Wednesday, 18 October 2017

SCOMNET - At an Inflection Point?

The carrot on the left can probably paint a thousand words about the recently announced proposed acquisition of the remaining 80% stake in Supercomal Medical Products Sdn Bhd (SMP).

BACKGROUND
SCOMNET (Supercomnet Technologies Bhd) was the first company to be listed on MESDAQ (now known as Ace Market) on 30 April 1999, carrying Bursa stock code "0001". It commenced its business in April 1991 and started with manufacturing of PVC compound, cables and wires for electronic devices and cable assemblies and data control switches. After it was listed, it diversified into manufacturing of advanced high technology cables for the automotive and medical instrument sectors. In 2015, its 20% associate company, SMP, introduced a new product, enhanced disposable pressure transducer (DPT) which has been driving the growth of the associate company.

AT AN INFLECTION POINT?
For the past 5 years, the share price had been fluctuating between 10sen and 20sen, corresponding to the rangebound financial performance of the company.

The share price made a breakout earlier this week after the announcement of the proposed acquisition.

WHY THE ACQUISITION COULD BE A GAME CHANGER?
1. Niche products
The target company sells medical cables and DPT. Being products of mission-critical nature where failure can literally means the difference between life and death, manufactruing of the medical products demand the highest quality. Therefore, the risk and cost of switching are high. Besides, the medical cable industry has relatively high barriers to entry with long production cycle as most of the products will require a gestation period of more than 15 months from product development, customer qualification to production on-stream. SMP's medical cable is approved by the Food and Drug Administration, US, as well as qualified by internationally renowned manufacturers and established players in the industry. (reference: company announcement)

2. Business has been growing
The target company was set up in 2004. It started commercial operation in 2005 and turned profitable in 2008. Business took off in 2009. Both the top and bottom lines surged in 2015 after the launch of a new product, DPT. The growths experinced by SMP in 2015, 2016 and 1H17 were mainly driven by the enhanced version of DPT.


3. High Margin
Since the operation has gained economies of scale in 2009, SMP has been recording extraordinary net margin of between 28% and 41%. This suggests that the products are niche and the company, as a supplier, seems to have strong bargaining power. This typically allow the company to pass on cost escalation to customers without much difficulty.

Its gross margins for 2014, 2015, 2016 and 1H17 were quite impressive at 44.8%, 46.2%, 45.7%, 47.4% respectively.

4. Zero Borrowings
Zero borrowings before and after the proposed acquisition.

5. Postive outlook
The existing business remains challenging with little prospect for growth but the outlook for the target company looks positive.
Source: Annual Report 2016

6. High ROE
SMP offers very high ROE. 37.9% for 2015 and 30.7% for 2016. ROE is one of the important factors Warren Buffett looks at when investing in a business. SMP is making a RM26m dividend payment prior to completion of the acquisition. This will increase the ROE as the denominator has been reduced substantially. The shareholders' fund as of end-2016 was at RM56m.

7. Major shareholders not cashing out
Of the RM80mn purchase consideration, only RM4m is paid in cash while the remaining purchase consideration is settled in shares. The major shareholders and PAC will collectively hold 74.7% of SCOMNET. This means the major shareholders are still very much committed to the business of SCOMNET and SMP.

VALUATION
On a pro-forma basis, at the previous closing price of 25.5sen, it is trading at a price/earnings multiple of 9.8x. To be honest, I am unsure what should the fair target price/earnings multiple be post-acquisition.

Medical related counters such as IHH, TOPGLOV, HARTA, KOSSAN, KAREX are trading at high price/earnings multiple ratios. They are in a different league, being giants in their respective fields.

Maybe quick comparisons can be made with COMFORT and LKL. COMFORT is trading at 14.0x based on annualised earnings while LKL is trading at 22x FY17 earnings. CAREPLS is not included as the price/earnings ratio appears to be an outlier.

The proposed acquisition of SMP is expected to complete by year end.

Tuesday, 5 September 2017

Contractor Awarded a Construction Contract Despite Disastrous Safety Track Record

TRC was awarded a sizeable LRT 3 package despite a disastrous record in Kelana Jaya LRT line extension project.

Recall, there were 3 site accidents involving the public in the SINGLE project carried out by TRC.

A motorist was killed and another seriously injured when construction equipment hoisted by a crane fell and crushed two cars in March 2013 (source).

A crane carrying out piling work fell and crushed a car in August 2013 (source).

A male driver and his female passenger were nearly killed when a steel beam fell onto a car in June 2014 (source).

