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.

Palm oil prices going on an uptrend again

A combination of a few factors is going to send CPO on an uptrend again. Watch out for plantation stocks.

Catalysts:

1. Hot and dry weather in US is going to hurt soyabean crops
2. La Nina floods to disrupt Malaysian and Indonesian palm oil output
3. Russia's ban on grain exports
4. Weather disruptions in Canada, Ukraine, Russia and EU to disrupt canola crops

The news:

Source: Bloomberg

Palm Oil Must Surge `Rapidly' to Cool Export Demand, Godrej's Mistry Says

Palm oil must jump by as much as 24 percent to cool export demand as output declines in Malaysia, the second-biggest grower, and weather damages canola crops in Europe and Canada, according to Godrej International Ltd.

“The market needs to move ahead rapidly so that there is time for rationing to set in,” Dorab Mistry, a director at Godrej, said in an e-mail from London. “At 2,600 ringgit, you can’t match demand with supply. And on top of that, the supply is shrinking.”

Palm oil has rallied 13 percent from a seven-month low on July 7 on optimism consumption will increase in Asian nations, which mark festivals in the September quarter, and on concern that weather may disrupt output in Indonesia and Malaysia, the top producers. Malaysian stockpiles touched a 10-month low in June as exports rose, according to the nation’s palm oil board.

“The consumer has got it wrong and is still in denial,” said Mistry. “He is watching as one piece of bad news after another come in each week. At some stage, the consumer needs to get ahead of the game rather than keep fighting the market.”

Mistry, who has traded vegetable oils for more than three decades, correctly predicted in March that palm oil prices would gain in the second half. He said futures may trade between 3,000 and 3,200 ringgit after June. Godrej is one of India’s biggest cooking oil importers.

Tree Stress

“In Malaysia, the effect of El Nino of last year coupled with shortages of labor has meant that the trees are facing a lot of stress during this critical low-cycle period,” Mistry said. “The situation in Indonesia is no better and with the Ramadan season at our doorstep, we can expect a recovery in production only after Hari Raya is completed in mid September.”

October-delivery futures dropped as much as 0.7 percent to 2,571 ringgit ($811) a ton on the Malaysia Derivatives Exchange and closed the morning session at 2,580 ringgit. The price rose 1.1 percent yesterday to close at the highest since April 9.

“Prices right now are just reacting to crude oil,” said Arhnue Tan, an analyst at ECM Libra Capital Sdn. “Another crude oil rally is going to lift all commodities, whether or not fundamentals are positive.”

Crude oil has jumped 14 percent in the past year and reached $82.97 a barrel yesterday, the highest intraday price since May 4. The price fell 0.2 percent to $82.33 at 2:03 p.m. Singapore time.

Canola Damage

Damage to canola crops from weather disruptions in Canada, Europe, Russia, Ukraine and western Argentina may help increase prices of soybean and palm oils, Mistry said. The two vegetable oils account for 60 percent of global supplies and demand.

“The list keeps expanding each week with new problems on the horizon,” he said.

Soybeans have risen for six straight days on concern that unusually hot weather will reduce yields in the U.S., the top grower and supplier of the oilseed. Soybean oil added 1 percent to 42.10 cents a pound yesterday, a 22-month high, boosting its premium over palm oil to $110.9 a ton, compared with an average of $90.97 a ton so far this year, according to Bloomberg data. December delivery futures dropped 0.8 percent to 41.76 cents at 12:11 p.m. in Singapore today.

New Hoong Fatt (RM2.45): Thrive on increasing car ownership/sales, improving margins, stable organic growth and commendable dividends

NHF's shares are getting hot lately. Fundamentally sound. Net profit could possibly reach RM30 million this year, translating into EPS of 40 sen. Its 2Q 2010 quarterly net profit was RM8.40 million while 1Q 2010 net profit was at RM6.4 million. PER for 2010 and 2011 earnings is undemanding at 6.5x and 5.6x which is at the low end of 6x-12x for automotive stocks. Net gearing is at about 5% currently and is expected to be net-cash by next year. Dividend payout is rather generous at more than 5%. P/BV is at 0.7x. Net profit has been around the range of RM18-27 million over the past 6 years. Shares issued is just at 75.16 million which makes it easy to nudge up the share price. Market cap at RM185 million.

Company Overview:

NHF has been in operation for more than 30 years (Another Lou Jiu Pai company in Cantonese which received much interest lately) is a market leader in Malaysia in providing a wide range of automotive replacement body parts to a huge customer base of about 1,400, consisting of wholesalers, retailers and workshops. It has two main business segments, namely trading and manufacturing. About 1,000 body parts are manufactured in-house while it also markets and trades third-party auto parts sourced from local and overseas manufacturers. In addition, the company exports its products to more than 40 countries, including ASEAN, MidEast, EU, America, Pakistan, Taiwan and Africa. ASEAN market will be the company's focus at the moment. About 76% of its revenue is from the domestic market, 21% from exports while the remaining is from other income.

Growth Prospects:

The company could thrive on the increasing car ownership especially in ASEAN region such as Malaysia, Thailand and Indonesia. The recent reports on Malaysian auto sales have been very favorable lately. The AFTA trade liberalisation which includes elimination of all import duties by 2010 for ASEAN 6 and 2015 for ASEAN 10 is expected to benefit the company's profitability which is further supported by lower taxes owing to utilization of reinvestment's allowances. The company's business has been on a stable organic growth by having double digit growth since FY2002. The company is setting up a new factory to boost its capacity by more than 15%. The factory is expected to be operational by 3Q 2010.

Market Data:

EPS for 2010-11: 40-44 sen

PER 2010 and 2011: 6.5x and 5.6x

Shares issued: 75.2 million

Market Cap: RM185 million

Net gearing: 5%

Dividend payout: 5%

P/BV: 0.7x

Shareholders:

Kam Foong Keng 34.09%

Moy Wong Ah 13.35%

Kam Foong Sim 2.4%

For more info, click here.

* Inclusive of a one-off goodwill impairment charge of RM5.3 mil in 4Q09. Discounting that, net profit is approx RM6.5 mil

Source: Company, JPJ

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.