Kumpulan Fima (RM1.74; TP>RM2.00) - Merger between KFima and FimaCorp

TheEdgeWeekly just had an article on KFima and FimaCorp of which both of them could be merged under a single entity and could be somewhat similar to the merger between Sunway and Suncity OR it could be via privatization of FimaCorp. KFima is also cash rich with net cash of RM151.2 mil. If KFima is to take FimaCorp private, it has to fork out RM200 mil to take FimaCorp private and might need to borrow additional RM50 mil. TheEdge mentioned that it doesn't make sense for the exercise to be fully paid by cash. It's quite true in the sense that if fully paid by cash, KFima shareholders would benefit more than FimaCorp shareholders as KFima shareholders would stand to benefit from the additional earnings contributed by the extra 39% equity stake in FimaCorp while earnings from FimaCorp would not be diluted by extra share issuance. However, FimaCorp shareholders could not participate in the potential upside of KFima's share price. Perhaps a share swap would be more ideal as FimaCorp shareholders would stand to benefit from potential upside of merged entity's share price. A bumper dividend from FimaCorp could be ("Could be only :p") on the cards to sweeten the deal and could pump in cash from FimaCorp to KFima. Another thing, just to make things clearer as the article could be somewhat vague about the plantation hectarage, they would have a total of about 23,000 hectares of agricultural land (Oil palm and pineapple) if both entities are merged. Usual benefits of merger are economies of scale and elimination of inefficiencies etc etc. The merger would be good for the shares as well as FimaCorp shares are hardly traded, remains illiquid and trading at such low valuations, thus better to be taken off KLSE. On the other hand, KFima's or the merged entity's shares could have a larger share base to enhance liquidity when merged.

Major shareholders of KFima are buying KFima shares over the past few weeks. There should be some good deal in the offing for KFima. Valuation  remains very attractive as KFima is still trading at low PE of only 6.4x based on historical earnings while PBV is at about 1x. KFima share price has remained at this level for a very long time, thus it's about time to make a move. At this price, it's still good to go in. Dividend yield remains commendable at 4%.  It has strong balance sheet with net cash of RM151.2 mil coupled with cash cow businesses in  printing government security and confidential documents in addition to oil palm/pineapple plantations. 

Having said all these, the deal remains uncertain as there is no official announcement yet on KLSE. Nonetheless, based on its fundamentals alone, KFima is an attractive share to accumulate.  

PS: It just recently acquired an extra 5,000 hectares of plantation land in Sarawak. Thus, total plantation land is about 27,000 hectares, not 23,000 hectares as stated above. My apologies.

Kumpulan Fima (RM1.63; Target: RM2.20): Highest quarterly earnings, steady!

Kumpulan Fima's quarterly results were out just now. Its earnings remained steady on an uptrend. Net profit rose to RM20.07 mil or EPS of 7.6 sen, a +35% q-o-q and +10.8% y-o-y. The increased earnings were contributed by higher earnings of all business segments, i.e. plantation, production & trading of security documents, bulking and food divisions. Net cash rose from RM120.7 mil in 3Q2010 to RM153,4 mil in 4Q2010 (calendar year), allowing the company plenty of flexibility for acquisitions or further expansion of its plantation business.

Trailing 12M net profit was RM64.6 mil or EPS of 25 sen, thus PER 2010 stood at only 6.6x, supported by net cash per share of 58.3 sen. Its share price movement had been rather lethargic lately, following the trend of the general market. I noticed that its shares have been moving rather close to the market (as opposed to TWS which could run quite contrary to market movement). Perhaps it could only rebound meaningfully when the general market is more favorable. As compared to Tradewinds, KFima's earnings growth is only 'decent' and rather predictable which probably led to its unexciting share price movement. It could also be due to the declining palm oil prices which plagued the plantation stocks, KFima is no exception.

In terms of valuation, putting an 8x PE to its EPS of 25 sen (most likely could earn more than that in 2011) will yield a share price of RM2.00, a 23% upside. I believe it should be trading more than 8x PE. Perhaps 10x should be a better valuation for it in view of its steady earnings growth backed by strong net cash position (reminds me of HSL).

