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.

TWS (RM10.40; TP >RM15): Nice debut for MSM (RM4.58), let's compare it with TWS

MSM's IPO performance was just fantastic and way beyond many investors' expectations. Within the first few minutes of trading, it has already shot up by more than RM1, currently trading at RM4.58 at the time of writing this post. Looking at how good MSM has performed thus far, inevitably I would start looking at TWS, perhaps the only comparable company which is involved in sugar business in Malaysia. I've written a few posts before (Click here to view) and TWS still remains my favorite pick. Take a look at the tables below. 

As seen from the table above, the ratio of TWS:MSM in terms of revenue and profits from sugar division is approximately 40:60 to 45:55. Therefore, should TWS' sugar division priced similarly to MSM, TWS' sugar business alone should be worth RM2.6 bil. And at this figure we have not even accounted for TWS' rice and oil palm plantation divisions. Based on TWS' 69.8% equity stake in Bernas and 72.6% equity stake in TWSP, both of them are worth RM0.99 bil and RM1.4 bil respectively at market price though I still think Bernas is undervalued and has further upside. 

In total, by adding TWS' 3 divisions i.e. rice, sugar and oil palm plantation, TWS should be worth RM4.96 bil or RM16.74 per share. At MSM price of RM4.50, PER and PBV are at 13.6x and 2.8x respectively, a lot pricier as compared to TWS.  TWS' PER and PBV are at a paltry 6.4x and 1.5x respectively. Assuming a fair value of RM16.74 for TWS, TWS' PER remains at 10.3x only while PBV is at 2.4x at its fair value, which are still lower than MSM's!! Dividend yields for both companies are approximately the same at 4%. 

Besides the cheap valuation of TWS, TWS has extra advantage over MSM by having 3 strong divisions as compared to MSM's single business while TWS growth prospects are better as it is already owning huge tracts of oil palm plantation land which still have relatively young tree age and provide availability for new plantations. MSM's business is rather stagnant as the bulk of its business is limited to the Malaysian market and it would still need to make acquisitions and investments for expansions.

In summary, TWS remains very undervalued as compared to MSM. and the strong debut of MSM should generate more interests in TWS. 


TWS: 
Market Cap: RM3.11 bil
Shares issued: 296.47 mil
Share price: RM10.48
Div Yield: 4%
PER'10 and PBV: 6.4x and 1.5x
Net Gearing: 80.4%

Some simple trades on call options

I just attended a simple talk by Terence Tan on stock options in US which can help us earn regular income. Summary of the strategy:

• Own a good and stable stock
• Sell a call option of the stock (One call option only for 100 shares of the stock) and pocket the money from sales of call option.

Assumptions: 

• Historically, 90% of the options do not get exercised. Meaning 90% of the buyers of call options would let them expire and lose the money. Thus, why not we sell call options and pocket the money 90% of the time? 

What are the risks? 

• If the stock price rises much higher than exercise price, highly likely the call option will be exercised and you are forced to sell at the exercise price. In other words, you don't get to profit from the upside of the stock price beyond your exercise price. But hey, you've already pocketed the money from selling the call option, so you're still profiting. 
• If the stock price remains the same as exercise price, the buyer of call options would likely not exercise, taking into account the transaction costs involved. You still pocket the money from call options sale and you're holding the stock.
• If the stock price falls, the call option is worthless and will not be exercised. You still pocket the money from call options sale and you're holding the stock. 

If you trade this repeatedly, the cash you receive from selling call option could help you buy more stocks and in turn enable you to sell more call options. It's just like buying properties and renting them out, the rental income you've got help you to own more properties and increase your rental income. 

But of course, the catch is that your stock must be good and won't go bust anytime :P Eg. Exxonmobil, GlaxosmithKline, Microsoft etc.

I've yet to explore this kind of trades so I can't judge how effective it is. You could try this through Optionsxpress or stockoptions in Singapore.