Saturday, 17 March 2018

Ekovest - From a perspective of a minority shareholder

Ekovest will convene an EGM on 29 March to vote on the takeover of Iskandar Waterfront City Berhad (IWC). My thoughts on the takeover and EGM:

1. Does the takeover of IWC bring value to Ekovest minority shareholders?
It was obvious that the market reacted negatively to the news. After the announcement, the share price of Ekovest gaped down from its previous closing of RM1.16 to open at RM1.01 and close at RM0.95. If the takeover does not go through, it is not unreasonable to expect the share price of Ekovest to recover, at least partially.

2. Taking flexibility away from Ekovest and IWC shareholders.
I like the idea of Ekovest listing its toll concession business. Separating businesses under different listed entities enhances value. By doing so, it gives each minority shareholder the flexibility to decide which businesses to invest/ the weighting of investment in each business according to own preference. By marging Ekovest and IWC, shareholders who like only the concession business have to be exposed to the risks of IWC property business. The flexibility deserves a premium in target PE multiple. By merging Ekovest with IWC, it deprives the shareholders of the flexibility in investing either in Ekovest's existing businesses or IWC's property business. This leads to my point no.3.

3. Why pay RM1.50 when you can buy below RM1.50?
IWC shareholders would most likely opt for the RM1.50/share cash option instead of going for the 1-for-1 share swap as Ekovest share price is currently way below RM1.50. If the takeover goes through, Ekovest shareholders are indirectly paying RM1.50 for each IWC share. If you like IWC, why pay RM1.50/share when you can get it directly below RM1.50 if IWC remains status quo? And you get to decide the weighting/ level of exposure you would like to have in IWC.

4. Bedrock orders from related companies.
The circular highlighted one of the benefits of the takeover is Ekovest may expand its concept of river beautification and rehabilitation along the Gombak River to Johor Bahru through the land bank of the IWC along the Tebrau River, to be promoted as an iconic development in the State of Johor by the enlarged Ekovest Group. 

I do not think it is a big hindrance for Ekovest to get the river beautification and rehabilitation works even if Ekovest and IWC remain status quo. We have seen how related companies such as SUNCON, MGB and FFHB secure bedrock orders from its related companies. To me, this is not a very strong point for Ekovest minority shareholders to vote in favour of the takeover.

5. Late payment by Greenland.
Greenland delayed its second payment (RM46.3m) and third payment (RM46.3m) from 15 October 2017 and 15 January 2018 to 15 March 2018 and 15 April 2018 respectively. 

Why the payments were delayed? Can Greenland settle the huge outstanding amount of RM2.1b promptly?

IWC has yet to announce the receipt of payment for second instalment which has become due on 15 March 2018. 

CONCLUSION: In my opinion, the takeover does not appear to be attractive to Ekovest minority shareholders.

Thursday, 8 February 2018

It is the inflation of money supply that drives the stock markets

Read this interesting piece about 7 years ago. It is unconventional and contradicts the texbook. But I find it very relevant. It was the market liquidity that drove the market for the past 10 years and vice versa could be true when the liquidity is being withdrawn.

US is reversing QE and Central Banks worldwide are raising interest rates. These may lead to derating of stock PE multiples, leading stock prices to decline even though the earnings are holding up well. It may not be a right time to catch the falling knife and increase exposure in the stock market now. Key numbers to monitor are the money supply and interest rate.

Read the article -> How stock market and economy really work by Kel Kelly

or listen to the audio version at Youtube ->

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Saturday, 6 January 2018

Sectors That Benefit From Strengthening of RM

Sectors that benefit from strengthening of RM are those that generate RM revenue in domestic market while having input costs denominated in foreign currencies, or enjoying stronger purchasing power in buying commodities.

F&B players - Import raw materials, or enjoy better purchasing power in procurement of commodities, and generate revenue mainly in RM. Eg. Nestle, Amway, Dlady, Bjfood

Auto Players – Auto parts imported from overseas become cheaper and sell them locally in RM.

Airline – Derive income mainly from domestic market but having input costs and liabilities denominated in foreign currency, mainly G3 (USD, Yen, Euro Dollar). Eg. Airasia.

