Agility has only one choice: settle the fraud case with the US government and move on. Take a one-time hit and standup and walk the line. As per Al-Qabas Kuwaiti newspaper (April 5th), the US government is asking for a $750 million settlement, while Agility is offering a $300-$500 million settlement. Latest reports conveyed through Al-Jarida Kuwaiti newspaper (April 8th) suggest that a preliminary agreement has been reached and $600 million would be paid over three years. We still have nothing official yet.
Not reaching a settlement will result in an infected company being dragged from court to court for years fighting a neverending and costly legal battle. More inflicting, this would result in more uncertainty for shareholders and a dead-stock. However, a settelement creates a clear visibility. There is no doubt that Agility is undervalued at the current 600 fils level. The company is trading at an EV/EBITDA 2010 of 4.5x relative to peers trading at an average EV/EBITDA 2010 of 7.5x. This is partially a warranted discount for the reasons above and the following questions: How much will the settlement be? How big is the reputational damage and how fast can it recover? Announced staff cuts of 500-600 are cost improvements or reflect expectations of a plummeting Defense and General Services business? Will Agility deliver margin expansion and growth after the settlement? Most crucially, will it be restricted from bidding for new contacts or not?
There is unanimous agreement that there is no visibility as it pertains to Agility. In fact, an analyst at NBK Capital wrote a note stating the following: “We maintain our status on Agility as “Under Review” as there are several variables in play for which we have no means of predicting an outcome.” What do you think of this recommendation? Not good. The analyst should’ve stated the different scenarios and projected the expected effect of each.
I believe uncertainty creates opportunities. It may be unrelated, but the substantial write-downs taken by banks all over the world last year are history and financial stocks led the way towards recovery. Further, if Agility settles and is allowed to bid on new contracts, I beleive it would be a screaming buy. The problem is you wouldn’t be able to buy because it would be trading limit-up everyday. I guess it also depends how much they settle for. An analyst from Nomura has a price target of 740 fils if Agility settles for $750 million. If it settles for $300 million, the price target would be 860 fils. If the $600 million figure turns-out to be the right one, then I calculated the target price to be 780 fils. Maybe NBK could learn a thing or two from Nomura.
I would be a buyer of Agility at the current levels.
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