Saturday, May 26, 2007
My usual highlighting and comments in italics below:
Litrak sees rebound after toll hike
Updated : 26-05-2007
Media : The Star
Story By : DARSHINI M. NATHAN via www.biznewsdb.com
LINGKARAN Trans Kota Holdings Bhd (Litrak) was thrust into the limelight early this year after the scheduled 60% toll hike for the Damansara-Puchong Highway (LDP) triggered a backlash among consumers.
But with uncertainties over the toll rate hike now resolved and traffic volume on the highway recovering somewhat after suffering in the first few months of the year, the investment case for Litrak is starting to look a lot more appealing.
[As I highlighted earlier in my first posting on LITRAK, as well as others who called LITRAK before me, the investment case for LITRAK looked really appealing when its stock price fell to as low as $2.60 in February this year.]
At the heart of it all is the fact that the toll concessionaire is fast turning into a cash cow. Its rising free cash flow (FCF) has emerged as the key driver of several research houses' "buy" ratings and revised target prices.
Most of the analysts tracking Litrak are banking on the company announcing a second capital repayment exercise as early as the second half of this year.
[To the best of my (limited) knowledge, this is not confirmed by LITRAK yet. However, I would not be surprised if it occurs in 2nd half of this year.]
Litrak embarked on its first capital repayment in November 2005, when it announced a distribution per share of 25sen.
This time around, analysts say the quantum is likely to be much higher. Most of them reckon a distribution of at least 50 sen per share could be on the cards.
[It pays to be a little skeptical whether it will really be 50 sen. Below, AmResearch is projecting 26 sen EPS for FYE 2008. My own projection is around 31 sen. There needs to be a very strong reason to make a capital repayment that is larger than the yearly earnings, since this would most likely mean that LITRAK would need to take on extra borrowings. Personally, I would be more than satisfied with a capital repayment of say 25 sen, same as last year, as it would imply a yield of 0.25/3.5 = 8.3% net of tax ... very, very nice].
There are several reasons for their optimism. The government-approved toll hike that took effect on Jan 1 this year means that motorists using the highway now have to pay RM1.60 compared with RM1 previously.
With that, some expect the LDP to generate an operating cash flow (before debt obligations) of about RM200mil per annum for Litrak in financial year (FY) March 2008.
[Most likely an error by the journalist. Already, the operating cash flow reported in LITRAK's latest quarterly report is larger than $200M, and closer to $300M. I don't expect LITRAK's cashflow to reduce in 2008 after the toll rate hike. ]
The agreed toll rate under the concession agreement however was much higher at RM2.10.
The government has agreed to a compensation package, which comprises a cash payment of RM150mil, to be paid in two tranches this year and in 2008, and a one-year extension to the concession period. Litrak received the first tranche of the compensation worth RM75mil in January.
[Most likely another error by the journalist. If LITRAK has already received the $75M, how can its quarterly "Revenue" be reported as only $69M? Also, how can its "Other Income" be reported as only $13M? Examining LITRAK's quarterly reports and studying its notes in detail, I believe LITRAK has not yet accounted for this in its earnings statement.]
This would boost its revenue and earnings in the fourth quarter of FY07. A local research house estimates that this would lead to a revenue growth of 3% and 12% in FY07 and FY08, respectively.
[There is no need to estimate FY07 revenue growth, as it is already reported by LITRAK last night. The actual revenue growth is $256M / $243M, or approximately 5.3% growth for FY07. Another poor reporting by the journalist.]
Litrak, which also operates and maintains the SPRINT or Sistem Penyuraian Trafik KL Barat highway for a period of 36 years ending December 2034, is set to announce its results for FY07 this week.
[Again, LITRAK already announced its results last night]
Apart from the compensation, the latest figures will also reflect the net gain of about RM11mil it realised from the disposal of all its investments in quoted shares in the third quarter of the last financial year.
AmReaserch, however, notes that higher losses at SPRINT following a staggered step up in its finance cost since the second quarter of FY07 could throw a dampener on Litrak's FY07 earnings.
Litrak's share of SPRINT's losses is expected to peak in FY07 at RM21mil, before falling to RM9mil-RM11mil over FY08-09. The research house, nevertheless, says SPRINT's cash flow would gradually improve if it successfully restructures its Islamic bonds. It is also up for a toll rate increase on the Kerinchi and Damansara links next year.
Milking the cow
Until then, the focus remains on the LDP. Traffic volume on the LDP has fared better than expected after the toll rate increase. According to AmResearch, daily traffic volume declined 8%-10% in the first two months of the year, compared with last December. However, the figures for March and April apparently suggest that volume has rebounded slightly.
[I have some doubts about the 8%-10% decline. I believe it is larger. Q3/07 Revenue (for 1 Oct - 31 Dec 06 period) reported was $62.4M, at $1 per entry (or approx 62.4 million entries). Q4/07 Revenue (for 1 Jan - 31 Mar 07 period) was $69.6M, at $1.60 per entry, or approx 69.6/1.6 = 43.5 million entries. So, reduction is 1-43.5/62.4 = 30% from Q3/07. So, 8-10% decline seems a bit on the small side. Nevertheless, despite the decline, net earnings still grow significantly due to the large toll rate hike.]
As pointed out by Aseambankers, there is limited downside risk to the LDP's traffic volume growth ahead owing to the lack of an alternative route to the LDP. The 40km toll road also stands to benefit from the frantic pace of development in the Bandar Sri Damansara, Damansara Perdana and Mutiara Damansara areas.
[Good points. Nice economic moat so far. Nice potential for growth / limited downside risks.]
This has prompted AmResearch to upgrade its FY08 traffic forecast to a growth of 1.5% from 7% contraction previously. Its analysis shows that every 1% increase in LDP traffic volume would lift FY07-FY09 earnings by 2%-4%.
"Factoring in a nine-month impact from the 60% hike in LDP toll rates, we project Litrak's FY08 core earnings per share to rise 60% to 26 sen,¨ it says.
[It's unclear what is meant by "core earnings", but if 26 sen is the full EPS, then, I believe AmResearch is too conservative with the 26 sen EPS. FY2008 (1 Apr - 31 Mar 2008 period) will reflect the toll-rate hike fully. My personal estimate is at least 31 sen, including $37.5M government compensation. However, if anyone has AmResearch report, I would appreciate receiving a copy for further perusal. Thanks.].
Early this month, the investment research outfit issued a report on Litrak to highlight its revised target price of RM4.50 per share.
[Not unreasonable, although I think a bit lowish since my own target price is $4.70 to $5.60 - see my earlier posting for the basis. Interestingly, the implied P/E is 4.50 / 0.26 = 17.3, which is within the range of 15-18, and not unreasonable compared to investssmart P/E of 15, Deutche Bank P/E of 18, and my earlier P/E range of 14-17, although bear in mind that P/E are not absolutes, and it may be better to apply a relativity principle rather than an absolute principle to P/E.]
The higher net asset value (NAV)-based target price reflects the lower discount to NAV of 15% it has now ascribed to the shares, as opposed to 35% previously.
AmResearch reckons that with uncertainties over the LDP toll rate hike resolved, the company's FCF is likely to rise to anywhere between 33sen and 50sen per share from FY07-FY09, compared with 16 sen per share in the latest financial year.
That the toll concessionaire's parent company Gamuda Bhd has raised its stake in the former to 43% from 38% a year ago supports the case for the capital repayment. Gamuda started accumulating shares in Litrak since January last year. The idea is to bring its stake closer to 50%.
