Japan Sagawa’s deal with Expolanka boosts Lanka’s hub aspirations

Monday, 12 May 2014 00:26 - - {{hitsCtrl.values.hits}}

Acquisition of 30% stake for Rs. 6.3 b makes it the biggest transaction in Colombo stock market since Malaysian sovereign fund Khazanah’s buy of 10% JKH stake two years ago
With commitment to buy a further 21% to make it 51%, a fresh Rs. 4.4 billion foreign investment is on the way making it a mega deal
Japanese logistics giant keen on expanding into South Asia and globally using Expolanka’s strong international footprint; for Expolanka SG deal a catalyst to go global
Two parties brought together in late 2012 by NWS Holdings at Tokyo Investor Forum
First major deal after Government allowed foreign ownership on freight forwarding operations from 40% to 100% recently and converting Katunayake and Mattala as free-ports

Sri Lanka’s aspirations to become a shipping and aviation hub got a major boost on Friday with Japan’s second largest logistics firm SG Group acquiring a 30% stake in local industry leader Expolanka Holdings PLC for Rs. 6.3 billion. Sagawa Global Logistics (SG Group) via its Singapore subsidiary SG Holdings has committed to buy a further 21% bringing the control to 51%. When it is implemented it will make a further investment of Rs. 4.4 billion at minimum or more if the mandatory offer results in an additional stake. The 30% stake amounted to 586 million shares and was done at Rs. 10.70 each with major shareholders shedding part of their stakes. Net asset per share of Expo at group level is Rs. 5.19. Expolanka Holdings PLC is South Asia’s leading freight forwarder and its business spans over 17 countries in Asia, Africa, USA and the Middle East. Apart from Japanese being long term investors, what is significant in the SG-EXPO deal is it is the first since the Government recently relaxed foreign ownership restrictions on freight forwarding operations. Earlier foreign firms could only hold 40% but now they can go up to 100%. "We saw great value in Expolanka Holdings and especially the strength and the strategic fit in the freight and logistics business. This acquisition will certainly help Sagawa to further increase and strengthen our footprint in Asia – SG Holdings Representative Director Nobuaki Kondo" Even India had relaxed foreign ownership rules in freight forwarding several years back which enabled Expolanka’s entry and making it one of the biggest in the neighbouring giant. Furthermore, this is the biggest deal of its kind since the Government declared Katunayake and Mattala as free ports. Sagawa and Expo were first brought together in October 2012 by NWS Holdings, also owned by a Japanese entrepreneur Takashi Igarashi when it held the second Investment Forum in Tokyo. The first one was held in November 2011. In his address at the 2012 Investment Forum in Tokyo, Expolanka Group Managing Director and CEO Hanif Yusoof said Sri Lanka is going to be what is Singapore or Djebel Ali is today. Apparently the deal has been in the making since then with extensive due diligence being carried out confidentially by KPMG, and protracted negotiations on which way to structure it best. Global footprint With a cluster of companies focusing on multi-modal freight and transport solutions and a global footprint spanning four continents and 18 countries, SG Holdings currently owns 24 locally-incorporated subsidiaries in 10 countries outside Japan, including China, Vietnam, and Singapore. The group has identified the strengthening of their overseas operation in the area of global freight forwarding as one of its core pillars. It said the acquisition of Expo was with the view of consolidating its operations in Sri Lanka and strengthening its global presence. Last week Expo announced that its Expo Global Distribution Centre (a value-added bonded warehousing facility) executed its first shipment under the free-port regulations at the Katunayake Export Processing Zone. The exporter was Eskimo Fashion Knitwear and the buyer was Reima Oy of Finland. "With the Sri Lankan economy moving forward in the positive direction, there is a great potential for export growth as well as global expansion in the freight and logistics industry. The partnership with SG Holdings will get us closer to our vision of being a strong freight and logistics player in the region – Expolanka Holdings PLC Group CEO/Director Hanif Yusoof" Following the purchase, SG Holdings Representative Director Nobuaki Kondo said: “We saw great value in Expolanka Holdings and especially the strength and the strategic fit in the freight