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Stock Investment Research with an Asian focus

2015- Our encouraging first year scorecard

25/1/2016

 
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It has been a little more than a year since we set up stockresearchasia.com in early 2015 to provide Asia based investors with proprietary stock research. While we did not envision it at the beginning, 2015 has turned out on hindsight to be a tricky year for investors to navigate in Asian equity markets. And 2016, for now at least, has proven to be far worse. Many Asian markets have plunged in tandem with the global markets to levels last seen in 2012 or earlier, led by China and exacerbated by an oil price collapse. It is hard to predict when the malaise would end except it inevitably will. As Herb Stein famously remarked and we agree, “If something cannot go on forever, it will stop.” In the meantime, we should see the market throw up good buying opportunities, ones that we hopefully can continue to exploit to our advantage.

It is against this backdrop that we are proud to say that our calls in the last year or so have mostly been spot on.  To recap, we have made outright recommendations on six stocks, five listed on SGX (Memstar, Chuan Hup, PCRD, MILF, IPC) and one on Bursa (Abric). We have also, when deemed fit, made a few situational analyses (Falcon Energy, Kejuruteraan Samudra Timur, Tiger Airways), giving investors some insights into ongoing corporate actions or potential strategic options from a corporate finance perspective.

Performance of our picks

Overall, our recommendations have outperformed the benchmark indices on an absolute basis by an average of 23% as at 31 December 2015. The outperformance would have been more pronounced if annualised but we see the computation of such data misleading and academic in nature at best. The 5 buy recommendations generated an average total return (including dividends) of 13.9%. This includes the short term arbitrage of MIIF where profits were locked in after just 2 weeks. Excluding MIIF, the buy recommendations generated average returns of 16.5%. Memstar, our lone sell recommendation, was down 55.0% as at end 2015 before getting suspended for being unable to complete its reverse takeover of Longmen Group, the transaction risk of which we have flagged out multiple times over the course of the year. 

A summary of our performance is presented below accompanied by key updates on selected companies that we have covered:
Stockresearchasia's recommendations have performed well vs benchmarks
Figure 1. Our recommendations have outperformed benchmark indices by a significant margin

Abric Berhad- cash realised from impending delisting

Following a year during which Abric has failed to find a suitable acquisition opportunity for it to extend its Bursa listing, the company has announced on 18 January 2016 that it will be going ahead with a delisting exercise. In conjunction with the delisting exercise, the company has announced a cash distribution of RM0.43 per share (vs last traded price of RM 0.48), which we estimate is roughly equal to its cash holdings less all liabilities as at September 2015 on a fully diluted basis. This does not include the approximately RM0.07 cash it was due to receive 12 months after the completion of disposal in December 2014 (i.e. December 2015).

As Abric has already announced its decision to dispose of its remaining assets and voluntarily wind-up, shareholders are expected to be entitled to a further cash distribution post delisting. We think that shareholders should also be able to realise an eventual amount close to the Company’s NAV of RM0.64 per share. With a finely balanced shareholding structure (controlling Ong family owns 35%, super minority Pui Cheng Wui 23% and others 42%, fully diluted assuming full conversion of warrants), minority shareholders can also take heart that their interests should be fairly taken care of post delisting. 

Memstar Technology- RTO woes not over

Memstar’s troubles in trying to complete the acquisition of Longmen Group continues unabated. In our previous report, we questioned Memstar’s over optimistic valuation of the target, then valued at US$420 million. Following the umpteenth supplemental agreement, the acquisition price has been revised downwards first to US$323 million in July, then to US$200 million in December, translating into an eye-popping 52.4% in reduction in value in less than a year! This is accompanied by a loosening in the conditions precedent of the acquisition particularly those pertaining to the Target group’s fund raising obligations. However, given the difficult current market conditions, we are still not optimistic that the conditions can be met even with the significantly lowered bar. And to add to shareholders’ woes, Memstar has suspended trading of its shares yet again on 6 January 2016. 

The only silver lining in all these is in SGX’s decision to grant the Memstar additional time (until end May 2016) to complete the acquisition. We can only hope that Memstar shareholders have taken heed of our multiple warnings and disposed of their holdings in time.