[Interesting, although I have not personally heard yet that GAMUDA intends to raise its stake to 50%. I would appreciate it if any readers can help confirm this, e.g. from past press releases, etc.]
However, under the Securities Commission's ruling, Gamuda can only acquire up to 2% of Litrak shares every six months or it will trigger a mandatory general offer for the rest of the shares it does not own.
[Interesting ... although I am surprised since other companies could do this without triggering an MGO - e.g. OSK's shareholding of OSKVI is higher, and it increased its shareholdings more than 2% in 6 months without triggering an MGO ... Appreciate comments from more knowledgeable readers.]
On its part, Gamuda has guided that it would reward its shareholders with a dividend of 46 sen per share or net dividend per share (DPS) of 33 sen going forward, from 12 sen per share net DPS currently.
It is understood that part of this dividend payment would have to be financed using the higher dividends it receives from Litrak.
The toll concessionaire's management is also working on extending the maturity of some of the debt taken on for the LDP to match that of the concession's lifespan. Whereas the LDP's debt expires in 2016, the concession ends in 2030.
If this happens, and given that the company has no significant investment capital expenditure plans in the near to medium term, it would free up cash that could be returned to shareholders.
A foreign research house suggests that Litrak may also choose to take on additional debt, given its net gearing of slightly above one time is backed by some solid recurring concession earnings.
[In the earlier posting, I note that LITRAK has actually reduced its debt in Q4/07. So, IF LITRAK were to take on additional debt in 2008, then, it could mean several things, including the possibility that it may wish to make a higher capital repayment than supportable by current year's earnings & cash holdings.
The speculative reason that GAMUDA wants to pay higher dividends to its shareholders is interesting... hmmnn ... since I don't yet know for sure, let's wait and see since to me, LITRAK's business case is already so good that I'm more than happy if LITRAK pays the same amount as last year.
Unfortunately, the name of the foreign research house is not supplied. Does anyone know?]
At this juncture, it is still not tax efficient for Litrak to pay out dividends, as it does not have enough tax credits to frank the dividends. As a result, the toll operator's dividend yields are below the regional average.
Given those circumstances, a foreign research house says it is important that Litrak embarks on a capital repayment exercise to enhance return to shareholders.
Friday, May 25, 2007
Q4/07 Income Statement
1. Q4/07 EPS of 9.1 sen has more than doubled Q4/06 EPS of 4.3 sen. On the surface, this is good news!
2. However, it is boosted by one-time realized gain by its subsidiary amounting to $11.3M, or approximately 2.3 sen. Excluding that, the EPS is 9.1 - 2.3 = 6.8 sen only, of just 54% increase over Q4/06 EPS. Personally, it is marginally dissappointing, as I had hoped to see something higher, although 54% increase in PAT is normally a good result.
3. A possible reason for the smaller increase is due to lower than expected increase in revenue, i.e. lower traffic volume. My rough estimate indicates that this could be around 26% reduction, or say a quarter, compared to same period last year. In a sense, this is not completely unexpected, as this is only the first quarter after the implementation of the toll-rate hike. I expect traffic volume to gradually increase over time, as more of the public accepts the toll-rate hike, i.e. I don't expect this to be a permanent reduction, but only a temporary problem.
4. It is also unclear if the government compensation of $150M payable over 4 year period from 2007-2010 has been included in the revenue above. My belief is that it is unlikely, as there is no direct mention in the notes, and it does not appear in the accounts, based on the size of the numbers reported. The amount per quarter is quite significant, approximately 1.9 sen EPS per quarter.
5. Maintenance expenses have also increased slightly from $0.8M to $2.6M. Perhaps due to one-time increase due to toll-hike change? Needs monitoring.
6. If one assumes that:
- FYE 2008 traffic volume improves slightly to say 80% (instead of 74%) of pre-toll-hike levels
- 90% of the revenue increase from the toll hike flows through to profit
- $37.5M government compensation payment per annum,
- otherwise, the business remains largely unchanged, then,
my estimate of 2008 EPS is around $0.31.
As traffic volume improves, I expect future EPS to grow higher than $0.31.
7. If one uses a reasonable P/E range of say 15-18, then, this suggest that a fair value for LITRAK may be around $4.7 to $5.6 within the next 2 years. If so, this would be equivalent to a potential upside of 22% to 46% from today's closing price of $3.82.
Q4/07 Balance Sheet
1. Total borrowings (short term + long term) at 31/3/07 = $890M. The equivalent on 31/12/06 (not shown above) is $99M+$905M = $1,004M. This represents a significant reduction in total borrowings by $114M in just 3 month period. This is comforting.
2. The reduction in total equity is largely due to capital repayment and dividend payments in 2006 of $122M and $35M respectively. Otherwise, everything else seems ok.
1. Nice 12 month operating cashflow of $306M. Given that this only includes 1 quarter of the higher toll rates, I expect FYE 2008 cashflow next year to be even higher, from having 4 quarters of higher toll rates, government compensation, as well as expectation of slowly increasing traffic volume effects.
2. LITRAK continues to repay its loans, which is a prudent and responsible thing to do. I like this. In fact, in the past, LITRAK M.D. has indicated that they intend to fully repay their loans in 8 years time. Looking at the above, they certainly have the cash-flow to do so. In fact, maybe even much sooner than 8 years if they really want to. However, I suspect LITRAK wants to share the cashflows with the shareholders, at least with higher dividend payments, and possibly even more capital repayments over the next 8 years.
LITRAK's latest Q4/07 results are within my personal expectations. There is a slight dissappointment with traffic volume and revenue, but this is not entirely unexpected as this is only the first quarter of implementation of the toll-rate hike. Overall, I still like what I am seeing very much, and would hold on to my LITRAK purchase. If Mr Market wants to be irrational and provides me with an opportunity to buy at discounted prices, I intend to oblige him and purchase more, as I believe it still has a nice potential upside from its current price of $3.82.
Disclaimer: I own LITRAK and it is my largest holding at the time of writing. Do read my previous post on LITRAK for context. Bear in mind I could be biased, and I could be wrong in my analysis. Naturally, I also reserve the right to change my mind in future without notice. Therefore, I strongly urge you to use your own judgement, and always remember that whenever you invest (buy, hold, sell), you do so at your own risk.
Wednesday, May 23, 2007
Not surprisingly, its after tax "earnings" (per existing report format - see above) is lower than last year due to lower "Revenue" (see lower revenue figure circled in red) compared to Q1/06. This is simply and mainly due to the smaller realization of its large paper gains.
The size of its paper gains at 31/3/07 is nearly $290M, easily dwarfing the $3.6M Q1/07 earnings reported above. Had management wanted to, it could have easily taken a small amount - say just 2% - of its paper gains for realization, and thereby report an additional $6M higher earnings for the quarter. However, this sort of practice may not always be in shareholder's best interest, as the best timing for disposals of shares should be dictated by market considerations (e.g. when it provides a high selling price) and not by the need to report higher quarterly "earnings".
As stated in past postings, a clearly better measure of OSKVI's true financial performance is NAV. An updated graph below. I expect the blue line to be significantly higher in 2-3 years time. I hope to be able to add more to my position when the pink line has reached bottom, before the catalysts appear.