Media players – Newsprint cost is denominated in USD. For Astro, imported content is largely denominated in USD.

Steelmakers – Input costs such as iron ore, scrap metal and coal quoted mainly in USD. Mainly domestic sales. Eg. Annjoo.

Poultry players – Having raw materials corn and soybean denominated in USD.

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Wednesday, 3 January 2018

Window Dressing Stunt

Window dressing in Bursa Malaysia on the last trading day of the year is not uncommon, including year 2017.

The amount required to push up the index/ stocks is not small. So it likely involves big funds.

Which funds were so "generous" to push up the market abruptly and benefitedthe sellers.

Lembaga Tabung Haji was one of them.

On the last trading day of 2017, Ranhill share price jumped abruptly from RM0.735 at 4:44:57 to close at RM0.80

Note that there were only 1.2736m shares transacted for that entire day, of which 0.5996m shares were done at RM0.80. This left 0.674m shares traded between RM0.705 and RM0.735.

Lembaga Tabung Haji transacted 0.914m shares that day. This implied that the fund must have, at least partially, bought shares at RM0.80.

Is it acceptable to inflate the share price artificially like this?

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Monday, 1 January 2018

SBCCORP - The Return of Jesselton Quay

Wrote about 3 stocks recently.

Reference price
Year-end closing price (RM)
Gain (%)

They stock picks were quite straight forward. Consistent historical trends, attractive valuation, sound balance sheet, high ROE, good margin etc.

Picking a deeply undervalued stock with a turnaround story is much tougher as we can't depend on historical trend to project future earnings. But the beauty of it is a stock with a trunaround story could be far more rewarding if it turns out to be a multi-bagger in a relatively short period of time as seen in ANNJOO, PETRON, HENGYUAN and HEVEA. 

A similarity observed in these stocks was the share price was depressed when the company performed badly financially but it rebounded following earnings recovery and the share price subsequently sky-rocketted, driven by strong earnings growth.

SBCCORP is potentially a stock with a turnaround story. It is a boutique developer with exposure in Klang Valley and Kota Kinabalu. While it is a KL-based company, its developments, The Peak Collection has made a name in Sabah. 

The share price has declined substantially from its peak, reflecting its weak results in recent quarters. In the latest quarter, it recorded a quarterly revenue of only RM2m, with a YTD loss of RM1.3m. This caused a further selldown in the stock.

Silver lining is around the corner

The weak results for the period ended September 17 was reflective of timing between the completion of earlier projects and the gradual work done of new projects. On its prospects,

In its 2017 annual report, the group expects to turn profitable from loss-making in FY17

If you did follow the stock, you probably would recall that the adjusted share price of the stock was driven to a peak of RM1.61 in 2014 when there was optimism surrounding the Jesselton Quay project. However, a longer-than-expected delay in securing approvals resulted in the stock being forgotten and neglected. Subsequently, Jesselton Quay was launched end-2016 and it enjoyed a very encouraging response from the buyers. The initial phase of 299 units soft-launched were fully booked within 2 hours!

The foundations for block 1 & 2 are being constructed (source) with building works expected to take place in 1Q18. Despite the significant advancement in the progress of the project, the share price is currently only about 1/3 of its peak.

The current market cap of the stock is merely RM130m (RM0.555 per share). What do investors get in return?

1. Traded at 1/3 of its book value, before revaluation of properties
It is currently traded at 34.3% of its book value. This has yet to include revaluation surplus from the long list of properties held under the group.

2. Jesselton Quay in Kota Kinabalu is the crown jewel of the group
It is a RM1.8b waterfront development in KK. Assuming a net margin of between 20% to 30%, this project could generate a potential net profit of RM360m to RM540m throughout the development period of 8 years, or an average net profit of RM45m to RM67.5m a year.