Despite the terrible safety record, the same project owner, Prasarana, still awarded a construction contract to TRC. Is Prasarana forgetful or safety track record does not matter at all?

Wednesday, 16 August 2017

Eversendai - Over-promise under-deliver?

1. Margin



PATAMI margin of 11% seems to be a thing in the past after he made that statement in April 2013. PATAMI margin has been below 4% since 2013.

2. RM2b Revenue



The actual revenue recorded in 2016 was RM1,582.4m, below his target of RM2b.

3 New contract to surpass RM2b in 2016
(source)

In September 2016, Tan Sri Ak Nathan was confidence that the new contracts wins in 2016 would surpass RM2b before end of 2016. 4 months later, the actual total amount of new contracts secured in 2016 was RM1793.6m.

4. Serious Delay in the Completion of Liftboats

In May 2014, Eversendai secured a contract to construct two liftboats. The liftboats were supposed to be ready by February and May 2016. However, to date, none of them has been completed. It probably takes about double the original contract period to complete the works. Whether the delay is caused by the client (related party transaction, a vehicle controlled by Tan Sri AK Nanthan) or Eversendai? And whether Eversendai would be compensated if the delay is caused by its client? Substantial overrun in overhead costs is likely given the prolonged delay.

5. Over-promise, under-deliver

Another blemish in the company was the bad investment in Technics Oil & Gas in which the company incurred more than RM100m of losses.

Conclusion
I would avoid the stock as it is not a stock that I could buy and sleep soundly at night given its track records and erratic earnings. There are more than 800 counters in Bursa Malaysia and I am sure there are some stocks that offer more attractive risk reward ratios. Furthermore, the stock is not cheap at current valuation, having high net gearing of 1 time (before private placement), and considering the payment risk associated with the liftboat project. Besides, decent dividend is unlikely in the foreseeable future due to its high gearing ratio.

While I have reservation on the stock, credit must be given to Tan Sri AK Nathan for his incredible track records in successfully completing various world class iconic projects.

Tuesday, 4 July 2017

LYSAGHT - Almost too good to be true?

Lysaght Galvanized Steel Berhad is a leading manufacturer of galvanised steel poles in Malaysia. Its main products are poles, masts, decorative poles and tubular steel structures.



An interesting smallcap stock for the following reasons:

1. Zero debt. Zero credit risk. A conservative company. It has been debt free for more than 10 years.

2. Strong net cash position. Its net cash stood at RM59.6m as of end-March 2017. That's 40.9% of its current market cap (RM145.5m)!

3. Single digit PE ratio at 9.2x (based of the net profit of RM15.751m for the most recent 4 quarters).  Ex-cash, it is trading at a PE ratio of only 5.5x!

4. Superb margin. The company has been enjoying margin expansion. Its FY16 gross margin and net margin were as high as 40% and 23% respectively. The margins tell a lot about its bargaining power, the competition among its peers and its specialty. More likely a price maker than a price taker. 


5. Products accepted worldwide. Its products are manufactured in compliance with recognised International Standards and are accepted worldwide as they are compliant with British (BS), European (EN) and American (AASHTO) standards (source: FY16 annual report). Export to advanced countries like Singapore, Hong Kong, Autralasia. About 47% of FY16 was generated locally and another 46% was derived from Singapore.

6. Low capex and cash generative business. It is in a low capex business. For the past 10 years, the capex was generally below RM2m a year except for FY12 and FY13 in which it spent a total of RM17.9m on land, buildings and machinery (including a RM11m factory on a plot of freehold land in Hicom-Glenmarie ). The capex was as low as RM67,560 in 2009. Despite paying out about 48% of cumulative core net profit between 2007 and 2016, its cash has ballooned from RM8.1m end-2006 to RM61.6m end-2016. It disposed off an investment property at RM6.4m in 2015. 


7. Product range and geographical expansions. Whilst the existing operations are fairly stable and sustainable for the moment, the group is currently looking into diversifying into a new product range to cater for tubular steel structures and export market. These products which carry higher loading are manufactured with heavier steel and more sophisticated know-how. Hence, better margin is expected from these products. In its recent AGM, the Board said the company has allocated RM10m capex for machinery upgrade.

8. Positive industry outlook. The group's business is largely reliant on supply to projects from the infrastructure and construction sector. Mega projects being implemented include MRT 2, LRT 3, East Coast Rail Line, Pan Borneo Highway, West Coast Expressway, Gemas-JB Double Track and KL-Singapore High Speed Rail. 