For now, I am putting more chips in Tradewinds (M) as this company's businesses are superior to that of KFima, and I would say, can easily surpass Kulim. Yet, it's trading at a lower valuation than KFima in terms of PE. Looking at Tradewinds trading volume, seems that big players are coming in. Such an expensive stock (in terms of share price) with hundreds of lots queuing up to buy is something worth taking a look. Nonetheless, its shares are more volatile. You must have enough funds to stomach the high volatility. It could end up being the top gainer, and also being the top loser. Hahaha. But it's an upward trend. Ok. Sorry, digressed already. Back to KFima. Have a look at the charts below.

For previous posts on KFima, click here.

Market Outlook and Stock Picks for 1H2011

How high will the market go? Most of the analysts are expecting a good run in KLCI in the 1H2011 while 2H2011 performance remains uncertain. KLCI at current valuations does not appear cheap anymore as it is already trading slightly above historical average 1Y Forward PER of 15x but remains below PER’s historical peak of about 18x. Should the market breach historical levels, it should be able to touch above 1,800 points. However, I do not want to be too optimistic. Consensus is targeting KLCI to reach around 1,700 points which is at PER of about 17x (+1σ), about 10% upside from current level. Corporate earnings growth is going to be about 16% y-o-y this year based on consensus. The impetus for 1H2011 would be QE2 (Quantitative easing 2), roll-out of ETP projects, earnings growth and election play.

QE2 is going to flush the market with a lot of liquidity, at least in the early part of this year, causing money to flow into markets with higher returns including Malaysia. Foreign shareholding remains relatively low, though it has risen from a low of about 20% to current levels of close to 22%. Its 10-year peak was about 27.5% in mid-2007. Nonetheless, this could also contribute to greater volatility in the stock market. Investors should have the holding power to invest in stocks or risk losing out. One should take note of monetary tightening policies in major economies such as US in 2H2011 as QE2 ends in June 2011 which might adversely affect equities and bonds. Tightening measures could cause money outflow from Malaysian market, thus dipping the KLCI. Nonetheless, tightening measures will likely be gradual in the form of draining excess reserves via increasing fed funds rate-discount rate spread and interest rate hikes (or having the word ‘extended period’ erased from their announcements :p). Economic conditions in US such as lower unemployment, higher inflation and improving financial conditions should drive tightening measures. But for now, we are still seeing low inflation and high unemployment in US, thus tightening measures should be rather distant. Therefore, I think we could just enjoy the ride for now before unloading our chips off the table as KLCI approaches 1,700 points.

Elections should benefit sectors like construction, property and O&G sectors. Contract newsflow should be more intense ahead of the elections. Construction sector is going to benefit from rollout of LRT and MRT projects, Pahang-Selangor Water Transfer, LCCT 2 and SCORE projects. I still like Sunway Holdings (RM2.25; Target RM2.90) with news of merger with Suncity to form a newco. I’m seeing more than 30% upside from here. Naim Holdings (RM3.60; Target >RM5.00) looks attractive and could ride on Sarawak election play, another stock with possible >30% upside.

Property stocks that caught my attention: Plenitude (RM2.15; Target RM2.80) and Hunza Properties (RM1.73; Target RM2.60) appear undervalued. Plenitude has a huge cash pile of RM325mil or RM1.20 per share, about 55% of the current stock price (Wondering how they are going to utilize the cash. Acquisitions? Projects? Privatization? Bumper dividends? Plenty of financial flexibility for land purchases and projects), trading at P/BV of 0.7x and forward PER of 6x. At least the management is now taking interest in its share liquidity, as indicated by its recent 1-for-1 bonus issue in Nov 2010. On the other hand, Hunza Properties is trading at P/BV of 0.7x, relatively low gearing, forward PER of 5-6x.

O&G stocks: Generally I shun most O&G stocks, highly leveraged, high PER, earnings instability and therefore high risks in project execution. The one that I like is Coastal Contracts (RM2.46; Target RM4.00), a counter which has been highly recommended by most research houses for the longest time. At least it appears to be moving now. Having said that, it’s still trading at absurd forward PER of below 5x!!! Its ROE remains one of the highest in the industry. A Forbes’ Asia 200 Under A Billion company. Consensus target price is at around RM4.00. For my previous post on Coastal, click here. Another counter is EPIC (RM2.30; Target >RM3.00), trading at PER of 7x. Recently its shares were bought over by Terengganu Inc from AZRB for RM3.09. In view of its strong balance sheet, resilient earnings and beneficiaries of greater O&G activities in the east coast, it should be trading around 10x with fair value at around RM3.10. For EPIC posts, click here.