What I am positive on the development?
i. Very strategic location with superb seaview.
ii. Complemented by the proposed Sabah International Convention Centre, Kota Kinabalu International Cruise Terminal and Kota Kinabalu Convention City.
iii. Influx of Chinese tourists. A perfect getaway destination for those living in Hong Kong, Shenzen and Guangzhou due to its close proximity. Increasing direct flights from China. Growth potential in tourism as only about 130m or 10% of Chinese population have passports currently.
iv. Sabah being a favourite tourist spot. Kota Kinabalu International Airport is the second busiest airport in Malaysia
v. Shortages of hotels in Kota Kinabalu (source)
vi. Why was SBCCORP picked to build Jesselton Quay? (A privilege to build Jesselton Quay)

3. Having 25 acres of strategically located land in KL for future developments
The East Kiara land is located within a walking distance to Batu Metropolitan Park and Taman Wahyu KTM Komuter Station. Mahsing purchased 12 acres of leasehold land at Taman Wahyu for RM73m, equivalent to RM135psf in 2013. In the same year, Ecoworld bought 9.6 acres of freehold land in Taman Wahyu for RM70m, translating into RM167psf. Among the 3 locations, I tend to think East Kiara has the most strategic location, being nearest to KTM komuter station and Taman Metropolitan Batu, and having the most convenient access to KL City Centre among the 3 development projects. Just assume the remaining 25 acres is valued at RM135psf, the 25 acres of land is worth RM145m, giving it a revaluation surplus of RM108m. The revaluation surplus on the East Kiara land alone makes up 83% of its current market cap.

4. Remaining 1000 acres of township development at the foot of Genting Highland
It is in a 50% JV with Selangor State Development Corporation (PKNS) to develop 1800 acres of freehold land in Batang Kali. The township is at the foot of Genting Highland. Genting Premium Outlet and Genting Highland are just about 20km and 29km away respectively. About 800 acres of the land has been developed and low cost housing requirements have been fulfilled. Assuming 1 acre of land could accomodate 10 double storey houses and selling at RM500k each, the remaining 1000 acres of land can yield RM5bn of GDV, or RM2.5bn for SBCCORP's 50% stake. Genting Integrated Tourism Plan, including a 20th Century Fox World Theme Park which is scheduled to complete in 2018 could be a boost to the Batang Kali development project. A rerating catalyst could come from a potential JV with theme park or resort operator to enhance the value of its development project.

5. A substantial 86% discount to its RNAV
CIMB's report dated 24 Nov 2016 estimated SBCCORP having RNAV of RM944.8m. The current market cap is at a steep discount of 86% to the RNAV.

The current market cap of the stock is merely RM130m (RM0.555 per share). What does investors get in return?

1. Likely a beginning of an earnings growth cycle for SBCCORP.
2. Potential profit of between RM360m and RM540m from Jesselton Quay project.
3. 25 acres of prime land in KL with an estimated market value of RM145m and a revaluation surplus of RM108m.
4. The remaining 1000 acre of Bandar Ligamas @ Batang Kali township development at the foot of Genting Highland with a potential effective GDV of RM2.5b.
5. Share price at 1/3 of its book value before revaluation of properties.
6. 87% discount to its RNAV.
7. Undeveloped GDV of at least RM6bn.

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Sunday, 17 December 2017

KAB - Charging Up

Warren Buffett puts a lot of emphasis on ROE. 

SUNCON, ECONBHD and INTA are examples of pure construction/ engineering companies that generate high ROE and have been doing well. 

KAB, an electrical and mechanical engineering company recently listed in Bursa Malaysia, is another engineering firm which offers high ROE.

A comparison is made between INTA and KAB. Both are pure engineering companies, listed on ACE market in 2017, and in net cash position after listing.

1. ROE
Both companies offer very attractive ROE (before listing). KAB has better ROE.

2. Margins
KAB consistently achieved better margins at gross, PBT and PAT levels

3. Order Book
As of 2 October 2017, KAB carried an outstanding order book of RM209.9m. It recorded a revenue of RM30.1m in 3Q17. In 4Q17 (another 2 weeks to go), it has secured RM38.3m of new contracts, which is higher than its 3Q17 revenue of RM30.2m. If we annualise the 9M17 revenue, its outstanding order book is roughly 1.9x its annual revenue.

Inta Bina's outstanding order book was at RM634.7m as of end-September 2017. That is about 2.2x of its FY17 annualised revenue. 