To get a feel for the amount of highway jobs being implemented currently, the longest existing highway in Malaysia, North-South Expressway is 772km long, while in near to medium term, various highways with a combined length of more than 2,500km are being implemented simultaneously. Besides these highways, LYSAGHT is likely to benefit from above mentioned rail-related projects as well. (Pan Borneo Highway >2,000km, West Coast Expressway 316km, East Klang Valley Expressway, and several urban highways which include DASH, SUKE, Duke 3 and Duke 2A)

The negative aspects of this stock:

Low trading liquidity. The Chew family and related parties are holding about 74% of the shares. Furthermore, it has a small share base with only 41.58m of shares issued. It is in the bottom 1% or 2% among Bursa Malaysia listed companies, in terms of number of shares issued. With a share capital of RM41.58m and retained earnings at RM85.3mn, a share bonus issue and/ or share split is overdue.

FY16 dividend yield unattractive. Its 7sen/share dividend for FY16 (2.0% dividend yield) has nothing to shout about. The Board said in AGM that the company is conserving cash for capex to widen its product range. However, for the past 10 years, it has cumulatively paid out about half of its cumulative core net profit. Between 2007 and 2016, it has paid out RM55.3m of dividends out of the cumulative net profit of RM114.5mn. Average payout was at 48.3%. It declared a special dividend of 50sen/share in 2014.

Board tussle. With the ex-MD, Mr Liew quit the MD role and ceased to be a board member, the tussle could a thing of the past. The MD position was taken over by Mr Chua, an old-timer in Lysaght. He was appointed as the acting CEO on 1 June 2016 and appointed as the CEO on 1 Jan 2017. Assuming Mr Chua took 3 to 4 months to settle down, the company under his stewardship, reported strong YoY growths in top line and bottom line for 4Q16 and 1Q17. If we annualise the net profit for the most recent 6 months, the stock is trading at a PE ratio of only 7.9x, and a mere 4.7x if ex-cash!!

Mr Chua is a loyal staff of Lysaght. He has been with the company for 45 years and works his way up to the top.


Conclusion:

Zero debt, strong net cash, low PE ratio, superb margin, worldwide recognised products, low capex, cash generative business, having growth potential and positive industry outlook.

If we annualise the EPS (based on the most recent 2 quarters) and set a target PE multiple of 10 times, the stock is worth RM4.44. This has yet to factor in its cash per share of RM1.43 per share and its growth potential. If we price in a premium of 2x PE multiple for its strong net cash position and growth potential, then the fair value of stock is RM5.33.

A savvy investor, Mr Teo Kwee Hock surfaced on list of 30 largest shareholders, as the 6th largest shareholder as of 31 March 2017.

Wednesday, 3 May 2017

The Other Side of the Story on Termination of Bandar Malaysia Agreement


Source: https://www.wsj.com/articles/deal-to-prop-up-malaysias-1mdb-falls-apart-1493828337

Was the termination of agreement due to failure of the consortium in meeting the payment obligation or the Chinese government refused to authorize the investment?

Also, will Malaysian government take action against WSJ for the accusations made by WSJ?

Tuesday, 2 May 2017

A company having older directors' average age than Public Bank's

Public Bank directors' ages average 71.5 years. There is a Bursa listed company with directors' ages older than this. Advanced Packaging Technology (M) Bhd at an average of 74, with the oldest director 87 years old.

Sunday, 19 February 2017

Tan Teng Boo now sees KLCI and S&P 500 hitting 2,400 and 3,000 in medium term

This is on hindsight.

Tan Teng Boo had been bearish since April/May 2011.
"Since April/May 2011, I have been bearish on equities globally, including that of Bursa Malaysia. My bearish views have not changed one iota" (source).
He was still bearish on the equity markets last week, foreseeing KLCI possibly hitting  800-900 points and S&P 500 touching 1,350 in medium term. Just a week later, he made an unprecedented and very drastic revisions in index forecasts, revising his KLCI mid term possible target to 2,400, and S&P 500 to 3,000 from 1,350.


(See previous posting: another extreme forecast that went wrong.)

He was persistent on his bearish view and missed the the run-ups in stock markets.

Icap's average return since inception is still decent, thanks to exceptionally strong performance of the fund in the initial years.


Personally, I prefer a semi-log graph to linear graph in fund performance chart like this. It gives better depiction of a fund performance as the fund size grows. (In linear chart, a 30sen increase in NAV from a reference price of RM3 looks more impressive than a 10sen increase in NAV from a reference price of RM1, even though both having the same 10% growth.)

