A second significant news update is the submission of American Depository Receipt (“ADR”) application to the US Securities Exchange Commission. ADRs represent ownership in the shares of a non-US company and trades in the US financial markets. It enables US investors to buy shares in foreign companies without undertaking cross-border transactions as ADRs carry prices in US dollars, pay dividends in US dollars and can be traded like the shares of US-based companies. Each ADR issued by the depository bank (The Bank of New York Mellon in this case) represents a fraction of a share, a single share or multiple shares of a foreign stock. For example, if the ratio is 1 ADR to 10 Sinotel shares in SGX, for each ADR a US investor purchases, 10 Sinotel shares will be delivered to the investor by buying from the open market of the Singapore Stock Exchange without a need to issue new shares.
We are very bullish on this event as ADRs provide increased liquidity to its shares, attract foreign investors and allow the company to carry out future fund raising activities when required. This greatly complements the Group’s participation in the prestigious Rodman & Renshaw Annual Global Investment Conference on 11 September 2009. This conference is expected to draw more than 2,500 investment professionals from around the world and Sinotel will have the opportunity to participate in the corporate presentation and daily networking sessions. We do not see any difficulty in the application of ADR to US SEC as, at this level, it is relatively straightforward and mainly requires that the company be listed in one or more stock exchanges in a foreign jurisdiction. We believe that with the approval of the ADR and the increased awareness derived from its roadshow in the US would give significant upside to Sinotel’s current share price.
Lastly, the Company has recently (4 September 2009) announced a placement of upto 28m new ordinary shares at a placement price of S$0.5052 per share. The placement will be placed to interested investors of which Providence SOGF Limited is one. The placement shares at full subscription represent 10% of Sinotel’s existing issued and paid up share capital of 280m ordinary shares. When completed, the placement will increase the issued and paid up capital to 308m. This has reduced our EPS forecast for FY09 from 10.72 SG cents to 9.27 SG cents.
Maintain BUY call at fair value estimate of S$0.93. Sinotel’s share price when we issued our report in August was only S$0.275, it has run up to S$0.585 since and we attribute the main reason to the announcement of the ADR. With the ADR just round the corner, we are pricing Sinotel closer to its US listed peers such as China Grentech Corp Limited and Telestone Technologies Corporation (Fig 2), which are currently trading at a PE of 13.53x and 6.66x respectively. With US investors likely to come in, the view that Sinotel is priced at a discount versus its peers is not unlikely. We thus move our PE to 10x FY09 forecasted earnings. This gives us a fair value of S$0.93, maintaining our BUY call. From the last traded price of $0.585, this represents an upside potential of 59%. As mentioned earlier, we view the ADR as a significant catalyst to the recent run up in share price, approval of which provides US investors a channel to purchase Sinotel shares that is still trading at a significant discount versus its peers.
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