Sri Trang prices Singapore share offer amid some confusion

Sri Trang Agro-Industry, a leading rubber producer in Thailand and globally, is set to become the first Bangkok-listed company to have a dual listing in Singapore after yesterday fixing the offer price at S$1.20 per share. This allowed the company to raise S$336 million ($262 million).

The share offer didn’t come without its difficulties, however. The pricing had to be postponed from Monday after the Thai market suffered its biggest plunge in 15 months and yesterday morning the company issued a statement on the Stock Exchange of Thailand’s website saying the deal had been cancelled, only to retract it some 50 minutes later, saying the deal was still on.

The two statements understandably caused a lot of confusion among investors and existing shareholders and, when the stock resumed trading in Bangkok after a two-day suspension, the share price plunged as much as 15.6%. It recovered some of those losses during the day and finished the session 10.2% lower at Bt33. By then, the company had priced the Singapore share offer, which eased the earlier confusion.

However, the price was fixed a full 25% below the earlier announced maximum price of S$1.60 and some 12% to 15% below the range where most investors had been willing to buy the shares last week, according to sources. Importantly, the Singapore price was also set at a 21% discount to the latest trading price in Bangkok last Friday, which obviously added to the pressure when the stock resumed trading one hour into the morning session yesterday.

That said, yesterday’s sell-off in the stock was also a delayed reaction to the 4.3% decline in the benchmark SET index on Monday when Sri Trang was suspended. The Thai market lost a combined 7.3% in the four days from Thursday to Tuesday as investors grew increasingly nervous about the ongoing protests by nationalist demonstrators, initially triggered by a border dispute with Cambodia.

Indeed, the fact that Sri Trang closed well above the Singapore offer price yesterday should probably be taken as a sign that investors recognise the underlying fundamental value of the company – even if they require a substantial discount to take on the exposure right now. The S$1.20 offering price in Singapore is equal to Bt29 per share, which means Sri Trang’s Bangkok-listed stock closed at a 13.8% premium to the offer price yesterday. The rubber producer is due to start trading in Singapore on Monday next week after the debut was pushed back by one day due to the delayed pricing.

The announcement yesterday morning that the deal had been cancelled was a mistake by the company, although the fact that someone thought that this was a possible outcome suggests that there had been discussions about a postponement. In the notice, the company referred to the “unfavourable conditions in the capital markets and volatility since late of last week” which it said “affects the investment decision of the international investors (as well as) price and demand of the shares of the company to be issued and offered to investors”.

However, sources close to the Singapore offering said that investors were still interested in the stock at the lower price and, after giving them an extra couple of days to re-evaluate the situation, most of the earlier orders were reconfirmed. Some new orders also materialised on Tuesday as the price was lowered, perhaps as investors recognised a greater potential for arbitrage opportunities between the shares listed in Singapore and Bangkok, which are fully fungible. According to the sources, most investors had previously been willing to buy the Singapore shares at a price equivalent to about Bt33 to Bt34.

While clearly not a blow-out – less than 50 investors participated in the offering -- there was sufficient demand for all orders to be scaled back somewhat. The buyers comprised global funds, including some tier-1 accounts and sovereign wealth funds; Malaysian investors and some London accounts with a good understanding of the plantation industry; short-term money; and some existing shareholders currently holding the Bangkok-listed shares.

Sri Trang offered 280 million new shares through the Singapore share offering, which equals 21.9% of its enlarged share capital. Five percent of the deal was earmarked for Singapore retail investors, while the remaining 95% was placed with institutional investors.

J.P. Morgan acted as global coordinator for the offering as well as joint bookrunner together with CIMB and Standard Chartered. The three banks did some pre-marketing in early January and the company kicked off a roadshow to Asia and London on January 13. The maximum price of S$1.60 was announced a week later. The Bangkok share price fell 10.4% during the roadshow from a record high of Bt41 just before.

Sri Trang, which has been listed in Bangkok since 1991, had a massive year last year amid a 50% rally in rubber prices. The share price surged 696% which, according to Bloomberg, made it the best performing stock among the 479 stocks in the SET index. The company is also a direct play on the rapidly-growing demand for cars primarily in India, China, Asean and South America, as the tyre industry accounts for more than 70% of the global demand for natural rubber. Following the sharp gains, Sri Trang now has a market cap of about $1.1 billion and, based on yesterday’s closing price, it trades at a 2011 price-to-earnings multiple of 9.4 times. The Singapore offer price was fixed at 8.0 times next year’s earnings.

Despite the impressive gains in its Bangkok-listed shares, Sri Trang wasn’t able to complete an attempt to list in Singapore last summer. The company called off the attempt in late August, citing global market uncertainties. At that time, it was expected to be able to fetch about Bt19 per share, which means that even with the significant discount this time around, the delay worked out in the company’s favour.

Sri Trang is present across the value chain, from rubber plantations to processing and sales and distribution. Through various associates, it is also involved in the downstream production of examination gloves and high-pressure hydraulic hoses. In 2009, it had a 15.2% share of rubber production in Thailand, which is the largest producer of natural rubber in the world with about one-third of the total production. On a global scale, Sri Trang’s sales volumes in 2009 accounted for about 8.2% of global demand. Its key customers include Goodyear, as well as tyre manufacturers in emerging markets like China and India.

In addition to its rubber plantations in Thailand, the company also has raw material procurement centres and 21 processing plants in Thailand and Indonesia, sales and distribution operations that are managed out of Singapore, as well as a global purchasing hub for key users of natural rubber and distribution and warehousing facilities in China. And the company continues to increase its global footprint with plans to build nine new plants for technically specified rubber (TSR), which is used to make tyres, in Thailand and Indonesia by 2012. This will increase its total annual production capacity to 1.5 million tonnes from 860,259 tonnes at present. It is also looking to acquire approximately 8,000 hectares of land in Thailand and Indonesia and other suitable areas over the next four years to grow more rubber trees.

According to the Singapore listing prospectus, the company generated Bt46 billion ($1.5 billion) of revenues in 2009, which it converted into a pre-tax profit of Bt2.6 billion. In the first nine months of 2010 it added significantly to this with revenues of Bt61.3 billion and a pre-tax profit of approximately Bt3.5 billion.