YLI defends price tag for control of rival

YLI Holdings Bhd, a pipe maker, said its proposal to take control of a rival is not expensive, considering that the latter has an exclusive long-term contract to supply a water distributor in Selangor.YLI announced a RM48 million deal to buy 51 per cent of Laksana Wibawa Sdn Bhd on Thursday and said this was a discount to what Laksana Wibawa is worth, based on the discounted cash flow calculation.However, it did not say why it was using the method to value Laksana Wibawa, neither did it mention that the company has a contract to supply Syarikat Bekalan Air Selangor Sdn Bhd, a subsidiary of Puncak Niaga Holdings Bhd."We have engaged an independent valuer. We have also done a due diligence and we have got legal adviser to go through the contracts. We have verified the information," Khor Song Sim, YLI's general manager of corporate services told Business Times.
Based on what was announced to Bursa Malaysia, the deal appeared to be expensive as YLI is paying a historical price to earnings multiple of 34 times, way above YLI's own valuation of about 11 times. Aseambankers Malaysia Bhd said it was surprised by the price tag and cut its target price for YLI's stock by 36 per cent to RM1.15."We are not positive on this acquisition, due to the pricing. Our main issue is the period of investment return for this new acquisition, as Laksana Wibawa's historical records are not compelling," the investment bank said in a report yesterday.However, its report was released before it had the chance to speak to YLI's management.Khor said Laksana Wibawa's exclusive contract with Syabas runs from 2006 to 2015. It will supply ductile iron pipes and mild steel pipes to Syabas.Laksana Wibawa is worth between RM102 million to RM133 million, based on calculations done by Kenanga Investment Bank Bhd."If it can fulfil demand from Syabas, it can make a lot of money," Khor said.Based on Laksana's accounts, it made a maiden net profit of RM2.8 million in 2007 since starting business in 2003. Over that period, its revenue has grown by almost 10 times to RM65.6 million.Apart from growing YLI's income, Khor said the deal allows the group to deal with competition.YLI would also help Laksana Wibawa to deal with the supply of ductile iron pipes as its facility has excess capacity. Laksana Wibawa is in the midst of building a ductile iron pipe factory."We can take up the slack and delay the factory a bit," Khor said. -www.btimes.com.my