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Paragon Union Bhd (Paragon) is a stock that we have followed closely since the emergence of Mr. Koon Hoi Chun as the new controlling shareholder. This week revealed a notable development that brings clarity to the plans that Mr Koon has in store for Paragon. On 27th May 2024, Paragon proposed to acquire 51% stake in Metahub Industries Sdn Bhd via Paragon Metal Sdn Bhd, a wholly owned subsidiary of Paragon for a purchase price of RM51 million.

HIGHLIGHTS OF THE PROPOSED ACQUISITION​

1) Background of Metahub Sdn Bhd​

Metahub Industries is principally involved in the business of recovery and reprocessing of precious metals from production waste and electronic scrap, and other related activities. Recovery and reprocessing includes metal (aluminium, copper, tin and nickel) and wastewater treatment. Trading of scrap waste involves sorting electronic scrap collected from its customers, the company trades the excess scrap waste which cannot be recycled and reprocessed.

2) Acquisition settled by the issuance of new shares and comes with a profit guarantee

The purchase consideration will be settled by the issuance of 17.2 million new Paragon shares at an issue price of RM2.95 per share to the vendors. Additionally, the vendors have given a profit guarantee of RM6 million and RM8 million, for FYE  2024 and FYE 2025 respectively.

3) Reasonable valuations versus its peers

Based on on the Valuation Certificate appraised by Asia Equity Research, the Independent Valuer for the proposed acquisition, the fair value range for the 51% equity translates to an implied forward PE of 6.8X to 7.8X, which is below the simple average of 11.4X of comparable companies. Two comparable companies listed on Bursa Malaysia include Texcycle Bhd and Jag Bhd, which are up substantially this year as well.

TECHNICAL ANALYSIS

In the previous post, we made reference to the possible short-term weakness in Paragon when the RM3.45 was broken on a closing basis. We called the next critical support at the RM2.90 to RM3.10 based on fibonacci  and chart support retracement levels. 

So true to form, the stock did exactly that when it dropped for the next 4 consecutive days after breaching  the RM3.45 level and fell in to our technical support and buying zone. Having tested the RM3.00 level for the next 3 days and failing to breakthrough on the downside, the stock rebounded swiftly to reclaim its position above the previous resistance turned pivot point level of RM3.45. 

So where do we go from here? Structurally, the chart show a lot promise, as the critical support of RM2.90 to RM3.10 has been successfully tested and defended. On this current move, it has also taken out the pivotal RM3.45 level, so we interpret this to be a strong motive move targeting the previous high of RM4.05 again. Should this level be breached on the upside, our original Wave 3 interpretation will be alive again with the minimum target based on fibonacci projections on RM7.08.

SUMMARY

With more clarity on the business direction of Paragon after this acquisition, we can look forward to exciting times ahead for this company. Leveraging on the expertise and experience of the Koon family in the aluminium business, could we see this as the next possible Press Metal and PMB Tech story?

Disclaimer: This blog is created for sharing of trading ideas only. It is not in any way or form meant to be an inducement or recommendation to buy or sell any stocks. Consult your financial consultant before making any financial investments