Brokers' Take / Analyst Reports

Thakral Corporation, Sept 21 close: S$0.09

Sep 22, 2006
The Business Times

PHILLIP SECURITIES RESEARCH, Sept 20

RABOBANK International, the independent financial adviser, has advised shareholders to reject the offer from Venture Delta. Meanwhile, certain directors of Thakral (Company), namely Kartar Singh Thakral, Inderbethal Singh Thakral and Jasvinder Singh Thakral, have informed the company that they are currently in discussions to consider making competing offers to acquire all the issued ordinary shares and convertible notes issued by the company.

Profit warning: Thakral has also announced a profit warning with regards to its 2Q07 results. The supply chain management division was affected by a delay in the release of new product models, while the electronic manufacturing services division was affected by a delay in receipt of orders. The recent mandatory conditional cash offer by Venture Delta also resulted in additional administrative expenses and Thakral is expected to make provision for its receivables from a Hong Kong-based customer.

Operating margin for the EMS division is also likely to remain in the red, as was in 1Q07. Administrative expenses are expected to inch up marginally.

Surprise twist: The move from the Thakral family surprised us. We are constantly under the impression that the Thakral family is looking to move behind the scene in terms of managing the company. The Thakral family holds shares in Thakral through Thakral Investment. For a start, Thakral Investment did not subscribe to any of the rights and bonds that the company proposed to issue late last year.

While it eventually ended up with a 5.3 per cent stake in both the rights and bonds issued, it should be noted that the portion of shares was under pledge to Hong Leong Finance Ltd (HLFL) and it was HLFL which exercised its right as a secured lender to protect itself from dilution, subscribed to the rights and bonds entitlement, and charged it to Thakral Investment.

Furthermore, Mr Inderbethal Singh has stepped down earlier as CEO and group MD of Thakral - another sign to indicate that the Thakral family was more keen to take a passive role. Despite all that, we do not doubt the financial strength of the Thakral family to launch a counter-offer for Thakral.

Future upside should come from Hong Leong Asia (HLA): Thakral's core business should still remain challenging in the short term. We do not foresee a turnaround of the SCM division any time soon and the scale of the EMS division is still too small to contribute significantly. Any upside, in our view, is more likely to come from HLA in the form of joint venture or partnership, either to tap on Thakral's existing logistic network or to use Thakral as a vehicle for further expansion into China . - HOLD

Compiled by MATTHEW PHAN