This may be a timely place to summarize a few possible catalysts:
1. Conversion of more paper gains to cash. The main reason is to be able to report higher earnings for FYE 2007, besides increasing the cash hoard for other uses such as potentially higher dividend payments, working capital, etc. This is especially important, not just for OSKVI, but also for its parent who owns 66% of OSKVI - if the parent wants to report higher profits to Bursa for FYE 2007. The exact timing of the conversion is naturally uncertain (depends on management), but some needs to be done this year. To me, the 3,500,000 GPACKET shares sold in April is clearly insufficient - it is almost certain there needs to be more paper gains realized this year (unless 2. happens). The earnings in the last 3 years are $6M, $20M and $47M for 2004, 2005 and 2006 respectively. It is clear OSKVI do not need to realize much of its huge $290M paper gains in order to deliver a result like $70M-$80M for 2007, and its parent will be able to account directly its share of that in the parents books.
2. Market value reporting?? IF this goes through by the end of this year, then, OSKVI will be reporting an extraordinary gain of nearly $290M in its earnings, thereby substantially reducing the need to realize its large paper gains in 1. above. As a shareholder, I will gladly let management to do the work (that's what they are paid for) and decide when is the best time to realize the paper gains. In other words, if this doesn't go through, I expect management to use method 1. above to enable higher profit reporting for FYE 2007.
3. Potentially higher dividends? Note that OSKVI has been steadily paying increasing dividends paid, from 0% to 4% to 6.2% net of tax for FYE 2004, 2005 and 2006 respectively. I personally like the nice increasing trend! Last year, the first interim dividend was announced on 30 August, 2006, so, end August might be another possible catalyst.
4. Announcement of its major listing projects in China and Singapore? I don't know when this will be announced, but most of the expenses appears to have already been incurred, and hopefully, there will be some news either this year or the next. (Given the large number of new listings in China and Singapore, it's hard to see a failed listing - the only uncertainty is how successful it will be, and in both markets, it's kinda hard to see an unsuccessful listing too. Even if both markets crashes, I believe it is only a matter of time before they recover ...)
5. Further buying of OSKVI shares by its parent? This has happened 3 times this year, the last 2 times occured when OSKVI was on "sale". Parent now owns nearly 2/3rd of OSKVI. Possible privatization??? Actual timing and plans unknown. Pure speculation, with low downside risks if the parent stops buying more. Given its large current NAV, and its expected growth, I do not expect its parent to dispose its OSKVI holdings. (i.e. if the parent dispose, then, consider selling your OSKVI shares proportionately too first and ask questions later).
6. Further good business news ... E.g. news of success of other venture capital projects. I personally like the high growth stories in markets like China, India, Vietnam, Singapore, etc. The high growth sector stories is also nice. Eventually, the delivery of concrete results (such as 4.) are more important of course, and this one needs time and patience from investor's perspective. My personal time-frame is say 2-3 years, which I believe should be more than enough for average management to deliver.
Disclaimer: All the views and conjectures expressed above are purely mine. I have no inside information, and relies purely on publicly available information as data for my personal analysis and interpretation. I own OSKVI. Read past disclaimers and posts on OSKVI for full context. As usual, use your own judgement and invest (buy, hold, sell) at your own risk.
Monday, May 21, 2007
So, if you have comments on either posts, please feel free to post it here. I have also received a comment on "GPACKET and OSKVI", and will post it here in the comments.
Sunday, May 20, 2007
Amanah Millenia's defensive moves
Updated : 17-05-2007
Media : The Star
Story By : C.S. TAN via www.biznewsdb.com
PETALING JAYA: Closed-end fund Amanah Millenia Fund Bhd, which is facing a resolution for its liquidation, is offering a few carrots to its shareholders to vote against such a move.
Firstly, it has proposed a cash tender offer of up to 10% of the company twice a year. That would enable shareholders to sell their shares back to Amanah Millenia, and cash out completely over five years, if they wish to do so.
Secondly, it proposed to reduce its management fee to 0.75% a year from the existing 1.25% of the fund's net asset value. This represented a 40% reduction from the current fee, Amanah Millenia announced on Tuesday.
"These are measures to encourage shareholders to vote against the resolution, and allow them to stay in business,¨ a fund manager said. Amanah Millenia's articles of association state that on its 10th anniversary, which is this year, a resolution has to be tabled for shareholders to decide whether they want the fund to continue for another five years, or to discontinue, which is to liquidate.
The company, listed on the Bursa Malaysia main board, said that in its AGM next month, its board would propose the resolution, in accordance with its articles.
The writing on the wall is that some institutional shareholders that have taken up substantial stakes in the company, have a probable objective to close the fund. In this region, it is fairly common for institutional funds that have bought stocks of closed-end funds that are trading at a sharp discount to their net asset values (NAV) to vote for their liquidation.
In OSKVI's case, there is no similar buying by foreign institutional funds nor complete liquidation plans (as far as I know). Instead, OSK - the parent - has been steading acquiring OSKVI shares over the last 3 years. It's annual reports show the following percentages of shares owned by OSK:
- 31/12/2004 - 56.2%
- 31/12/2005 - 59.2%
- 31/12/2006 - 65.4% - quite a significant addition.
Since 31/12/2006, OSK continues to accumulate OSKVI shares 3 times with no disposals yet:
- 10 Jan 2007 - Buy 389,000 OSKVI shares at $2.66
- 28 Feb 2007 - Buy 408,000 OSKVI shares at $2.47
- 5 Mar 2007 - Buy 186,400 OSKVI shares at $2.28
The increasing %s does not necessarily mean that OSKVI intends to privatize the company. But it doesn't preclude the possibility of that happening, since it makes it easier, should a need arises to do so in future. Naturally, a company like OSKVI would represent great value to a private owner, who can buy $1 worth of business for far less than $1 (or say $0.65 as of last Friday), and the $1 is quite likely (almost certain??) to grow in future.
It is also interesting that the last 2 parent purchases happened on 28 Feb 2007, and 5 Mar 2007, both dates coincides with the period when OSKVI went on "sale" during the end February correction.
Laxey Partners Ltd, a fund management company registered on the Isle of Man, first declared its interest of a substantial stake of 5.05% in Amanah Millenia in March last year. That was when the share price was around 80 sen, a hefty 29% discount to its NAV of RM1.03.
Since then, Laxey has kept buying the stock until it became the second largest shareholder, with a stake of 16.2%.
Most closed-end funds trade at a discount to their NAVs because liquidating them would not result in the realisation of their NAVs, especially in funds that invest in thinly traded small-cap stocks. A sell-off of such stocks would cause their share prices to drop.
In the case of Amanah Millenia, which is mainly invested in big-cap stocks, any sell-off can be done easily. As such, a liquidation should lead to a conversion from shares into cash that is close to the NAV.
The discount in Amanah Millenia's shares has narrowed from a few months ago but it is still substantial. The stock closed at RM1.07 yesterday against its NAV of RM1.215 on May 11, a discount of over 13%.
That showed that Amanah Millenia's NAV has gained only 21.5% after 10 years. That is partly due to its launch just before the regional financial crisis broke out in 1997.
The only other listed closed-end fund, iCapital.Biz Bhd, is in contrast, traded at a slight premium to its NAV. The stock closed at RM1.64, just above its NAV of RM1.63 on May 9. There is a premium mainly because the fund has performed exceptionally well since its relatively recent launch.
It should be added that when the market values ICAP at a premium, it means there is expectation of outperformance in the future. Past outperformance does not guarantee future outperformance, but it does improve perception and the odds.
