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Friday, May 11, 2007

OSKVI - A hidden gem


To a fundamental investor, OSKVI is a stock that is easy to overlook. Why? Well, take a look at its latest quarterly earnings, and see if it makes sense ... Revenue = $4.4M ... PBT = $7.2M ... PAT = $7.7M. Huh??? Revenue smaller than PBT??? PBT smaller than PAT??? (... next stock please ...)

Or maybe it's just 1 quarter abberation. So, let's take a look at the entire 2006 year. Revenue = $42M. PBT = $55M. PAT = $47M. Okay ... at least PAT is smaller than PBT, but that still doesn't explain why Revenue is smaller than Profit, and it's not just 1 quarter aberration ...

I suppose if one is busy, it is only natural to dismiss this company as "strange", and move on to other companies with more reasonable numbers ... In fact, I nearly dismissed this little gem myself, if it wasn't for its 2006 annual report which was also published in Bursa on 28 March. As someone who is naturally curious and likes reading, I downloaded the annual report from Bursa's website, got myself comfortable and started reading.

Well, I'm glad I did that, as well as other digging around, because it explained a lot of things. It gave me a much better understanding of why the accounts got reported that way. It gave me a good understanding of OSKVI business, and its main source of profits. And it led me to personally conclude that the quarterly earnings reports and the Balance Sheet reports - in their current format - is deficient. In summary form, they would not present a true and fair picture of the company. Here is one case where they clearly must be read in conjunction with the annual report, to get a true picture of OSKVI.

Ok. Let's start with the questions - how can OSKVI revenue be smaller than its PBT? What is OSKVI business, and how do they make money? More importantly, as a potential investor, why should I buy OSKVI? Is current price ($2.42) cheap or expensive?

Let's start with OSKVI business. OSKVI is a small cap Mesdaq stock which operates a venture capital and private equity business. Simply put, OSKVI helps other businesses to list on the stock exchange. OSKVI puts up the venture capital (to cover cost of listing, etc.), and in return they may receive either some fee income and/or more importantly, a certain % of the shares of the newly listed companies for free. If the listing turns out to be successful and the share price shoots up, OSKVI strikes gold. If the listing is unsuccessful, the venture capital is lost.

On the surface, this might seem risky. Monies put up, once spent, is gone. The returns uncertain. So, why invest in OSKVI? Well, OSKVI is managed by professionals, and they've been around in this business for over 6 years now. Their track record is good. To date, they have invested in 20 companies, of which 12 are now listed. Some of the more important companies are Green Packet Bhd (GPACKET), mTouche Technology Bhd (MTOUCHE), eBworx Bhd (EBWORX), MNC Wireless Bhd (MNC), Willowglen MSC Bhd (WILLOW), INS Bioscience Bhd (INSBIO), all of these listed on Mesdaq. More importantly, GPACKET is by far the largest stock by market cap in Mesdaq, so, it's clear that at least in terms of getting a listing on the Mesdaq exchange, there's no venture capital firm that is more successful than OSKVI. At least not yet.

Also, they have successfully ventured overseas. GMO Limited is their successful listing in London Stock Exchange Alternative Investment Market (LSE AIM). From various news, they intend to continue their activities around the region, particularly China, Vietnam, Singapore, etc. This seems promising, since the stock markets in China, Vietnam and Singapore provides a much better valuation of companies than Malaysia, and the chances of a successful listing there seems better.

As mentioned previously, 2006 Revenue was reported as $42M. In the annual report, it provided a breakdown as follows:

Quick observations:
1. It's clear that more than half of the so-called "revenue" is made up of gain on disposals.
2. If OSKVI did not dispose their paper gains, then, the accounting standards would only count revenue as "interest income" and "fee income".
3. As I described above, the main bulk of OSKVI's true revenue is not the fee income charged, but the gain in value in the shares owned. And they receive significant shares and for successful listing, the price can easily exceed the IPO price and continue growing. Unfortunately, these are not reflected under "Revenue".

