Monday, June 04, 2007

De-listing candidates - Abbott Labs

CMP - 486
Mcap - Rs.703 crore
Non-promoter holding: 34.86%
Value of Non-promoters holding - Rs.245 crore
Cash & Cash Equivalents as of the latest financial year - Rs.218 crore
Avg. Npat over the last five years - Rs.69 crore
Avg. Depcn over a similar period - Rs.5 crore
Avg. Cash Flow (a rough estimate) - Rs.74 crore per annum

Cost of a buyback -

@ 25% premium to the CMP - Rs.306 crore
@ 50% premium to the CMP - Rs.367 crore
@ 100% premium to the CMP - Rs.490 crore

Adjusting for the Cash & Cash Equivalents in the B/S:

@ 25% premium - Rs.88 crore
@ 50% premium - Rs.150 crore
@ 100% premium - Rs.272 crore

Based of last five years Cash Profits, how much time will it take for the company earn the amount spent on the buy-back (net of the C&CE):

@ 25% premium - (88 / 74) = 1.2 years
@ 50% premium - (150 / 74) = 2.0 years
@ 100% premium - (272 / 74) = 3.7 years

This ratio sounds more like our usual P/E ratio, and it actually terms of the price the company will pay to acquire the remaining stake and time it will take to earn it back. The reason I am strongly in favour of a buy-back is the [USE OF CASH & CASH EQUIVALENTS]. There are neither being used for business purposes, since their current business barely requires any major CAPEX and nor is the mountain of cash being deployed for other purposes such as a OTS special dividend, acquisition, etc.

If the co. can't find any good reason for deploy its cash, it might as well give it back to the shareholders, instead of sitting on it for years. It only does one thing, destroys shareholder wealth, and plenty of it!!

A rising pile of cash, invested essentially in conservative mutual fund schemes (debt & liquid) can at best earn returns of 8-10% or in an exceptional case, a little more. Compare the same with the company's Return on Equity of over 35%!!

The stock remains a strong de-listing candidate despite repeated (1 & 2) buy-back offers from the Company.

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