In OSKVI's case, I feel there is a good chance its NAV may increase faster than ICAP and AMANMFB over the next 2-3 years. I think if the market continues to under-value OSKVI persistently, either OSKVI is forced to realize its gains (at closer to market value than outdated book value) and distribute the cash to shareholders, or the parent might take the company private, both of which should be good for OSKVI shareholders.
Amanah Millenia said in its latest quarterly report it is not intended that the company should have a limited life,¨ but shareholders have the opportunity to review that this year, and at five-year intervals after that.
It is not known, however, how its largest shareholder, Permodalan Nasional Bhd (PNB), would vote at the AGM. It is surprising that PNB has steadily trimmed its stake instead of raising it to vote against the resolution to liquidate.
PNB's stake in Amanah Millenia stood at about 20% at the start of the year but this has gone down to 17.3% early this month.
The Employees Provident Fund (EPF) owned about 7.7% of the fund at the start of the year but had gradually sold down its share and ceased to be a substantial shareholder last month.
Disclaimer: I own OSKVI, ICAP and AMANMFB, and naturally, my view may be biased. At this moment, I do not intend to add any more OSKVI, unless Mr Market presents to me an even more compelling opportunity. I intend to use TA to supplement my trading decisions. Please use your own judgement and invest (buy, hold, sell) at your own risk. Please also read past disclaimers and postings for context.
Saturday, May 19, 2007
"OSKVI quater reports might coming out in this few days. It might be the key to drive OSKVI to uptrend or even more downtrend ... Let see... "
I think it is possible to estimate OSKVI earnings for Q1/07. My personal expectation is that it will be worse, simply because OSKVI has not reported to Bursa a realized gain (for its 4 large Mesdaq associates) for Jan 1-Mar 31 period. I could be wrong, but my rough estimate, after reading the reader's comment, is around $4-5M. If true, this is likely to be a dissappointment from last year's earnings of $7M+.
It is also possible that the market knows this dissappointed result based on the declining price trends over the last fortnight.
The downtrend can clearly be seen in last fortnight at the least.
On the other hand, as I mentioned previously, OSKVI has realized gains in GPACKET on 19 April. This should be reflected in Q2/07 result. Even though Q2/07 is not yet over, the odds are better than 50/50, that it will be better than Q1/07 result (and even Q2/06), simply due to the large realized gain on 19 April. The odds of this happening is better than 50/50 to put it modestly.
You may not believe this, but based on an unusually large revenue (most likely due to large realized gain) in Q3/06, one one could almost predict that Q3/07 is likely to dissappoint, if management do not realize an equivalent amount of gains in Q3/07. However, since Q3/07 is not here yet, it is safer not to trade assuming this will be true, as management can choose to realize its substantial paper gains at any time during Q3/07. Take 1 quarter at a time.
But a question - should earnings reflect just realized gains? Does paper gains not matter? As investors, do you feel happy if your realized your gains (and keep your paper losses)? For me, I don't.
However, the reader is correct, in the sense that if the market believes that reported earnings is accurate for OSKVI, then, it is foolish to bet against the market. Until there are signs that perceptions changes (and TA is the best tool for this), it may be wiser not to enter, if one has a shorter term horizon.
To me, I have different reasons for owning the stock. Unfortunately, due to time constraints, I am unable to write further. But the interested investor is referred to research up OSK's holdings in OSKVI over the last 3 years - there you can see that OSK is steadily accumulating OSKVI's shares. Further, study its dividends pattern over the last 3 years - there you should see a steadily increasing dividends. Further, there may be a move to move to market value accounting by the end of this year, but I am not an expert in this area and merely speculating. Now, all these patterns could mean nothing at the end of the day. Further the time to realization of value could be a long way away, and we could be talking 1, 2 or maybe 3 years. So, time your entry carefully (using TA if you know how), and don't invest more than 5% of your stock portfolio in this, as the stock has the potential to tie up capital for quite some time.
Disclaimer: As usual, use your own judgement and invest (buy, hold, sell) at your own risk. I am not an employee nor affiliated with OSKVI, but merely a retiree. My opinions are based purely on publicly available data, and so, it could be incomplete and wrong. Be cautious since the market is rarely obvious, and is likely to fool most people over the long term. For a more accurate timing of entry using TA, please consult an expert, as I do not consider myself as one, but merely a student (and likely a lifetime student) of TA. And please read past OSKVI posts and disclaimers for context.
(courtesy of tradesignum.com)
Yesterday, GPACKET continued its downtrend from Feb 26 peak of $5.85 to close $4.02 May 18.
May 18 day seems significant, not purely from the size of the price fall (18 sen) but volume traded. Volume is highest in last 3 month, 2nd highest over last 12 months at 3.8M shares traded (Highest = 4.4M on Dec 20, 06), and is the 2nd "high" volume to follow May 11 first relatively high volume (6 trading days ago).
It is worthwhile to zoom in into GPACKET trading history yesterday. Unfortunately, since I don't know how to capture the picture of the intra-day chart, I need to give you a verbal description.
GPACKET Intra-day Price and Volume commentary
- GPACKET closed $4.20 the prior day.
- At 9.17 AM, opened at $4.18 with a slight gap down.
- At 9.55 AM, price started to decline further, albeit at low volume initially.
- At 11.17 AM, the stock has fallen to $3.80, and volume started to pick up at around 11.17 AM. This indicates possible intra-day fear selling.
- At 11.23 AM, the stock touched a low at $3.68 (12.4% and 34% fall from prior day close and Feb 26 peak).
- During 11.17AM-11.23 AM, it must have felt very scary to own GPACKET if one just look at market prices.
- At 11.24 AM, the bulls stepped in and drove the price back up.
- At 12.30 PM, the stock closed $3.88.
- Upon reopening at 2.30 PM, strong buying interest on higher volume stepped in at $3.90.
- The afternoon session sees the bull having the upper hand, and the price closed at $4.02.
- However, for the whole day, one would say that the bears still have the upper hand, driving the price from $4.20 (prior day close), down to $4.02 (yesterday's close). Therefore, it is possible the intermediate downtrend might not be over yet, and one would need to watch GPACKET price on Monday morning/next week for confirmation of further downtrend, or otherwise.
Effect of GPACKET on OSKVI on Share Price and Volume
(courtesy of tradesignum.com)
Since OSKVI owns a large amount of GPACKET, what was the impact to OSKVI, after the large drop to GPACKET, at least to $3.68 at $11.23 AM yesterday?
1. From a volume perspective, not much. In fact, the total OSKVI volume traded is very low from the last 12 months perspective, well below average daily volume, almost minimal. (but watch next Monday to next week for possible time-lag/time-delay effects on OSKVI).
2. From a price perspective, a slight fall. Price fell from $2.40 close May 17, touching a low of $2.34 on small trade (2% fall), before rebounding and closing at $2.38 (<>
Effect of GPACKET on OSKVI NAV
Let me reiterate that I firmly believe that when one supplements fundamental analysis with an accurate application of TA, then, one can get superior results than merely employing one method alone. It may seem obvious and redundant to say this, but if you can read TA accurately, don't ignore TA.
Notwithstanding that, let's take a look at OSKVI's chart - please use your judgement, and form your own conclusions:
You might rightly ask why is it correct to buy on July 3 at a higher price than on June 29 (just 2 days ago)?
To a trader who focussed purely on share price and volume, July 3 provided confirmation of an uptrend. June 29 didn't.
However, to a value investor, a situation like June 29 is not a bad day to buy since the stock is on a bargain.
It is important to keep both concepts clearly in mind. There is no right and wrong answer, just different styles.