Ok. How does the Earnings get reported? Well, take a look at below.

Quick comments:
1. Mathematically, PBT = Revenue - Admin Expense + Share of Profits.
2. The Share of Profits figure is really share of profits of its associates. However, under present accounting rules, Share of Profits for holdings less than 20% (or non-associates) don't get counted at all. Further, the major source of OSKVI's value is in its shares, which are only counted if OSKVI makes a disposal (i.e. realized gains). So, it doesn't really present a true picture.


Quick Comments:
1. Absolute no debts. No short term debt. No long term debt.
2. Total liability only a measly $0.8M. In other words, nearly all the assets belong to shareholders.
3. Cash $27M is nice.
4. Most of the assets are in Associated Companies ($226M) and "Other Investments" ($75M). This means, you must read Notes 12 and 13 carefully, and try to understand them.


Quick comments:
1. Now we get to the interesting part. We note that OSKVI owns free shares in many of these institutions - e.g. 17% Green Packet, 20% MNC, 20% eBworx, 20% mTouche, 15% GMO, etc.
2. Not all the associates are listed companies. Finexasia and Eco Industrial are not listed.
3. So, with this information, we can actually calculate the current market value of the listed companies, to get an idea of how much OSKVI Net worth truly is, as opposed to Book Value (which is an out-dated value of the holdings). At 31/12/2006, I obtained a market value of $490M approximately. Already, this figure is much greater than the Book Value stated in the Balance Sheet of $226M, a difference of over $260M. Since 31/12/06, to date, the market value has risen even further (but let's not count that). According to current accounting standards, this difference is not stated in the Balance Sheet, and so, the Shareholder Equity is understated by at least $260M.


Quick comments:
1. The amount stated in the Balance Sheet is $75M.
2. There is actually some gain in the quoted shares in Malaysia ($9.1M market vs $6.9M book).
3. There may be additional hidden assets in its unquoted shares outside Malaysia, but I have not bothered to investigate deeper since the margin of safety is already quite large from Notes 12 alone.

Ok, I think we have enough information now to do a first estimate of OSKVI's Intrinsic Value. Recall the company has no debt, and the bulk of its assets are free shares in the companies that they help to list. So, at first cut, it is clear that its Net Assets should be around $331M (as reported in the Balance Sheet) + $260M = $590 or say $600 M approximately.

Interestingly, this is roughly the same as the fund size managed by OSKVI, which is nearly $600M.

However, if one looks at OSKVI Capital Structure, it has 150M shares outstanding. At current market price of $2.42, it would value OSKVI at $363M, well below $600M. It suggests that at $2.42, an investor could buy OSKVI for $0.60 for every $1 net worth. By any standards, this is a steal.

It is worth noting that OSKVI owns approximately $348M worth of GPACKET alone (assuming GPACKET price of $4.52 at 31/12/06). Last look at GPACKET shows it's trading higher, albeit marginally. This alone is nearly the same as OSKVI Market Cap. In other words, just its current ownership of GPACKET is already worth its entire market capitalization. So, instead of buying GPACKET, why not buy OSKVI and get FOR FREE all the other holdings that OSKVI owns, such as mTouche, MNC, eBworx, etc. plus its cash plus its future prospects?

Or put another way, if all the other assets are valued at market value, take 100% cash, and put a zero value on its future prospects, then, at current OSKVI price of $2.42, one could buy GPACKET at only a quarter of its current price approximately ... (psstt ... don't tell the recent buyers of GPACKET - they might cry ...)

Notwithstanding the above mispricing, what I am extremely excited about is 2 of OSKVI's future prospects.

Here, I will quote the Chairman's Statement in the 2006 Annual Report.
"... the Group has also invested in a company involved in the outdoor advertising business in China. The company holds all the economic rights and benefits to the existing bicycle shelter and public service bulletin board advertising business via an exclusive concession granted by the Ministry of Public Security in China. To date, the company is the only exclusive provider to carry out this type of advertisements for the whole of China. Our investee company is poised to become the market leader in the outdoor advertising business in China..."