Chuan Hup Holdings- hit mainly by FX losses

When we first recommended Chuan Hup, it was on the back of its extremely robust balance sheet, under-appreciated assets and the possibility of a bumper dividend arising from its disposal of CHO shares to Falcon Energy. While Chuan Hup’s financial strength and asset backing have remained largely unchanged, we were disappointed in the board’s decision not to reward its shareholders with a bigger payout. It did announce and pay a total dividend of 3 cts though for its financial year ending 30 June 2015, representing a yield of almost 10% of the prevailing price when our report was first posted.

Results wise, Chuan Hup continues to be hit by the effects of a strengthening US dollar against both SGD and AUD even if its units’ underlying businesses have not deteriorated as much. PCI, its SGX listed electronics manufacturing arm, for example, recorded a 62% plunge in its latest 1Q16 profit after tax from US$1.6 million to US$0.6 million, largely due to a US$1.5 million foreign exchange loss (vs +US$0.1mil the year before). Strip that out and adjusting for mark-to-market profits/losses and the core profit would have remained almost the same as the 1Q15’s. Similarly, a US$6.1 million hit from foreign exchange losses was the main culprit for Chuan Hup reporting a loss of US$3.9 million for 1Q16 vs a profit of US$3.0 million in 1Q15.

For its joint venture property development projects in Australia, the results have been mixed. Toccata, which has been completed is almost fully sold. We estimate that only 10-15% of the sales have yet to be recognised. Meanwhile, Concerto, the largest of the 3 projects by development value, has sold an additional 50 units over the past 11 months to achieve 68% in total sales. With completion due only in 2017, we believe there is still enough time for the JV to ramp up sales to 80-85% or more, similar to what Toccata achieved at its completion. Sales in Unison on Tenth, however, has made little progress in the last few months in particular and 48% of its units remain unsold despite the fast approaching completion deadline. That said, as we have stressed in our previous report, we do not expect any negative cashflow impact from these projects as Chuan Hup’s main obligations in these is in injecting the land while Finbar contributed the working capital. 
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Figure 2. Sales performance of Chuan Hup’s JV development projects have been mixed

As at the latest balance sheet date of 30 September 2015, we estimate that Chuan Hup still holds, after accounting for dividends paid after, adjusted net cash and short term securities worth S$0.194 per share or almost 73% of its last traded price of S$0.265, which should provide a strong buffer against the current market volatilities. 

Pacific Century Regional Development- delisting imminent if share buybacks continue

Since our report highlighting PCRD’s aggressive share buybacks and suggesting that this may be a prelude to majority shareholder Richard Li potentially privatising the company, PCRD has not shown any intent to restrain its share buyback activities. In the past 9 months, the company has acquired a further 89.1 million shares, shrinking the public float to a precariously low 10.2%. We estimate that the company can only acquire and cancel a further 5.1 million shares before its trading has to be halted pending a delisting decision to be made.
PCRD's share buybacks have boosted Richard Li's stake and shrunk public float
Figure 3. Aggressive share buyback from PCRD has shrunk public float precariously close to 10% threshold

To recap a point made in our update report on 5 May 2015:

“Under the current regulatory regime, there are a few ways that PCRD's privatisation could take place: through a general offer, a scheme of arrangement, a voluntary delisting or a forced delisting by SGX due to low free float (<10%) coupled with an exit offer. Based on current circumstances, we see the last two as the most likely options. Both would require a reasonable exit offer to be tabled and the appointment of an independent financial adviser ("IFA") to opine on the fairness of the offer as stipulated in the SGX listing rules. We note that IFAs tend to benchmark fair value of a company's shares to the market prices of its underlying assets where such values are available as in the case of PCRD. As such, we do not expect any exit offer, if it materialises, to deviate greatly from the fair value computed using this methodology in order to obtain a positive recommendation from the IFA.”
Share prices of PCCW and HKT  have held up well vs Hang Seng Index
Figure 4. PCRD’s key underlying assets, HKT and PCCW, are up 6.9% and 3.5% respectively in the last 3 months and has held up well vs HSI, which declined 17% over the same period.

As at 22 January 2016, PCRD’s stakes in PCCW and HKT, both of which shares have held up well despite the recent market turmoil, is worth a total of S$0.61 per share. While it remains to be seen if the “reasonable” offer by Richard Li comes close to matching the market value of PCRD’s underlying assets in the event the mandatory delisting and exit offer is triggered, we believe that that any IFA appointed will use this as a benchmark to base its recommendation on. Richard Li would thus find it hard to justify offering an amount that is significantly less. With the shares trading at $0.37 as at 22 January 2016, we believe PCRD still has significant upside. 