2. Aug 24 - Nov 16, 2006: Share enters consolidation phase.
3. Nov 16 - Today: Share appears to enter a mid-term downtrend.
Here, it's worthwhile to point out the benefits of being a trader. A trader would have noticed the downtrend signal around Dec 4-5, or maybe even earlier. On the other hand, a value investor that ignores TA could still be holding on to the stock as it should still appears under-valued, although clearly less under-valued than on June 29. In this instance, a trader would do better. Again, it is important to appreciate the benefit of different styles.
4. Mar 16 - Today: There may be a possible side-ways trend, but at the back of a longer-term downtrend bias noted in 3. above, it is still not clear. Certainly no clear uptrend visible yet.
5. On May 16 07, the stock showed a small green candle, with a small green volume (i.e. slightly volume increase). To be honest, on May 17, I mistook that for a potential bullish TA signal in investssmart chatbox - a TA beginner mistake. In retrospect, it was clear that I was wrong in interpreting the charts in at least 2 respects. First, the price increase is small, i.e. it pays to be suspicious. Second, the volume increase on May 16 is small, and it pays to be suspicious, especially with point 3. Third, on the next day (May 17), there was already clear sign that the upside observed on May 16 might not have much energy left, as confirmed in May 18. In other words, the strong uptrend sign is clearly not there yet. It is important to continue monitor for that sign, be patient, and wait for the signal to show itself (or more accurately, for all signals to align themselves to give compelling reason to buy), if one wants to time one's entry well.
1. If you have the skills, use TA to supplement your entry into OSKVI.
2. From a business perspective, OSKVI shows a compelling value, despite the potentially large fall of GPACKET. Certainly, as a value investor, I would consider acquiring OSKVI in its entirity at current prices.
3. Other things equal (and bear in mind real life is rarely equal), GPACKET would need to fall from $4.02 to $1.55, before OSKVI trades at 100% NAV.
4. There needs to be strong catalysts that will unlock its potential value, before one decides to invest. A reader has just commented on a potential catalyst. I have provided some potential catalysts in earlier posting, but since the post is long, I will comment on that in a later post. Hopefully, I'll get the time to do this, but there should be no hurry, as the catalysts may take some time before it happens.
Disclaimer: As usual, use your own judgement, and invest (buy, hold, sell) at your own risk.
Thursday, May 17, 2007
You might not have seen this before.
I have estimated the NAV using publicly available data (see basis below). No doubt it will differ if OSKVI publishes its own NAV figure (except perhaps at the starting date at 31/12/2006), but it looks to be the right order of magnitude. Buffett quote ... "it is better to be approximately right than precisely wrong".
Share Price Observations
(see pink line)
1. Note the peaks ($2.90 10 Apr, $2.84 23 Feb) and low ($2.26 5 Mar).
2. The peak to low fall is 22%.
3. Seems irrational, since the NAV didn't even come close to the share price on 5 Mar.
(see blue line)
1. Note the peak ($4.60 23 Feb) and low ($3.77 twice - 5 Mar and yesterday)
2. Only 18% fall - proportionately stabler.
3. Still big gap between Low NAV ($3.77) vs Peak Price ($2.90), or 28% potential gain.
4. Still bigger gap between Low NAV ($3.77) vs yesterday's price ($2.40), or 54% potential gain.
(compare pink with blue line)
1. Some correlation between Price and NAV. Both peaks on Feb 23, and both lows on Mar 5. Not perfect, but close.
2. Correlation would make sense, if there was no gap between NAV and OSKVI share price. But given the huge gap, it doesn't make full sense. It suggests Mr Market doesn't really know how to value OSKVI, due to largely inefficient market.
3. As noted before, closed end funds rarely (almost never?) trade at such a large discount for such a long period. Eventually, the investment community and investing public will discover the mispricing, and blogs like this and others will come up to reduce the information gap.
4. Just a couple of days ago, AMANMFB announces a proposal to shareholders to buy back a limited amount of its shares at 97% NAV. Note the discount is only 3%, not 28% to 54% potential gains above.
5. Since 31/12/06, several OSKVI's holdings has taken a significant price beating:
- Green Packet fell 27% from $5.75 peak (23-26 Feb) to $4.22 low (yesterday).
- MNC fell 37% from $0.295 peak (19 Jan) to $0.185 low (yesterday) - 37% fall.
- mTouche fell 46% from this year's high of $3.70 (8 Jan) $1.96 low (4 May), before recovering to $2.19 (yesterday).
Individually, these falls are scary. And the May effect, possible Shanghai crash rippling to the rest of the world, and other scary stories are not even here yet ...
6. Yet, OSKVI NAV didn't fall that badly, and didn't even come close to Share Price. This is due to the big starting gap, and the diversification benefits in its portfolio. When Green Packet, MNC and mTouche fell, eBworx gained 126% and Willowglen gained 38% (from 31/12/06 to yesterday).
7. Further, valuing OSKVI based on just NAV is understating its true net worth, as we get closer to the date when its China and Singapore ventures are listed. Its future venture capital business must surely be worth something too. There is no doubt in my mind that OSKVI is worth a lot more than yesterday's NAV of $3.77.
- Do read my earlier posts on OSKVI for context and additional information.
- Do read the disclaimers there also.
- As usual, use your own judgement and invest (buy, hold, sell) at your own risk.
NAV Estimation Basis
- My starting point is the data reported in the 31/12/2006 Balance Sheet and the Notes in the Accounts. This gives a calculated NAV of $594M.
- At the same date, the sum of the Market Values of its 6 listed Mesdaq counters is $444M.
- This gives a difference of $150M (=594 - 444), which I have assumed to remain constant since 31/12/06 (I believe this is not critical at this stage, since the number is relatively smaller, and the degree of under-valuation is high).
- Therefore, the fluctuations since 31/12/06 is simply due to the daily changes in share price of the 6 listed Mesdaq stocks that it owns.
Wednesday, May 16, 2007
OSKVI to step up investments in regional telco, media
Updated : 19-04-2007
Media : The Edge
Story By : Isabelle Francis via www.biznewsdb.com
OSK Ventures International Bhd (OSKVI), which intends to almost double its fund size to RM1 billion in two years, plans to step up its presence in the regional telecommunications and media sectors.
A growth from $600M (estimated NAV, or what the article called "fund size") to $1B in 2 years time is equivalent to 29% per annum growth rate - very decent return. However, the per share NAV is $4 (=$600M/150M shares), which is higher than current share price of $2.36. So, if one buys at $2.36, then, the potential upside is even better. Since OSK already own 65% of OSKVI, I will not be surprised if one day, OSKVI does a VGO when the time is right - the potential returns are just incredible.
Its executive director and chief operating officer Eddie Yap said it had identified a "few" new businesses in the telecommunication and media sectors to invest in, both locally and abroad.
If anyone has more details on the new businesses, I would appreciate hearing from you. Thanks.
He said it was keen to expand in China and have direct exposure in the Indian and Vietnamese markets.
"These are sectors that are growing rapidly. We also focus on dynamic regions. We focus a lot on the Southeast Asian and North Asia region, particularly China," he told reporters after OSKVI's AGM in Kuala Lumpur on April 19.
He said OSKVI, which is the venture capital and private equity arm of OSK Holdings Bhd, had to date invested in 20 companies, of which 12, including Green Packet Bhd and mTouche Bhd are now listed.
On its current investment overseas, Yap said its latest venture in China was the outdoor advertising businesses there.
It has also invested in a Singapore-based industrial waste management company.
