Sunvic

Sunvic: CIMB just released an unrated/tatical report on the counter. Note that in a rare blockbuster deal in the chemical industry, the world’s leading chemical producer, Arkema, is set to acquire a portion of Sunvic’s (SVC) production capacity for Rmb3.9b. Disposal gains (Rmb1.9b) alone are about 120% of SVC’s current market cap. SVC’s earnings and stock price have been on the mend in the past year, reflecting the industry’s overall turnaround. The latest transaction could lead to special dividends to reward shareholders, though the house see more than this in the stock. Believe that this transaction will effectively wipe out SVC’s debt, as Arkema will take over SVC’s largest geared-up facilities (Rmb2.2bn debt, 480k tonnes/year). SCV will also be able to save c.Rmb120m/year in interest costs. House understand that there is no non-competing clause in place, meaning it can rebuild capacity cheaply using its new-found wealth and some leverage. A cheaper option is to start the rebuilding when volatile AA and AE prices come down in the distant future. Reckon that SVC’s founder/major shareholder, Mr Sun, might even seize full control of the listed company and start the rebuilding process under the radar. Re-listing the company on other bourses in the future might be a better idea, given higher valuation multiples. Note that the Stock is worth at least $1.35. S see the current market mispricing as its biggest investment merit. Post-transaction, SVC’s NTA is estimated at $1.50. In seasonally stronger years, the market used to price SVC at above 0.9x P/NTA (1 s.d. above its mean since listing), such as in FY10-11 when SVC had smaller capacity and record earnings due to favourable commodity prices. Its current valuation of 0.4x FY14 The house blieve its stock has the potential to hit S$1.35/share (0.9x FY14 P/NTA).