Consumer sector: Beneficiaries of removal of subsidies such as Bernas (RM2.81; Target >RM4.20) and Tradewinds Malaysia – TWS (RM7.40; Target >RM13.00). For Bernas, please refer to here. TWS is a giant food conglomerate with three gigantic business segments, namely oil palm plantations, rice and sugar. Its rice and sugar businesses are monopolies in their respective fields and have the ability to set the prices of sugar and rice. Its expected profits will touch RM400 mil this year, or EPS of RM1.35. There have been worries over its high debt which is at RM2.2 bil. However, judging by its resilient earnings (Who does not need food?) of about RM400 mil, RM2.2bil is not a big issue at all. 5 to 6 years of earnings will be able to cover that. Besides, it holds more than 70% of Tradewinds Plantation which has 150k ha of plantation land, with matured plantation of 70K ha and immature plantations of 20K ha. Looks like it is going to be another Kulim in the making. Currently trading at PER of 5.5x, it is “super duper” grossly undervalued. Should it follow other F&B counters such as QSR, F&N, Mamee, QL etc, it should be trading at PER of above 10x, which is still conservative. Target price works out to be RM13.00 based on 10x PER!! Judging by its monopoly businesses, it should trade close to valuations of QSR and F&N which are trading at PER of 15-18x. Oh well, you could calculate the fair value. Just to be conservative, let’s just set it at RM13.00 first, which is already a 76% upside from current levels!!!

Conglomerates: Kumpulan Fima (RM1.70; Target RM2.20), DRB-Hicom (RM2.07; Target >RM3.00). Kumpulan Fima I’ve covered quite extensively in my previous posts. Refer here. I’m looking at another 25-30% upside for Kfima. DRB-Hicom is another giant, covered extensively by Dali here.

Automotive: MBM Resources (RM3.26: Target RM5.00) looks good fundamentally. But its share performance has been disappointing thus far as it has been stuck at this level for a very long time. Investors will just get fed up with it and sell the stock every time the stock price rises a little. Its PER is at 6x, net cash of RM120m or RM0.50 per share. Proton (RM4.54; Target RM6.00) remains attractive at PER of 7x supported by net cash of RM1.4b or RM2.55 per share.

Plantation: The sector very much depends on CPO prices. How long could CPO prices hold at this level? Will it be sustainable? I can’t really see where it is going. But this level is at historic high, I see limited upside from here. Plantation stocks might have a short run only during 1H2011 and likely cool down in 2H2011 in anticipation of higher production and potential bumper crops in 2012 especially from Indonesia (Assuming stock prices run ahead of fundamentals by half a year). The weak US dollar could be a drag to plantation stocks as well. TDM (RM3.04) had a really good run lately, as with other plantation counters as well. Hahaha. But I will be more careful at this level.

Other counters that look attractive at a glance: Pintaras Jaya, Protasco, RCE Capital, Mitrajaya, Century Logistics, Freight Management, Harrison Holdings, Poh Kong, MFlour, White Horse, Paramount (Might be rather quiet after its corporate exercises though attractive), Leader Universal, Leong Hup Holdings, Ajiya. – To be continued when I delve deeper into these counters. Please share with us as well if you find any good counters. Thanks :)

PS: I find it harder to pick undervalued stocks as many good ones have moved up :( Maybe after the rally in 1H2011, I will start unloading my investments from the stock market and put them into some bond funds. Btw, not a single research house covering TWS??!! Hopefully someone will get the ball rolling :)

"Why I Like Kumpulan Fima" by Dali: Malaysian research houses, please expand your horizon :p

Looks like the ballrolling has to start from the bloggers eh? There're still no research reports on Kumpulan Fima though probably everyone in the bloggersphere is recommending it (including Dali, Moolah and myself) and already investing in it!!!??? Maybe bloggers who are doing the hardwork of picking out these undervalued stocks should demand some payment eh..hehe..Ok, I'm just joking :p Some of the stocks which are not in the Bloomberg's analyst coverage list at all which have strong potential such as DRB Hicom, TDM, Kumpulan Fima, Cepatwawasan (though there's a write-up from CIMB with no recommendation).

