Unico ... Jul11

UDP has proposed to distribute shares in the group’s hire purchase (HP) arm ELK-Desa Resources Sdn Bhd pursuant to the listing of the unit.

The question is, will the listing of ELK-Desa Resources be priced at an equal or higher earnings multiple than UDP’s 17.18 times historical earnings? If it is not, the HP business could be better off kept within UDP.

UDP, in which Unico owns a 29.59% stake, proposed to list ELK-Desa Resources. The unit owns 100% of ELK-Desa Capital Sdn Bhd, whose principal activity is HP financing, and ELK-Desa Risk Agency Sdn Bhd, which deals in insurance and automotive trader ELK-Desa Marketing Sdn Bhd.

The listing exercise would involve the distribution of 86.51 million shares or a 86.51% stake in ELK-Desa Resources to UDP shareholders on a 1-for-10 basis while another 13.49 million shares will be offered for sale to UDP shareholders under a restricted offer for sale (ROS). ELK-Desa Resources is also proposing a public issue of 25 million new ordinary shares of RM1 each, representing 20% of its enlarged issued and paid-up share capital.

Given Unico’s shareholding in UDP, it stands to receive 25.6 million distribution shares and is entitled to subscribe for about four million shares in ELK-Desa Resources.

ELK-Desa Resources makes decent profit, having contributed RM15.22 million or 28.8% of UDP’s after-tax profits of RM52.85 million for FY11 ended March 31.

Assuming UDP’s 17.18 times price-earnings ratio, the whole of ELK-Desa Resources could be worth some RM261.5 million, with Unico’s stake valued at about RM77.4 million. That is much more than its receipt of dividend income from UDP of about RM30.2 million from FY09 to FY11. But again, that is assuming the HP unit can fetch such high valuation currently attributed to UDP, whose core business is oil palm plantations.

In addition, it is not known whether the distribution shares received by Unico will be distributed to its members or shareholders or that the cooperative will seek to place out some ELK-Desa Resources shares in an initial public offering. Minority shareholders or small members own about 80.62 million shares or 82% of Unico.

How Unico handles the distribution shares of ELK-Desa Resources could attract interest.