His global fund is not that lucky.

After about 9.5 years, the Global Fund generated a cumulative return of 5.9%, or at an annual compound rate of 0.6%. The fund's performance dipped below its benchmark, giving up the outperformance the fund had been enjoying since inception.

The International Value fund has a moderate cumulative return since inception, at a CAGR of 4.21%. It underperformed both benchmarks.

He had been reminding us the investing rule of never lose money. For a 50% loss in an investment, you need a 100% to make up the earlier loss.

Thursday, 20 October 2016

KHEESAN and REACH to have general meetings in early morning hours and late afternoon hours

Headquartered at Seri Kembangan, Kheesan had been conducting its AGMs in Klang Valley. 


FY
Venue
Time
2000
Bukit Jalil Gold & Country Resort
1500
2001
Bukit Jalil Gold & Country Resort
1500
2002
Bukit Jalil Gold & Country Resort
1500
2003
Bukit Jalil Gold & Country Resort
1500
2004
Bukit Jalil Gold & Country Resort
1500
2005
Mines Resort City, Seri Kembangan
1500
2006
Mines Resort City, Seri Kembangan
1500
2007
Mines Resort City, Seri Kembangan
1500
2008
Mines Resort City, Seri Kembangan
1500
2009
Mines Resort City, Seri Kembangan
1100
2010
Mines Resort City, Seri Kembangan
1111
2011
Mines Resort City, Seri Kembangan
1111
2012
Mines Resort City, Seri Kembangan
1111
2013
Mines Resort City, Seri Kembangan
1111
2014
Mines Resort City, Seri Kembangan
1111
2015
Mines Resort City, Seri Kembangan
1111
2016
Taman Perindustrian Desa Cemerlang, Ulu Tiram, Johor
0800
However, for FY16, the group will convene its 22nd AGM at Ulu Tiram, Johor. Looking at the list of properties of the group shown in FY15 annual report, it did not show Kheesan owning any property in Ulu Tiram. The AGM will be held at London Biscuit's office in Ulu Tiram. London Biscuit is the largest shareholder of Kheesan.

Besides the unexpected change in meeting venue, the meeting is scheduled to start at 8a.m..

What could be the real reason of having the AGM so far away from its business address, and at such early hour if it is not trying to discourage minority shareholders from attending the AGM? Shareholders should seek clarifications from the management.

Separately, Reach Energy will be having its EGM on 4 Nov 2016 at 3.30pm. I think the reason of having the general meeting in late afternoon hours is to provide fair trading of its shares as the asset acquisition voting results are material to the movement of the share price, its warrants price in particular. It may take 1 to 2 hours for presentation on the proposed acquisition and Q&A session before the voting starts. By the time the results are released, stock market would probably have closed for the day. This prevents potential unfair advantage to those who know the results before announcement by the Chairman in the EGM or to those members attending the meeting versus those shareholders who do not.

Monday, 10 October 2016

Bina Puri – Keep asking for money but where has the value gone?


Bina Puri had its IPO in November 1994. Based on IPO price of RM2.80/share, it carried a market value of RM112m. It has been about 22 years since its listing. However, its current market cap is below the value of the group during IPO time (based on IPO offer price).


Let’s not forget after IPO, Bina Puri has raised a total of RM150.4m from rights issue (RM40m), private placement (RM93.3m) and ESOS (RM17.1m). This has not taken into consideration that the group had capitalised RM20m of debt in 2009.



And last Friday, Bina Puri proposed a private placement of not more than 10% of enlarged share capital of the group. Again?


The company has been profitable since 2000. But why is it still stucked as a micro cap company? Furthermore, the total proceeds raised over the years after IPO alone (RM150.4m, excluding RM20m debt capitalisation) were already greater than its current market cap, even after deducting total dividend paid out since 2003!(historical records of dividend payout before 1999 were not available at Bursa website)

Despite it has been profitable since 2000, it had to carry out capital reduction (from par value per share of RM1 to RM0.50) in 2014 in order to new shares as the share price then was way below RM1. As highlighted above, the IPO offer price was RM2.80/share. What has gone wrong?

Is this company too undervalued that investors failed to appreciate the assets owned by the group and its earnings potential or is it something not right within the company that caused value destruction to the minority shareholders? Something for existing shareholders of Bina Puri and potential investors to look further into.

UPDATE: The group's cash and cash equivalents as of end June 2016 was RM-11.4m (negative cash!)

You may be interested to find out previous writing about Bina Puri: Is Bina Puri Cheap?