to finance the acquisition by drawing on MYR6.5m in internal funds and external borrowings amounting to MYR27m. This will marginally raise its gearing from 0.34x to 0.41x and raise its finance costs by MYR1.6m for FY14, assuming an effective interest rate of 6%. This leads us to revise lower our FY14 earnings forecast by ~3% to factor in the higher interest expense.

Source: RHB