He expected these two investments, which are worth over RM53 million, to spur the growth in the near future.
Actually, the way I would interpret the $53M figure is that it is not "worth" but cost OSKVI $53M. Technically, the actual worth to OSKVI is still unknown, until they list both ventures. And it is not unreasonable to think that the China and Singapore ventures combined could be worth close to $300-$400M? (being the difference between $1B and $600M). If so, that's not a bad return for a $53M outlay.
"20% to 30% of our portfolio are foreign entities but all our companies have business overseas although listed in Malaysia,¨ Yap added.
Yap said as of Feb 28, 2007, the total market value of its investments in the listed investee companies was about RM536 million while its cost of investments was only RM145 million, giving an unrealised gain of RM391 million.
The $391M figure should be more reliable as it captures everything. My earlier figure of $260M is on a different date (31/12/2006 - older date - big difference), and is based on a sub-set, i.e. just the 6 Mesdaq listed stocks. I believe it is sufficient to show that at current prices, OSKVI is clearly under-valued. This is also why I prefer NAV reporting, to show a truer picture of its net worth.
"When we reach a certain value, and we think it is a right sale, we will sell.We are in the investment and divestment business. We need to make money for our shareholders,¨ said Yap.
In retrospect (and hindsight is 20/20), I think it would have been better to sell more of their large holdings during the Feb 2007 bull run. Prices were higher, trading volumes were much bigger, that the conditions were perfect for a large block sale. At its peak, GPACKET was trading above $5.30 (peak=$5.85). Last night, it was only $4.18. They did sell 3,500,000 GPACKET shares on 19/4 on an off-market transaction, but the price range on that day was only $4.96-$5.05.
In addition, he said, OSKVI fund size had grown at a commendable compounded annual growth rate of over 40% to over RM600 million now. It expected it to grow to RM1 billion in the next two years.
"In terms of profitability, we definitely grew over 100%,¨ Yap said, adding that the company remained optimistic with its financial growth moving forward.
For the financial year ended Feb 28, 2007, OSKVI's net profit jumped 132% to RM47.01 million from RM20.3 million a year earlier.
I understand the market currently prefer to focus on "net profit" and in the ideal world, it would be correct. But in OSKVI's case, due to its unique business model, I believe NAV is the clearly better measure of the underlying business performance for reasons mentioned before. Personally, I prefer OSKVI to educate the public that NAV is the better measure, but the accounting profession might disagree (although I am not an accountant, and I still can't understand why the accountants report OSKVI books the way they did). This is why I don't recommending owning OSKVI more than 5% of one's stock portfolio. It has the potential to tie up capital, as long as OSKVI, the accounting profession and Bursa don't focus on the right tool to measure OSKVI's success. Still, I'm sure the parent - OSK - isn't bothered, and so, I will follow the parent.
Disclaimer: As usual, use your own judgement and invest (buy, hold, sell) at your own risk.
Tuesday, May 15, 2007
ICAP (ICapital.Biz Bhd)
- Between ICAP and AMANMFB, I would regard ICAP as the more popular fund amongst investors.
- To me, its long-time popularity is due to many reasons centering on its superior past performance. It has enabled the MD to appear in the both local and international business news with greater publicity. Its stock advisory service in both print and internet form is popular as a result of it, so, not surprisingly, the fund is generally popular with investors.
- In the CEF business, success is measured by NAV (Net Asset Value) growth, or the growth in the market value of its investments. Note – not book value. Almost nobody measures CEF by book value. Doing so can be potentially hazardous to one’s financial health.
- For ICAP, it has successfully grown NAV from $1 to $1.63 in just 1.5 years. This is a truly impressive performance, if they can sustain this over the long term.
- Its popularity is reflected in its share price trading at a premium to NAV.
- However, the premium % is never a constant nor guaranteed. For CEF, the premium % varies over time, and ICAP is not immune. Historically, ICAP has more often traded at a premium than a discount, and is currently trading at a premium around 1%-3%.
- To a rational investor, the premium% is a reflection of investor’s confidence in the Fund Manager to grow its NAV in the future.
AMANMFB (Amanah Millenia Fund Bhd)
- AMANMFB is a much older fund (nearly 10 years old) than ICAP.
- Its past performance is rather poor. Latest NAV at 11 May 2007 is only $1.215 compared to $1 ten years ago. The main reason is because AMANMFB started the fund at a bad time, when KLCI was close to its peak 10 years ago.
- Still, a poor performance is a poor performance regardless of the reason. Investor’s long-term disappointment is reflected in the share price. The share is still trading at a discount to its NAV.
- However, what is interesting is that in the last 6 months, AMANMFB NAV has begun to turn-around, and grow again.
- As a result (together with speculation of higher liquidation payout & large interest from foreign investors), we have seen the discount% gradually reducing from over 20% to 13%.
- This has resulted in “double-whammy” effect on AMANMFB share price. The share price has increased faster, from the rise in NAV and the reducing discount%.
- Like all CEF, the discount% (or premium%) varies over time.
Therefore, we can see that in the CEF business, superior performance in growing NAV (or Intrinsic Value) is very rewarding. Not only does increasing NAV (underlying asset values) results in increasing share price, the increasing fund popularity with investors also result in an increasing premium % (or reducing discount %) to NAV. This creates the “double-whammy” effect on the share price.
Ok. But what does this have to do with OSKVI?
Well, as the title suggest, I believe OSKVI is really a Special Closed End Fund disguised as a company.
There is a saying that if something looks like a duck, walks like a duck, swims like a duck and quacks like a duck, calling it a chicken or a goose doesn’t change the fact that at the end of the day, it’s still a duck … Sounds logical right?
Well, having looked at OSKVI in detail, it seems to me that OSKVI looks like an Enhanced CEF, walks like an Enhanced CEF, swims like an Enhanced CEF, and quacks like an Enhanced CEF. So much so, that even if Bursa & the regulator calls it a company (and impose company type reporting without weekly NAV reporting), at the end of the day, it should still be an Enhanced CEF. Makes sense?
Logically, if they are really similar, then, the financial characteristics and financial statements should look similar right? Well, let’s compare OSKVI financial characteristics first with ICAP.
The similarities are more striking when comparing Balance Sheets:
Comparative Balance Sheet
To make the exercise a bit more interesting, I have kept the names hidden first.
1. Investments and Cash forms at least 99% of Total Assets for both.
2. Current Liability less than 1% of Net Assets for both.
3. Borrowings nil for both.
4. Net Asset reported in the Balance Sheet is at cost. Not representative of market values of listed securities for both.
5. NAV (market value) is larger than Book Value (at cost), due to Unrealized Gains for both.
6. Unrealized Gains are significant. In fact, one of them is much larger than the other
Actually, if you had studied my previous article, you should be able to identify the correct answer instantly from the size of the numbers. If you had picked the RHS column for ICAP (since it has a bigger Unrealized Gain), then, your pick would be wrong.
Yes, OSKVI has a much, much larger unrealized gain than ICAP, even though it is not a CEF. Actually, it is not surprising due to the highly successful listing of its Mesdaq “associates” like GPACKET, etc. OSKVI is worth a lot more than what Book Value would indicate, and a large amount of this extra net worth does not depend on distant future events, but are quite real today.
Ok, here’s the full table, with labels, as well as additional section below to compare NAV vs Share Price to show the premium % (or discount %) size.
1. ICAP share price is closer to NAV than BV.
- At 31 May 2006, ICAP share price = $1.25. NAV = $1.13 (12 sen lower). Book Value = $0.99 (or 26 sen lower).
