Etika

Etika: ($0.44) Flush with cash and grossly undervalued Etika will receive a cash windfall, having completed the sale of its dairy business to Asahi Group on 30 Jun for US$328.8m (RM1,062.2b). Assuming full debt pare down, Etika will have an estimated net cash of $268.5m ($0.428/share), equivalent to nearly its entire market cap. Post deal, Etika’s proforma FY13 NAV is expected to rise to RM911m, or $0.568/share. Etika’s remaining businesses comprise: i) Trading and frozen food; ii) Nutritional products; iii) Beverages; and iv) Texas Chicken franchise in Malaysia, though as a group, they generated a net loss of RM3.1m in 1Q14. Management guided that the cash proceeds from the sale will go towards debt repayment, funding the growth of the remaining businesses and also a possible cash distribution. At $0.44, Etika is grossly undervalued from an asset-based valuation perspective. Netting off the net cash of $0.428/share, an investor is effectively forking out a mere 1.2¢ for Etika’s leftover businesses worth a combined 14¢ on its books, implying a whopping 91% discount. Alternatively, ascribing a conservative 0.5x P/B multiple for Etika’s remaining businesses, Etika shares would still be worth ~$0.50, implying 13% upside from current levels.