Dali's article on Kumpulan Fima, click here.

PS: Another Forbes' Asia 200 Under A Billion award winner is Coastal Contracts which is trading at RIDICULOUSLY low PE of less than 5x!! Wakarimasen!!!

Kumpulan Fima (RM1.30): Quick note on quarterly performance

Kumpulan Fima just released their results today. Net profit was decent at RM14.8 million, which was a 50% increase year-on-year. Earnings growth were observed across all business segments. Nonetheless, earnings were down by 15% quarter-on-quarter, triggered by lower profit from manufacturing, plantations and associates.

EPS for the quarter was at 5.63 sen, with cumulative 9-Month CY2010 (Calender year) EPS standing at 16.9 sen. EPS for 4Q CY2010 could hit 6 sen easily, making EPS for the total year at 22.9 sen. Thus, PE for CY2010 could be at 5.7x. Net cash position continued to rise to RM120.7 million or 45.9 sen. I'm seeing another Faber in the making, quite similar in terms of the numbers. Recall that Faber was still at RM1.40 when net cash was at RM100m, PE of 6x, dividend yield at about 4% and stable and diversified earnings. Its stock price eventually doubled.

Click here for related posts.

Kumpulan Fima (RM1.25): Solid earnings at PE of less than 5x??!!! Dividend yield of 4% with strong net cash of 39 sen per share

Kumpulan Fima, another stock with extremely low PE, high net cash, solid earnings from diversified businesses and riding on the wave of strong CPO prices. Earnings over the next few quarters will be boosted by strong CPO prices.

The company's earnings are mainly generated from three main business segments, namely production and trading of security and confidential documents (Manufacturing), oil palm and pineapple plantation and bulking services. About 54% of earnings come from manufacturing division, followed by plantation (35%) while the remaining come from bulking services coupled with food (canned fish products) and trading (military aviation agencies and food products packaging).

Earnings from manufacturing division has been on an increasing trend albeit at a slow pace of single digit percentage increase p.a. The bulk of the earnings growth will be coming from the plantation division in view of the favorable CPO prices coupled with its expanding planted areas. The company currently owns about 21,000ha of plantation land of which 7,600ha are planted with oil palm and pineapple (proportion unknown). For now, I've no idea how it could rake in PBT of more than RM30 million with just 7,600ha of planted area in FY2010. Other plantation companies would probably need about 14K-15K ha of planted area to have that kind of profit. Unfortunately, its palm oil production figures are not available in KLSE website.

Having said all these, profit is still good. Its plantation PBT was at RM13 mil already for quarter ending June 2010 when CPO prices were still low at less than RM2,500/MT. With current CPO prices at more than RM3,000/MT coupled with higher production (2H probably 50% higher compared to 1H), earnings from this division are going to spike up.

Valuation: 1HCY2010 net profit (Note that I'm using calendar year, not financial year) is already at RM30 mil. With high CPO prices and palm oil production, net profit for CY2010 could reach about RM70mil or 26.6 sen per share. Thus, PE for 2010 earnings might be less than 5x!!! Dividend yield is reasonable at 4%, supported by strong cash position of RM102 million or 39 sen per share. Its cash position kept on increasing unabated. This could easily pave way for further acquisitions and expansion of oil palm plantation or more generous dividend payout. Attaching a PE of 8x would put its share price to RM2.10.

PS: They just entered into a conditional S&P agreement to acquire 80% of Victoria Square Plantation SB which in turn holds 65% stake in Amgreen Gain SB which has 5,000ha of land for oil palm cultivation. An estimated RM70mil will be used to develop oil palm plantation over the next 5 years on this 5K ha land.

Share issued: 263.16 mil

Market Cap: 329 mil

Net profit for CY2010: RM70 mil or 26.6 sen per share

PE CY2010: <5x

Div Yield: 4%

Net cash: RM102 mil or 39 sen per share

PS2: I've yet to see any brokers reporting on this company. There are just so many good counters which should be covered by sell-side analysts. Readers might just get bored reading on the same counters again and again :(

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.