Closing note

While our first year scorecard has certainly been encouraging, our focus is solely on longer term returns. In that regard, we do not expect our picks to be able to outperform the markets by such wide margins year in year out. However, we are confident that with a relentless focus on value and our core competencies, we would be able to generate a positive return on our picks relative to the market over the long run. 

ABRIC Berhad (Update no. 2) - Lower margin of safety but still a low risk value play

20/3/2015

 
Developments since our last update on 25 January 2015 (link)

  1. On 27 February 2015, ABRIC announced that it had recorded a profit after tax of RM69.3 million for the FY ended 31 December 2014.
  2. Substantial shareholder, Pui Cheng Wui, has been steadily increasing his stake through open market purchases. As at 13 March 2015, Pui owned about 18.4% of ABRIC's total outstanding shares, almost doubling his stake in 2 months.

Our Views

The profit after tax of RM69.3 million is largely due to a one-time gain from the sale of its security seals business. As ABRIC is currently a cash company (PN16), the profit recorded from this sale is immaterial going forward.

Based on the latest announced balance sheet, the Company has cash of RM126.1 million. Adjusting for dividend payments of RM42.1 million, full proceeds from warrant conversion of RM13.8 million (RM1.1 million had been recognised as at balance sheet date), and conservatively subtracting all borrowings of RM8.1 million and payables of RM14.8 mil, net cash is around RM74.8 million or RM0.50 per share, substantially the same as we previously estimated. Revised NAV estimate is slightly lower at RM 0.62.

Note that some variations in subsequent quarters to these two estimates are to be expected due to ongoing corporate expenses, rental and interest income.

As for Pui, we do not wish to speculate on his intentions. However, we note that with him holding a 18.4% stake in ABRIC and stepping up his interests rapidly, any future use of the company's large cash reserves such as for an acquisition may eventually require his buy-in. For comparison, the controlling Ong Family holds around 35% of ABRIC's total outstanding shares.

Recommendation

At the closing price of RM0.505 on 19 March 2015, ABRIC's share price is already up by 25% since our first report 2.5 months ago, adjusted for the special dividend of RM0.30. While the margin of safety at this level is considerably lower than at RM0.405, we still see ABRIC as a low risk value play. We expect good support at its net cash level of RM0.50. Further upside will depend very much on what happens over the next 9 months. If ABRIC does not acquire a new business within this period, shareholders will likely be returned an amount close to its estimated NAV of RM0.62. Any potential acquisition could boost the returns even more.
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Figure 1: ABRIC's share price has gone up by 25% since our first report was released.

ABRIC Berhad (Update)- Continues to be attractive value play at Ex-div price of RM0.425

25/1/2015

 
Events since our first report on 6 January 2015 (link)

  1. On 16 January 2015, ABRIC announced that it had entered into a sale and purchase agreement for the acquisition of an office unit within a 45-storey Grade A office building known as Q Sentral, part of the Kuala Lumpur Sentral development. The consideration is RM3,704,590, to be paid over the construction period of 48 months.
  2. ABRIC Berhad has been trading ex-dividend (of RM0.30 per share) since 21 January 2015 which reduces our entry price at the date of last report to RM0.405 vs last close of RM0.425.
  3. As at 25 January 2015, ABRIC has only announced total outstanding shares of 140,486,774 instead of the maximum 148,578,750 had all its outstanding warrants being exercised.

Our Views

The property purchase does not materially affect our estimates. Recall that ABRIC had sold off all its operating assets except for two properties that are currently leased out to its former subsidiaries. This new property once completed is intended to serve as its corporate headquarters. It will be constructed and paid progressively over 48 months, meaning that the cashflow impact is minimal and should be more than offset by incoming cash proceeds of up to RM11.0 million yet to be received as part of the sale of its security seal business.

As it stands, there are still 8.1 million company warrants that have either curiously not been converted or which conversions have not been announced as at 25 January 2015. Pending further announcements on new conversions that made the 23 January 2015 books closure date deadline, holders of these warrants likely missed out on the RM0.30 special dividend bonanza. The implication is that the additional RM2.4 million saved bumps up our cash estimates by another RM0.02 per share.      