- At 9 May 2007 (NAV date), ICAP share price = $1.65, just 1% premium over NAV.
2. As expected, OSKVI share price doesn’t reflect its NAV at all.
- At 31 Dec 2006, share price = $2.80. NAV = $4 ($1.20 higher). BV = $2.2 (60 sen lower).
- At 11 May 2007, OSKVI share price = $2.4 , which is a large 35% discount to NAV.
- Therefore, at current prices of $2.38 which implies 35% discount, it appears Mr Market is penalizing OSKVI much worse than when AMANMFB didn’t perform for the last 9.5 years and provided negative returns.
Measuring OSKVI’s Past NAV Growth
Ok, if OSKVI is a special type of CEF, how has its NAV grown in the past?
According to the company website, OSKVI IPO raised $175.5M from shareholders on August 2004. The stock was listed in Sep 2004, or nearly 2.75 years ago. During this period, that $175.5M shareholder equity (or initial NAV) has grown to nearly $600M in 2.75 year period. Standardizing, for the same base line as ICAP, that would be equivalent to ICAP growing from $1 to $3.42 over 2.75 year period. That’s mighty impressive for a CEF isn’t it?
And the best part is that OSKVI’s future growth is not over yet. In Apr 2007, the company reported to the press that it intends to grow its funds to $1B. To me, this has a high level of believability, if one factors in the China listing venture together with the Singapore listing venture, as well as allowing for Mesdaq and stock market general growth over the next 2 years, not to mention growth in venture capital industry domestically and within the region, it's plans to expand into rapid growth market like Vietnam, etc. etc.. At $1B NAV, it would be equivalent to ICAP growing to $5.70! (from $1 originally).
Or put another way, can AMANMFB or ICAP really generate the same NAV growth performance like OSKVI?
So, I submit to you - is this rational market pricing, to price OSKVI ignoring its NAV and ignoring its future prospects?
Some Concluding Comments For Consideration
To me, it is clear that OSKVI has been mis-priced in a large manner. Why?
1. OSKVI is really an enhanced closed end fund in disguise. If I were a private buyer, NAV matters, and hell, its current projects and future prospects matters too (after due diligence of course). In fact, its proven ability to identify good and promising businesses to list, and its ancillary services that it provides are real enhancements to normal CEF, that makes it a fairly unique CEF.
2. Bursa reporting doesn’t report the weekly NAV for OSKVI, which clearly has resulted in the market mis-pricing OSKVI.
3. However, just because of a long-term reporting deficiency in 2. is it rational to assume that OSKVI doesn't have unrealized gains? Is it rational to let weekly NAV reporting to decide whether OSKVI have or don’t have unrealized gains in its books?
4. Is OSKVI’s past performance so bad that it deserves to be priced at a much bigger discount to NAV than AMANMFB?
5. Is OSKVI’s future prospects so bleak that they deserve to trade at huge discounts to its NAV?
6. Is OSKVI’s future NAV outlook worse than both AMANMFB and ICAP?
7. IF OSKVI were to suddenly report NAV on a weekly basis, would you suddenly decide that instead of $2.4, the stock is now worth a lot more? Is that rational?
8. Will the mis-pricing lasts forever?
9. Will it take a long time before mis-pricing is corrected?
10. When OSKVI is successful in growing its NAV, and the market decides that instead of applying a discount%, it should apply a premium%, what effect would it have on OSKVI's share price? Is a double-whammy effect (both NAV growth and reducing discount% effect) worth nothing?
11. If it takes a long time (e.g. 2-3 years) for a huge catalyst to appear (I expect the usual news effect to occur from time to time), is the current dividend yield of 8% gross and 6% net attractive compared to current fixed deposit rates?
12. If you don’t intend to sell over the next 2 years, what is the downside and what could be the potential upside?
13. Even if one's conservative Target Price is say $3.2 (= 80% of its NAV of $4), and with current market price at $2.40, that is equivalent to 33% expected return … Is OSKVI a sell with this sort of potential returns? A hold? Or a Buy?
What do you think?
Disclaimer: As usual, use your own judgement, and invest (buy, hold, sell) at your own risk.
Sunday, May 13, 2007
Raw material costs for Ethanol Division (Chemical Industries)
In one of HEXZA's annual reports, I learned that the main raw material cost used in the production of ethanol by HEXZA is molasses. For those of you who don't know what is that, molasses according to Wikipedia is a thick syrup by-product from the processing of sugarcane (or sugar beet) into sugar. As such it doesn't seem unreasonable to expect molasses price trends to follow sugar prices trends. I managed to find a nice long-term graph of sugar prices which could be worthwhile to take a look:
1. Note the exponential rise in sugar prices from mid 2005 to mid 2006.
2. According to the Chairman's Statement in 2005 Annual Report, molasses price skyrocketed from Dec 2004 to April 2005. It affected HEXZA since local production of molasses are clearly insufficent, and they needed to be imported from overseas. This is consistent with the above chart where in Dec 2004 to Apr 2005, sugar prices has just came out from a bottom at 2003. The reason given was due to the severe draught in India and Thailand. India - a usual exporter - became importer. The Chairman expected the high prices to remain until the next harvest season in Dec 2005. This is consistent with the above chart where prices continue to escallate sharply (due to limited global supply) and peaking at the start of 2006, and then fall as the next harvest comes in.
3. More interestingly, in 2007, sugar prices seems relatively stable, and a slight drop towards the end.
4. Whilst HEXZA might actually pay different prices for molasses, the sugar price chart above suggests that if the trends are similar, then, we can perhaps expect HEXZA raw material cost to come down over the near term. I suspect there should be some time-lag effects, although at this stage, I am only speculating that the period might be say over the next 1-6 months?.
5. But there is no doubt that there is a clear secular / cyclical pattern to sugar prices, when looked from a long-term perspective. I expect this to apply to both HEXZA and its competitors that uses molasses as the main raw material.
Raw material costs for Resins (timber) Division (Norsechem and Hexzachem)
The main raw material for Resins Division are methanol, urea, phenol and melamine. According to a past Annual Report, the prices follow Crude Oil and Liquified Natural Gas. Fortunately, I've also managed to find a fairly long-term graph of light crude oil (Nymex). Again, the actual prices paid by HEXZA will be different, but hopefully, the price trends will be a close enough approximation.
1. Note the escallating crude oil prices since the bottom at end 2001, which steadily rise to a peak in mid 2006, before declining towards the end of 2006.
2. What I find most interesting is that during this long period of escallating raw material costs, HEXZA bottom line actually grow over the same period. To me, this is a good sign since it shows that the company knows and have proven themselves to know how to manage escallating raw material costs over a fairly long period.
3. In 2007, crude oil prices has risen again. It is unclear if there is a time-lag in HEXZA's actual raw material costs. Certainly, the Resin Division and the Ethanol Division are 2 different and separate processes. It is possible that maybe there isn't significant time-lags - perhaps more knowledgeable readers can comment further.
4. Nevertheless, I take some comfort that there seems to be diversification benefits - whilst crude oil prices have increased from the start of 2007, sugar prices on the other hand has came down.
5. At this stage, my own personal conclusion (based on the little that I know so far) is that maybe, the raw material cost increase reported in the latest earnings report is a temporary event (i.e. assuming earnings to fall by 30% permanently might be a bit drastic). More likely, HEXZA management should be successful in controlling its raw material costs, as they've demonstrated over the last 4-5 years at the very least.
