Will you buy REACH???

SPACs look attractive by offering certain returns amid uncertainties

By Hong Leong Investment Bank Research / The Edge Financial Daily   | July 21, 2015 : 11:59 AM MYT   

Oil and gas sector
Maintain neutral: Given the uncertainty of the external factors, such as the US Federal Reserve’s rate hike, oil prices and China slowdown, and internal issues of 1Malaysia Development Bhd, political glitches, weak second-quarter corporate earnings post-goods and services tax, investments in special purpose acquisition companies (SPACs) look attractive by offering certain returns to investors.

We maintain our investment thesis that the gross trust value of SPACs should serve as the base value as investors can choose to vote against qualifying assets (QAs) and get back the cash value from trust accounts, plus net interests earned. 

Since our oil and gas (O&G) — SPAC report dated Dec 10, 2014, Cliq Energy Bhd ( Financial Dashboard) and Sona Petroleum Bhd’s share prices have surged 6.5% and 5%, respectively, outperforming the FBM KLCI’s 0.7% decline.

If referred to gross trust per share at initial public offering (IPO), the upsides for Sona and Cliq are only left with 3% and 7%, respectively. 

However, if we include the interests earned since IPO, the latest gross trust per share of Cliq and Sona offer 9% and 11%, respectively.

For investors with longer-term horizon, in the worst-case scenario, holding to maturities will provide an attractive return of 10% to 27%. This will translate into an approximately 13% risk-free return per annum (pa), which is significantly higher than the average fixed deposit rate of 3.2% pa.

Among the three undergraduate O&G SPACs, Reach Energy Bhd is trading at the highest discount of about 16% of its latest gross trust per share, mainly due to longer maturity date. If Reach Energy manages to secure QAs in the near future, we expect the share price to trade at least close to its gross trust per share at IPO, which should provide an immediate return of 19%.

SPACs are cash companies looking for oilfield assets and should potentially be able to negotiate for better pricing, especially in the declining oil price environment. However, transparent disclosures on the maturity date and cash available could disadvantage SPACs.

Risks to our call include the identification of qualifying assets taking at least three years, further market mis-pricing and plunge in oil prices. — Hong Leong Investment Bank Research, July 20


This article first appeared in The Edge Financial Daily, on July 21, 2015.