Golden Energy and its IFA hit back at criticism of opinion and valuation methodologies
Benjamin Cher
W CAPITAL, the independent financial advisor (IFA) in the exit offer for Golden Energy and Resources (Gear), has hit back at criticisms of its opinion by the Securities Investors Association (Singapore), or Sias, and The Business Times’ senior correspondent Ben Paul.
In two separate statements, the IFA laid out explanations for its approach to valuing the shares of Golden Energy Mines (Gem), its valuation methodologies for the exit offer, and its opinion.
Gear shareholders are to vote on two resolutions – a distribution in specie of Gem shares, and the delisting of Gear.
In valuing the Gem shares, W Capital said that the trading liquidity for the shares in the past 12 months had been low, with its average daily trading volume of 127,500 shares representing 0.029 per cent of the free float.
The free float of Gem shares was lower than average; their average daily trading volume to free float was lower than the mean and medium of the top 15 companies in the Indonesia SE Energy index in the same period, said W Capital.
The IFA was thus of the view that the market prices of Gem shares may not necessarily serve as a meaningful reference point or indication of fair value. It cited as evidence a transaction on Aug 31, 2022 – when the shares were transacted at 3,737 rupiah per share – a 41.8 per cent discount to its closing price of 6,425 rupiah.
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The low free float and liquidity of the shares led the IFA to adopt the market approach to value Gem shares based on the enterprise value (EV) to earnings before interest, depreciation and amortisation (Ebitda) multiples of selected comparable companies. That translated to a fair-value range of 3,773 rupiah to 4,277 rupiah.
W Capital also offered explanations for its valuation methodologies for assessing the distribution and exit offer. Sias’ allegation – that the IFA had over-emphasised EV to Ebitda to set a lower bound – was therefore “grossly inaccurate”.
The IFA said it used a blended approach – the market approach based on mean EV/Trailing 12-Month (TTM) Ebitda multiple of selected comparable companies – to arrive at the lower bound, and mid-point sum-of-the-parts (SOTP) value for the higher bound, to obtain its estimated range of values.
Sias had questioned using the EV/TTM Ebitda methodology on the grounds that it was too generalised for the comparable companies.
Wayne Lee, the chairman and chief executive of W Capital, said: “We disagree with Sias’ view, as we are of the opinion that using the EV/TTM Ebitda methodology is appropriate, given that the market approach using ratios of publicly traded guideline companies, such as EV/TTM Ebitda, is one of the most commonly used and acceptable valuation methodologies.”
W Capital said relying on EV/TTM Ebitda multiples of selected comparable companies gives a more holistic picture of the value of the enterprise. It considers both equity and debt components of the capital structure and excludes non-cash expenses. The upper-bound SOTP valuation takes into account Gear’s portfolio of businesses and other factors that could affect the realisable values.
“Accordingly, we are of the opinion that a combination of the EV/TTM Ebitda and SOTP methodologies is the most appropriate approach to be adopted in arriving at the estimated range of values of the shares,” he said.
The IFA pointed out that it did not apply any conglomerate discount on the SOTP valuation and that the volume-weighted average price of Gear shares for the month prior to and including the last undisturbed trading day was at a higher value than the fair value implied by the market approach.
Accordingly, the range of values was narrowed and the final estimated range of values was derived using the interquartile range of estimated market value of S$0.64 per share and the mid-point SOTP value of S$1.072 per share. This resulted in the final estimated range of values at between S$0.748 and S$0.964 per share.
The reason for not including the entire list of Indonesian comparable companies for the Gem comparable-companies list was to prevent a skewing toward listed Indonesian thermal coal producers’ trading multiple. Instead, the IFA wanted a more comprehensive list of Singapore-listed, Australia-listed and indonesia-listed thermal and metallurgical coal mining companies to better reflect Gear’s business profile.
Addressing the comment for including a comparable company which was one-fifth the size of Gear to lower the EV/TTM Ebitda ratio, W Capital responded that it was not included to lower the ratio.
Lee said: “The mentioned comparable company refers to Geo Energy Resources, and we disagree with Sias’ comment. Geo Energy Resources was included because it is the only SGX-listed coal producer that is broadly comparable to Gear.”
W Capital also hit back at Sias’ allegation that it conflated the distribution and the exit offer. The IFA cited the letter from the Singapore Exchange, which required W Capital’s opinion to state whether the distribution and exit offer, when taken together as a single transaction, were fair and reasonable.
“The IFA Letter, as contained in the Circular, complies with SGX-ST’s directions, and there has therefore been no deliberate attempt to conflate the two corporate actions as alleged,” said Lee.
The IFA acknowledges that no single method of valuation will be met with universal acceptance and humbly respects differences in views and opinions.
“The board of W Capital Markets would like to put on record that we have always been mindful and use our best endeavours to ensure that we exercise due care, skill and professional judgment in all advisory engagements, and we firmly believe that our IFA opinion in respect of the proposed distribution and exit offer is supported by reasonable grounds and assumptions,” he added.
In a separate announcement on the Singapore Exchange, Gear sought to explain some inaccuracies and omissions in the Sias letter. The company said that the conflation of the two corporate actions is a mischaracterisation that the IFA has sought to address.
Gear also hit back at Sias over the simplification of the two resolutions. The resolutions are inter-conditional on each other; if either the distribution or delisting resolution fails, shareholders will not be able to receive the distribution.
It’s only if both resolutions are approved can shareholders receive the distribution. Gear emphasised that the exit offer is not a resolution for shareholders to vote on. The company called on shareholders to note that they can still choose to reject the exit offer after approving both resolutions. Shareholders who reject the exit offer should note that they will continue to be a shareholder of an unlisted entity.
Shares of Gear closed down S$0.01 or 1 per cent at S$0.945 on Wednesday.
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