My take on AZRB and EPIC (Amended)

My guess is EPIC will be a privatization target. Terengganu govt won't stop at owning over 60% and not make a GO. It makes very good sense for them to privatise as EPIC is a cash cow. Around RM250mil++ of borrowings (Accounting for their net cash position) could help Terengganu govt to privatize the whole company (To buy another 60% of EPIC shares since they're owning 40%). Less than 5 years of EPIC earnings could easily pay off its entire debts.

As for AZRB, unless AZRB is paying a bumper dividend or invest in a business at least same or more profitable than EPIC, I see little upside to its stock price. Without EPIC, AZRB will lose about RM10-12 million of profit p.a. from its stake in EPIC, thus potentially making its PER very high. Though AZRB has 40 sen per share of cash if EPIC sale goes through, I'm afraid it'll end up the same as Fajarbaru with a lot of cash but have no idea what to do with it.

For me, EPIC will be a better bet. Will the share price shoot up to more than RM3? Hopefully :))

See previous related post.

PS: The RM10-12 million is not a loss. Rephrase: AZRB will earn RM10-12 million lesser p.a. if its 21% stake in EPIC is sold since EPIC is earning RM50-60 million p.a. The RM10-12 million p.a. is not the borrowing costs :)

A wave of privatisations coming to Malaysian shores: Who's next?? Featuring EPIC, AZRB, TDM, Paramount and CSC Steel

There have been quite a number of privatisation of listed companies in Malaysia. Among the companies being privatised or in the progress of doing so since late last year are:

1. Tanjong Plc
2. Measat
3. Astro
4. M3nergy
5. Malaysian Mosaics Bhd
6. Kretam
7. New Straits Times
8. Southern Steel
9. Titan Chemicals
10. Hume Industries

The latest candidate is EPIC (RM2.11) as reported in TheEdge Weekly, citing possible reasons of undervaluation and not being appreciated by the market. The takeover price remains unknown. However, the privatisation must have a much higher takeover price than current stock price to go through especially with AZRB holding 20.97% equity stake in EPIC. To recap, AZRB purchased the shares at RM2.40 per share in Oct 2007. It will be hard for AZRB to let go of the shares if the takeover price is not more than RM2.40. Incorporating AZRB's holding costs (AZRB incurred borrowing costs to purchase EPIC) of about 15% (Assuming 3 years at 5% p.a. interest rate), takeover price has to be RM2.76 to enable AZRB to breakeven for its venture into EPIC.

In addition, at RM2.40, PER is undemanding at around 8x-9x for FY2010-11 earnings. Having said that, book value is at RM2.04 with P/BV at 1.03x at current price of RM2.11. As at end June 2010, EPIC has a net cash of RM66mil or 39 sen per share. Terengganu Inc might need to fork out another RM244-305 mil (assuming takeover price of between RM2.40-3.00) to purchase 101.8 million shares of EPIC which are not owned by it. Anyway, I think the takeover price shouldn't be based on book value but more on PER due to its consistent earnings. By attaching PER of 10x, takeover price could be in the range of RM2.80-RM3.00. Will the takeover price be this high? I'm only guessing.

What are the companies which could be privatisation targets? I still feel there are quite a number of undervalued stocks which have been lying low for a long time and not being appreciated by the market. There are still some companies with stable businesses and strong balance sheets which are still trading at PE of less than 7x. So, maybe we could do ourselves a favor by identifying these potential companies? Stable business, good earnings, cash-rich, low peer valuation etc etc.....

Some companies that came to my mind after reading the EPIC news include TDM, CSC Steel and Paramount. If you have any ideas, don't mind sharing with us :)

TDM (RM2.34): 53.1% owned by Terengganu Inc, same shareholder as EPIC. TDM is also cash-rich with net cash of RM133 mil and trading at ridiculous PE of 6.5x only assuming 2010-11 earnings at RM80 million p.a. Book value is at RM2.97.

CSC Steel (RM1.78): 46% owned by China Steel Asia Pacific Holdings Pte Ltd (Taiwan's largest steelmaker with revenue of up to RM16.5bil). Net cash of RM288 mil and PER of around 7x. Net profit was at RM70-90m over the past 5 years except for 2008, the year which they were still able to make RM59 mil net profit despite the severe downturn in the steel industry. Book value at RM2.17. Will the Taiwanese follow Titan's footsteps?