Inta Bina's appears to have slight better earnings visibility. 

4. Valuation
The earnings for both companies which were listed this year are affected by listing expenses. To have a more mearningful comparison of the valuations for these 2 companies, earnings were adjusted for listing expenses and PBT were used instead of PAT

Based on INTA and KAB share prices of RM0.37 and RM0.275, KAB has lower market cap/ adjusted annualised PBT. 

5. Competitive strengths and positive industry outlook
i) KAB is a nominated subcontractor in most of projects undertaken (an average of 70% for the past 3 years). Direct negotiation with project owners on the terms of subcontracts is less competitive as compared to a public tender and, thus, a better margin.  

ii) Potential market from old commerical high-rise buildings. There are plenty of old commercial high-rise buildings which require refurbishment/ replacement of electrical wiring and electrical items. 

iii) The company hopes to increase revenue generated from maintenance services, which is recurring, to 20% to 30% of its total revenue in 2 years' time

iv) Mushrooming of high density high rise developments which require competent and highly qualified contractors to perform the M&E works. KAB holds Class A, the highest class of electrical contractor certification registered with the Energy Commission Malaysia. Furthermore, KAB also holds Grade G7 license, the highest grade of license issued by CIDB which allows KAB to tender for projects with unlimited amount of value for general building works and various M&E works.

6. Top line and profit on an upward trajectory
Both top lines and PAT are on an upward trajectory. Excluding RM0.5 one-off listing expenses incurred in financial period ended 31 May 2017, PAT for FPE 2017 would have been higher than FPE 2016.

"We are confident that 2018 will be a better year for our group in view of our expansion plans, as well as the improving macroeconomic landscape," KAB managing director Datuk Lai Keng Onn said in a separate statement. (source)

7. Peers. Majority of listed companies with M&E as core business such as LFECORP, PASUKGB, YFG and MTRONIC are struggling to deliver good profit numbers.

8. Conclusion
Small base (market cap <RM100m), low capex, high ROE. A stock that I would want to include on my radar screen.

This posting is not implying KAB is superior to INTA nor KAB is cheaper in terms of valuation, but merely as a comparison made to have a better understanding of a stock against its peers.

Previous postings on stocks:

Lysaght - Too Good to be True? More so Now!

Scomnet - At an Inflection Point?

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Sunday, 3 December 2017

London Biscuits - Talk without Speaking

Look without seeing

Hear without listening,

London Biscuit's 3QCY17 revenue dropped 18.7%. This prompted me to jump to "review of performance" segment to find out the reason behind the significant drop in earnings.

In the case of London Biscuit, it was talking without speaking.

London Biscuits produces confectionaery, sweets and candies, snacks and potato.

Then, eat without tasting?

Wednesday, 22 November 2017

Lysaght - Too Good to be True? More so Now!

Wrote about Lysaght - Almost too good to be true? about 4.5 months ago.

Surge in top line and bottom line
Lysaght released stunning 3Q17 results, whether you compared in YoY or QoQ

Revenue growth (%)
Net profit growth (%)
3Q YoY
9M YoY

9M17 sales tonnage increased by 27%, revenue jumped 51.7%, gross profit improved, 46.4% net profit surged 46.4%. It enjoyed higher average selling price. Margin was relatively stable.

PE 7.2x
Its current market cap stands at RM145.53m. If we annualise the 9M17 net profit, the stock is trading at an undemanding PE of merely 7.2x.

Net cash per share RM1.67
Its net cash per share improved to RM1.67/share, from RM1.42/share a quarter ago. 
Its cash makes up 47.4% of its market cap.
It has zero borrowing
Ex-cash, the stock is trading at a PE of  3.8x! (based on annualised 9M17 earnings), for a stock that enjoy 39.3% gross margin and 22.1% net margin!

Commenting on the prospects on the company, the group expects to maintain its profitability.

Growth prospects?
The company announced in early October 2017 that it is acquiring 2 acres of land adjacent to its existing galvanizing plant in Tasek, Ipoh, to enhance production flow and to facilitate future expansion plan of the company (source).

Judging all the above, is it not a steal at current share price?

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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).

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.

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.

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.

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.

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