and logistics business. This acquisition will certainly help Sagawa to further increase and strengthen our footprint in Asia.” Expolanka Holdings PLC Group CEO/Director Hanif Yusoof said: “With the Sri Lankan economy moving forward in a positive direction, there is a great potential for export growth as well as global expansion in the freight and logistics industry. In view of this, the partnership with SG Holdings will get us closer to our vision of being a strong freight and logistics player in the region.” Second largest foreign inflow The deal on Friday was the second largest foreign inflow since Malaysian sovereign fund Khazanah Nasional Berhad bought an 8.4% stake or 71 million shares in premier blue chip JKH for Rs. 13.77 billion on 16 March 2012. The transaction also erased most of the year-to-date outflow (which was Rs. 6.8 billion as of Thursday) and reduced it to Rs. 524.6 million by Friday. The required quantities (586 million shares) for SG were made available by founder shareholders of Expo – Chairman Osman Kassim and Directors Sattar Kassim, Shafik Kassim and Farook Kassim who shed 5% each from their existing stakes of 14.5%. Group CEO Yusoof sold 7% stake from his 14.5% stake. All five collectively held a 73% stake. The buying broker for the deal was Nawara Securities (formerly New World Securities) whilst the selling broker was Asia Securities. The sellers on Friday have given an undertaking that they will not sell in the mandatory offer made by SG Holdings at Rs. 10.70 per share. However in the event other shareholders don’t accept the offer, the five Directors have agreed to sell down further to ensure 21% stake to SG rounding its overall stake to 51%. Net asset per share of Expo at group level is Rs. 5.19 as at 31 December 2013 and at company level it was Rs. 3.25. Whilst its 2013/14 Annual Report is still pending, Expo had 8,900 shareholders as at end FY13 of which 8,633 were local individuals. The bulk of these shareholders entered Expo during its IPO at Rs. 14 per share. Those owning between 1 and 1,000 shares amounted to 3,735 and between 1,000 and 10,000 amounted to 3,884. Among major institutional shareholders as at 31 December 2013 were JKH (4.26%), a JP Morgan fund, (1.9%), Watapota Investments (1.78%) and Ceybank Unit Trust (1.4%). Core business largest contributor Expo Group’s core business freight and logistics contributes more than 62% of the group’s revenue and a near 82% of group’s earnings. Over the years, the company has established itself regionally as one of the premium freight provider for the apparel industry and thus, has recorded five year revenue CAGR of 36% (FY09-FY13). Moreover, Expo freight which has been ranked number one in Sri Lanka, Bangladesh and Pakistan, whilst securing sixth place in India symbolises the strong footing in the region. The diversification and overseas expansion strategies augured well with the group recording revenue CAGR of 28% over the past five years (FY09-FY13) and a recurrent net profit CAGR of 36% over the same period. In the first nine months of FY14, EXPO’s group revenue grew by 19% to Rs. 42 billion and gross profit by 8% to Rs. 6.5 billion. Pre-tax profit was up by 39% to Rs. 1.8 billion which included Rs. 927 million from other income and gains (largely from the sale of stakes in non-core business). After tax profit was up 53% to Rs. 1.46 billion whilst net profit attributable to equity holders of the parent was Rs. 1.34 billion, up by 78% over the first nine months of last financial year.

Expo remains fundamentally strong and attractive: Softlogic

Expolanka Holdings PLC is a fundamentally strong and attractive counter, according to Softlogic Stockbrokers. In a commentary post 30% stake acquisition by SG Holdings on Friday, Softlogic said Expo group is valued at 10.4x FY14E earnings and 15.5 x FY15E net profits which is at a discount to conglomerate sector four quarter trailing P/E multiple of 15.5x. Softlogic Stockbrokers expect an EPS of Rs. 0.4 to come in as capital gains in FY14E, therefore on recurrent basis EXPO is trading at 18.0x FY14E earnings). Moreover with a forecast ROE targeted at 11%, Debt to Equity at 30% and revenue inclined of c.17% in FY15E is backed by the current restructuring strategies (investment target of Rs. 2 billion) to consolidate on its core business. Expo remains a fundamentally strong asset with light counter trading on 1.9x PBV (FY14E) and 1.7xPBV (FY15E) and remains attractive with the share having a breakup value (SOP value) of Rs. 17.9.

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