Our revised estimates of the NAV and cash per share is now RM0.50 and RM0.64 respectively:
Abric Berhad balance sheet
Notes:
1. The newly acquired property has not been included as it will only be recognised progressively over the next 48 months
2. Updated to cash position announced on 21 Jan 15 and adjusted for actual special dividends likely paid based on total outstanding shares as at 25 Jan 15
3. Net of total borrowings but not inclusive of cash in the escrow account of RM10 million and addition RM1 million which has been lumped together under Receivables


Recommendation

At RM0.425 per share, ABRIC continues to trade at significant discounts to its breakup value of RM0.64 per share and net cash per share of RM0.50 which does not include another RM0.05 worth of receivables even after conservatively adjusting fully for the new property purchase. We believe the current share price provides an attractive entry point and a good margin of safety for value investors.

ABRIC Berhad- Significantly undervalued at RM0.705 per share

6/1/2015

 
Background

ABRIC Berhad ("ABRIC") is a Malaysian company listed on Bursa Malaysia (formerly known as Kuala Lumpur Stock Exchange). Prior to December 2014, it was primarily engaged in the provision of security sealing solutions with a presence in over 80 countries worldwide.

In September 2014, ABRIC announced that it has entered into an agreement with UK based Essentra PLC to dispose of its core operating business for a total consideration of RM146.0 milllion on a "cash-free, debt-free" basis. The disposal was subsequently completed following approval from its shareholders at a shareholders' meeting held on 9 December 2014.

Post completion, ABRIC has become a cash company with the majority of its assets in cash and properties. Under Bursa rules, ABRIC has to submit a proposal for approval to acquire a new core business within 12 months from the date it becomes a cash company implement its proposal within the timeframe prescribed by the Securities Commission, failing which they would be forced to delist, a scenario which would likely mean that they would be forced to dispose of the remaining assets and distribute the cash back to its shareholders.  

Significant Undervaluation

We estimate that the shares are worth conservatively RM0.92 per share vs the current price of RM0.705 per share giving the shares potential upside of 30%. Our computation is as follows:
Abric Berhad balance sheet
    (All numbers in '000 except per share data)
Notes
1. Based on cash consideration received as 16 Dec 14 less estimated expenses of RM6 million
2. Based on Cash and cash equivalents less total borrowings but not inclusive of cash in the escrow account of RM10 million and addition RM1 million which has been lumped together under Receivables


We further note that ABRIC has entered into a lease agreement with its former subsidiaries to lease out its 2 properties for a combined RM1.1 million per year for at least 2 and 3 years respectively. This implies a high capitalisation rate of 11.4% based on the current book value of the properties. As such, we believe that the market value of the properties would be higher than that stated in its books. However, to be conservative, we have not included any potential property valuation surplus in our computation.

Recommendation

The stock is trading at a significant discount to its breakup value of RM0.92 per share and net cash per share of RM0.78 which does not include another RM0.08 worth of receivables due as part of the disposal. We are a buyer at this price. Further upside will  come from potential acquisition of a new core business as management has set aside RM50.0 million for this purpose.

Downside is limited to its cash holdings in the event of a liquidation or breakup pursuant to a delisting. Furthermore, ABRIC has announced a special dividend of RM0.30 per share which will enhance the already favourable risk-reward at RM0.705 as net exposure will be down to RM0.405 per share ex-dividend against RM0.62 and RM0.48 per share of NAV and net cash respectively. While management has set aside another RM15.2 million for working capital, we think this is purely for contingency purposes as the remaining 2 properties leased to its former subsidiaries are its only assets left and hardly justify such a large working capital.

Key Risks

As with cash companies, the key risks would be for the management to spend all its cash on acquiring a value destructive business. However, this risk is partially mitigated by the special dividend that has already been announced and is to be paid on 6 Feb 15 (ex-div date is 21 Jan 15)
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IMPORTANT NOTICE
We put money where our mouth is. As such, we do take positions in the securities mentioned on this website or any securities related thereto and may from time to time add or dispose of or may be materially interested in any such securities. The research materials provided on this site is for information only. Investors should seek the assistance of a qualified and licensed financial advisor in making their investment decisions. The research reports/notes are compiled based on information, which we believe to be reliable. Any opinions expressed reflect our judgment at as at the date of the reports or notes and are subject to change without notice. It does not have regards to the specific investment objectives, financial situation and the particular needs of any specific person who may receive or access this research material. Our recommendations are not to be construed as an offer, or solicitation of an offer to sell or buy securities referred herein. The use of this material does not absolve you of your responsibility for your own investment decisions. We accept no liability for any direct or indirect loss arising from the use of this research material. This research material may not be reproduced, distributed or published for any purpose by anyone without our specific prior consent.