Singapore Equity: OLS Enterprise

Quick update to the portfolio, no major changes since the last update besides Ho Bee and Overseas Education both going ex-dividend:
Equity PortfolioA friend highlighted the following penny stock to me and I felt it was sufficiently interesting to add it to the portfolio under the Special Situation category:

Company Name: OLS Enterprise
Share Price: SGD 0.006
Market Capitalisation: SGD 11.8m

A brief history about this company:
OLS Enterprise was formerly known as Transcu, a Japanese biotechnology company listed on SGX via a RTO of the former Eng Wah Global (Eng Wah cinemas).

Transcu was listed with a lot of hype with their transdermal pharmaceutical business undergoing FDA approval (was at Stage II) in the US, a cosmetic business which was enjoying increasing popularity in Japan and their green tech business (nano-fuel emulsion systems) which was meant to help vehicle owners save fuel.

At one point in time, they were even testing a bio-mass system which could help to clean up the radioactive remains from the Fukushima tsunami!

Suffice to say, due to consistent high cash burn for R&D (pharmaceutical segment) and investments to test their green tech projects which led to repeated cash calls and the inability of the company to crystallise their exciting prospective businesses into revenue and profits, Transcu saw its share price decline continuously.

The main funding source for Transcu then came from a certain AMAC Capital Partners whose founder and  fund manager was Mr Chew Eng Han (yes, City Harvest Church):
http://news.asiaone.com/print/News/Latest%2BNews/Singapore/Story/A1Story20120628-356034.html

To cut the long story short, Transcu eventually had to dispose of all its businesses for a token sum of JPY 1 or SGD 1 for each segment.

The company name was changed to OLS Enterprise and it acquired a 51% stake in a Malaysian advertising company, Mojo Sdn Bhd which was a barely profitable business but at least, no cash burn unlike the previous businesses.

So what’s so interesting about OLS Enterprise?
Post the restructuring of the company’s debts (Scheme of arrangement where creditors converted 80% of amount owned into equity at SGD 0.008 cents per share), OLS Enterprise looks like a good RTO target for any company looking for backdoor listing into SGX:
http://infopub.sgx.com/FileOpen/OLS-Ann-Scheme%20Submission.Final.ashx?App=Announcement&FileID=337516

Here are the key figures:
Cash: SGD 6.1m
Total other tangible net assets: SGD 1.2m
Total liabilities: SGD 3.0m

Net tangible assets (NTA): SGD 4.3m
Market cap: SGD 11.8m
Implied value of shell company: SGD 7.5m

This looks very cheap compared to historical valuations of SGD 10m to SGD 20m and Jaya’s implied shell value of SGD 12.2m (do note that Jaya is facing possible claims for up to SGD 15.6m from the earlier disposal of its offshore vessel business otherwise the implied shell value might even be higher).

Assuming a shell value worth SGD 15m, then OLS Enterprise should be worth at least SGD 19.3m or SGD 0.01 per share, representing upside of at least 64% from the current share price of SGD 0.006.

Do note that one is buying the shares cheaper than the value of the share agreed with the creditors under the scheme of arrangement.
For example, Stamford Law Corporation was issued 107.8m shares in lieu of services provided in 2012 at an implied value of SGD 0.0159 per share and was issued another 67.1m shares at an implied value of SGD 0.008 per share.

I am betting that major shareholders such as Advance Opportunities Fund which now owns 45.6% of the shares will be able to find a suitable RTO target for OLS Enterprise.

Moreover, OLS Enterprise has been on SGX’s watch list since 04 Dec 2013 and they will need to find a prospective profitable RTO target and enter into a preliminary agreement with them by 04 Dec 2015.

The RTO is the only route to be removed from the SGX watch list before Dec 2015 (see conditions below).

What’s the downside?
In the worst case scenario where OLS Enterprise is not able to find a suitable RTO target and has to make an exit offer before being delisted from the SGX, shareholders can possibly receive the NTA per share of SGD 0.0022 per share.

While the risk reward ratio of 1:1 does not look favourable here (downside of 64% v.s. upside of 64%), it has to be weighted against the probability for each scenario and I think the probability of the worst case scenario is definitely less than 50%.

SGX Watch List
To be removed from the Watch-List of the SGX-ST, the Company would be required to meet the requirements of Listing Rule 1314 of the SGX-ST Listing Manual within twenty-four (24) months from 4 December 2013.

Rule 1314 states, inter alia, that an issuer may apply for its removal from the Watch-List of the SGX-ST if it satisfies any one of the following requirements:-

(a) records consolidated pre-tax profit for the most recently completed financial year (based on the latest full year consolidated audited accounts, excluding exceptional or non-recurrent income and extraordinary items) and has an average daily market capitalisation of S$40 million or more over the last 120 Market Days on which trading was not suspended or halted for a full Market Day;

or
(b) satisfies Listing Rule 210(3) and either one of the following requirements:-

(i) cumulative consolidated pre-tax profit of at least S$7.5 million for the last three (3) years, and a minimum pre-tax profi t of S$1 million for each of those three (3) years;

or
(ii) cumulative consolidated pre-tax profit of at least S$10 million for the last one (1) or two (2) years. Rule 210(3)(a) applies to the last one (1) year or last two (2) years, as the case may be.