Paramount (RM4.00): Will be very cash-rich if Jerneh Insurance shares are sold. Net cash of RM140 mil with potential to go up to RM280mil or RM2.40 per share when Jerneh is sold. PER around 7x and earnings have been around RM50-60 mil over the past 5 years. Book value at RM4.87. It is 29% owned by Dato Teo Chiang Quan, a member of the Teo family which controls See Hoy Chan. (Actually I don't see any reason for them to list this company in KLSE as Teo family could probably be one of the richest billionaires in Malaysia and it might be easy for them to take the company private. No one knows how much they are worth as most of their assets remain hidden from the public's view.)

PS: Other companies that I glanced through (Look attractive but not necessarily privatisation targets) include Pintaras Jaya, TRC Synergy, Fajarbaru, Insas, Wellcall, TSM Global, Protasco, Kurnia Setia, Harrisons, Faber, Mudajaya (A lot of uncertainty over SC's probe. Could it be that someone want to drive down Mudajaya's share price to buy more of its shares? Could it be related to the privatisation rumours? Who's the one releasing the 'poison letter' to SC? Insider job? Questions questions and questions???) etc.

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.

AZRB (RM0.945) clinches RM309m PWD project

KUALA LUMPUR: AHMAD ZAKI RESOURCES BHD (AZRB) has secured a project from the Public Works Department worth RM309.37 million to build a complex along Jalan Sultan Salahuddin, Kuala Lumpur. "The works are to be completed within the period of 130 weeks, that is commencing from Dec 1, 2009 to May 28, 2012," it told Bursa Malaysia on Wednesday, Nov 18. AZRB said the project was expected to contribute positively to the AZRB group’s earnings and the net tangible assets for the financial years ending 2009 to 2012.

Source: The Edge

Commentary:

Construction & Valuation: This job award will possibly add about RM5mil earnings or 1.8sen EPS annually assuming EBIT margins of 4.5%. By imputing this job award, outstanding orderbook stands at about RM1.2bil to last for more than 2 years. Assuming construction revenue of RM600mil annually for the next two years and EBIT margins of 5%, construction EBIT should be at RM30mil. Its bunkering service should provide another RM14mil in addition to EPIC's earnings contribution of about RM8-10mil. Total EBIT will be about RM52mil-54mil. Minus interest expense of RM14mil and taxes of about RM10mil, net profit should be around RM30mil for FY2010-11. EPS will be about 10.8 sen while PER 2010-11 will be at 8.8x, reasonably cheap in my opinion, considering the potential small-mid size job awards from government pump priming, revived construction margins (It was hard hit in 2008 from high construction material costs, resulting in 29% y-o-y decrease in earnings) and potential earnings contribution from its plantation venture starting 2010. Note that the earnings forecasts above have not imputed possible earnings contribution from its plantation business.

Plantation Business: The more exciting part will be its plantation business in Indonesia with plantation land area of 20.5K Ha. Earnings contribution from this division should come in 2010-2011 as they started planting since end of 2007. Based on 20.5K ha, assuming FFB (Fresh Fruit Bunch) yield of 20MT/Ha/year, OER (Oil Extraction Rate) of 20% and planted area of 75%, plantation could potentially yield 61.5K MT of CPO (Crude Palm Oil) a year or revenue of about RM150mil at RM2,400/MT CPO price. Assuming 10% net margin, net earnings could reach RM15mil or 5.4sen EPS, potentially boosting its total EPS to 16.2 sen by 2011. Having said that, the risk of investing in a business unrelated to their construction line of business should be of concern. Hopefully they'll be able to manage it well and not end up with the same fate as Tradewinds Plantation and Kulim whose venture into Indonesia plantation turned out unsuccessful. Wait and see.

Share Price: RM0.945

Shares Issued: 276.64mil

Market Cap: RM261.4mil

Net Profit for 2010 & 2011: Approx RM30mil

EPS: 10.8sen

PER 2010-2011: 8.8x

Share Price Triggers: Project awards, stronger quarterly earnings, earnings growth from its plantation business.

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.