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.

CSC Steel (RM1.96): Dividend Yield above 7%; PER of 7X; Net Cash of RM303 mil !!!

Brief description of company:

CSC Steel Holdings Bhd (Formerly known as Ornasteel Holdings Bhd) is a flat steel manufacturer in Malaysia which is 48.5% owned by China Steel Pacific Holdings Pte Ltd, a Taiwanese steel giant. The other two major shareholders are Lembaga Tabung Angkatan Tentera (10.2%) and Lembaga Tabung Haji (7.7%). Having China Steel as its major shareholder, the company could leverage on the management, technology and high quality products to improve its productivity and operational efficiency.

It is principally involved in flat steel manufacturing, with core products such as PNO (Pickled & Oiled Steel Coils), CRC (Cold Rolled Steel Coils), Galvanised steel coils (GI) and pre-painted galvanized steel coils. The products are used in various industries such as automotive, furniture, roofing, construction, E&E parts, home appliances etc. Its customers are well diversified and is not dependent on any single customer. On the other hand, its supplies are mainly sourced from its mother company with the remaining coming from local players.

Attractive dividends:

The company has very strong operating cashflow and balance sheet. Its current net cash position stands at RM303 million, extremely rare for a steel company!! In addition, the company has no expansion plans for now. This would allow the company to continue paying good dividends to shareholders. Consequently, it has a dividend policy to pay out 50% of its net profit. It recently announced net dividend of 15.25 sen which translates into 7.6% dividend yield. Ex date will be on 28 June 2010. In view of this, its existing cash pile alone could actually sustain the current dividend payments for the next 5 years!!!

Earnings:

Demand for flat steel products are expected to remain buoyant in tandem with the economic recovery. Steel prices are generally expected to head north owing to higher raw material prices, which might be positive for company's margins. But peer competition could limit margin expansion. Over the past two quarters, it managed to achieve net profit of RM39 mil in 3Q 09 and RM37 mil in 4Q 09, owing to higher selling prices coupled with lower raw material prices. Conservatively, assuming that it could sustain above RM25 mil net profit per quarter for the rest of 2010, net profit could easily be above RM100 mil or EPS of 27 sen, translating into PE 2010 of 7.3X. From another perspective, if we take away the net cash per share of 81 sen (Net Cash of RM303 mil / 373.2 million shares) from the stock price, stock price will be at RM1.15 only. Based on this, PER of its business is only at a mere 4.25x.

In conclusion, the stock is attractive just based on its dividends alone. It is further supported by huge net cash position of RM303 mil in addition to its cheap valuations. Note that the trading volume has picked up over the past few weeks, some big buyers could have been accumulating the shares I suppose.

Net Cash: RM303 mil or EPS of 81 sen

Dividend: 15.25 sen

Dividend Yield: 7.6%

PER for 2009 & 2010: 8.0x and 7.3x

Shares issued: 373.2 mil

Market Cap: RM731.5 mil

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.