6. As usual, more knowledgeable readers are welcome to correct me. :-)
Other comments on raw material costs
1. As stated in one of the annual report, "most of our raw materials are imported".
2. It seems HEXZA does not have any outstanding foreign currency forward contracts (none disclosed in latest earnings report and annual report).
3. Thereby, an appreciating RM can be reasonably expected to reduce the cost of its imports, and vice versa.
Investment in Quoted Securities / Other Investments
Grahamsmun brought to my attention that HEXZA actually hold listed stocks in its portfolio. Thinking about what Grahamsmun said, and reflecting on the balance sheet further, I note that I have been extremely conservative in my calculation of P/E and Liquidation Price in the past. In both cases, I have assumed a nil value, when they are clearly not nil. (I'm sure even if I ask HEXZA very nicely to part with their quoted stocks, I believe they are unlikely to give it to me for free :-) ). So, there's clearly value there - the only question is how much? It's clear that we need to study Note 16.
1. The book value basis is "at cost".
2. The book value of listed shares (including warrant, etc.), less allowance for dimunition in value is $12.3M.
3. The market value of the same listed shares is $12.3M also, i.e. there doesn't seem to be a significant unrealized gain at 31/1/2006. (This is not too surprising, as the bull run only started later in 2006).
4. There is unquoted shares at $3.9M.
5. Note all these are out-dated values at 31/1/2006. For updated values, we need to check the quarterly earnings report.
6. In that report, at 31/3/2007, the total investment at cost is $14.0M. Total investments at market value is $18.5M. Not surprisingly, there is unrealized gain of $4.5M (KLSE has been good recently).
7. I suspect that if one is forced to liquidate its shares today, probably one could easily fetch 95% of that stated market value of the quoted shares. However, the stock market is volatile, and much depends on the timing of liquidation. There is no guarantee that in future, the market value of those stocks will rise (even though we might expect the market as a whole to rise). Since we simply don't know exactly what stocks HEXZA hold, we have to be prudent and assume a safety margin. For my liquidation valuation, I have assumed a prudent factor of 75%, and yes, it is debateable, and yes, your factor can be validly different than mine.
Updated Liquidation Valuation
1. Liquidation Price 1 is the old liquidation price that I previously reported here.
2. Liquidation Price 2 is adding 75% of the quoted shares at Market Value, with other % unchanged. (see original posting). At 31/3/2007, this comes out at $13.9M (= 75% x $18.5M). Based on this revise basis, the latest liquidation value is $0.76.
3. Looking at liquidation price 2, it is interesting to note the trend over time. Back in FY 2001, when the company quoted shares is only $2.9M, both Liquidation prices are close to one another. Over time, the gap has steadily increased, and today, there is actually a $0.11 difference. This quite a significant difference, even though I have assumed a 75% factor.
4. Note that in my liquidation valuation, I am still assuming nil value in HEXZA's other assets as I am lazy, and it is a conservative valuation.
5. It is interesting that at last Friday, HEXZA happened to trade at $0.77, which is just slightly higher than its liquidation valuation. Had I done a proper job earlier, I would have considered grabbing as much HEXZA shares as possible when it was selling at well below $0.70 ... as it was clearly trading below its liquidation valuation ... oh well ...
It is a fairly common analytical technique where when there is uncertainty about one or two variables, that the analysis considers the possible ranges of the variables in order to get a feel for the impact on the final result. Here, I foresee 2 possible variables - the first is on earnings (whether earnings will stay the same, or fall by say 30% forever due to the recent rise in raw material costs), and the second is on whether the business should be valued including / excluding 75% quoted shares. For completeness, I have also considered the superficial P/E (where one ignores Net Cash completely).
1. My base case is actually Scenario 3, where I've taken out Net Cash (= Cash + equivalents - Total Borrowings) as well as 75% of shares from the current price. At current price of $0.76, it suggest that the business is available for sale at $0.37 = $0.76 - $0.27 - $0.11. The EPS for the Trailing 12 Months (TTM, which I've approximated, assuming uniform distribution of earnings in Q1/07 and taking a third of that) is $0.11. This suggests that at last Friday's closing price, HEXZA is still trading at a fairly undemanding valuation of 3.5 times.
2. It is possible that some of us might still be a bit nervous that the raw material costs could stay permanently high, despite the charts that I've shown and despite the appreciating RM. It's probably worthwhile to consider (for peace of mind) what would happen if HEXZA's earnings were to stay 30% below forever. This is Scenario 6, and it suggests that at current prices, HEXA P/E would be 5 times. Still fairly undemanding (now I can sleep ...).
3. A novice fundamental investor might only consider the market price and the EPS. This is Scenario 1, and the implied P/E is 6.9. Still undemanding. In the worse case, if EPS drops 30%, this is Scenario 4, and the P/E is about 10.
4. My personal conclusion is that HEXZA is really trading at a fairly undemanding P/E, even at last Friday's closing price of $0.76.
Updated Intrinsic Value
As I mentioned above, I believe that my base Scenario should be Scenario 3. It is clear that this is different from what I had written earlier, due to the new information (new to me) and updates that I mentioned above. Under this scenario, a natural question might be what could be an appropriate Intrinsic Value for HEXZA?
Again, this would boil down to what should be the appropriate P/E for HEXZA. Personally, my discount rate could be different from yours, but if I demand a minimum return of say 15% p.a., then, if HEXZA earnings has nil growth, then, my P/E will be 1/15% = 6.7 times. This I think is fairly conservative and prudent. So, my own intrinsic value is $1.14 = 6.7 x 0.11 + 0.27 (cash) + 0.11 (75% share). This is higher than SBB's Intrinsic Value of $1, both of which are higher than current price.
If you don't know what Intrinsic Value is, then, basically it's just what I think the company is worth and what I think a rational businessman would consider paying, if he wants to buy HEXZA in its entirity, without changing anything at all (including not changing its management). If you want to know more about Intrinsic Value, I recommend you to read Berkshire's Annual Reports. There's no single right answer to Intrinsic Value. But as Buffett likes to say "It's better to be approximately right than precisely wrong". This is the spirit as to how I estimate HEXZA's Intrinsic Value.
Still, there might be other shareholders who might not be as demanding as me, in terms of applying a P/E of 6.7. They might use a higher P/E, say 7 to 10. If so, this will naturally raise their own estimate of HEXZA Intrinsic Value.
However, you might validly think that raw material prices will permanently decrease HEXZA earnings by 30%. In that case, the Intrinsic Value might be $0.90 = 6.7 x 0.077 + 0.27 + 0.11. In which case, it would be slightly lower than SBB Intrinsic Value. So, maybe SBB's Intrinsic Value of $1 might not be too bad after all for prudent investors.
For the readers of this blog, I encourage you to form your own opinion on what is HEXZA's Intrinsic Value, based on the data that I have provided here and elsewhere.
For me, I believe that HEXZA is still trading at a fairly undemanding P/E, despite last Friday's price increase. I believe there is more potential upside. However, it is possible that the market might not agree with me. That is always a risk. However, if you believe Buffett, that in the long run, the market is a weighing machine, then, there is only one conclusion. (buy)
You already know I don't work for HEXZA.
You also know I own HEXZA shares, although in a moment of temporary insanity, I sold some of my holdings earlier to bring down my average cost ...
You know constructive comments are welcomed, especially when they are different from my own.
And you know my usual Disclaimer - "as usual, use your own judgement and invest (i.e. buy, hold, sell) at your own risk".