Quick comments:
1. This company is not yet listed in China.
2. How much would this company with exclusive concession be worth, when it is listed?
3. Is it worth nil? Obviously not. In fact, I am personally very bullish, that it will be worth at least hundreds of millions. Yet, the market is valuing OSKVI as if it is worth nothing (actually, at $2.42, it is technically a negative value, which is a laugh ... :-) ).

Again, I quote Chairman's Statement:
"...We invested in a Singapore based company involved in providing comprehensive waste management solutions from environmental laboratory testing to treatment of disposal for both hazardous and non-hazardous wastes. The company focusses mostly on industrial waste that is generated from petrochemical and pharmaceutical companies. ..."

Quick comments:
1. This company is not yet listed in Singapore.
2. How much would this company be worth, when it is listed?
3. Is it worth nil? Obviously not. In fact, I am personally quite bullish, that it will be worth quite a lot to OSKVI. Again, the market is valuing OSKVI as if it carries a negative net worth to the company.

It should be noted that for both Prospects, OSKVI spends $53M in venture capital. In a separate press article, it is stated that OSKVI intends to grow its fund to $1B (from approximately $600M currently) within 2 years. In other words, besides paying $0.60 for OSKVI (to get a value of $1 worth today), it seems OSKVI is quite likely to grow to $1.67 in 2 years time (for every $1 worth of value). Seems to me like this is not just a value investment, but also a growth investment at the same time!

There are 5,058 shareholders at 31/12/06, the distribution can be found in the Annual Report.

It should be no surprise that nearly 2/3rd of OSKVI is owned by OSK, its parent company. I can count only 3 funds in Top 30 holdings - #17 SBB Emerging Companies Growth Fund, # 19 - UBB Common Fund, and #30 - DBS Malaysia Equity Fund. The rest of the Top 30 owners are largely high net worth individuals.

It should be noted that it had been reported in the news before, that OSKVI is a significant contributor to OSK earnings. So, I would not be surprised if one day, OSK were to launch a VG Offer to remaining shareholders. It is easy to think of a scenario where as both the China outdoor advertising business and the Singapore waste management company gets closer to a successful listing stage, that OSK might decide to get all the free shares for itself (instead of sharing with the rest of the shareholders), by launching a VGO.

For 2006 year, OSKVI paid a total of 20 sen dividend. At $2.42, this translates to a gross dividend yield of 8.3%! Net of tax dividend yield is closer to 6%, well above F.D. rate of 3.7%.

Potentially, there are risks in owning OSKVI.
1. The stocks that OSKVI holds might be viewed as over-valued stocks.
2. There may be fears that OSKVI, even though it owns the 6 Mesdaq stocks, might never dispose its holdings.
3. There may be fears that OSKVI won't be able to dispose its holdings, since they are significant holdings, without depressing prices.
4. As its underlying holdings are shares which fluctuates daily, it's Intrinsic Value also fluctuates daily.
5. ? (you tell me)

To me, these risks are manageable.
1. Someone might think that GPACKET is overvalued at today's prices and vice versa, but there is an open market out there, and there is such a large safety margin (an entry equivalent to just a quarter of current market price).
2. & 3. There are many ways to dispose significant holdings with minimal impact on share price. A normal method is via professional private placements. If the timing is done correctly (e.g. during a bull run where there is inherently large volume traded) and done by professionals, it might not even have a noticeable price impact. As OSK and OSKVI are in the securities industry, I have confidence that they will be able to dispose their holdings in a manner that maximizes value to shareholders, especially when OSK owns 2/3rds of OSKVI. The only question is when, and for me, I will leave it to the professionals. So far, they haven't completely dissappointed me yet ...
4. That's a normal stock market risk. Every stock price fluctuates daily.

I believe this is a steal, at $2.42. Ignoring its bright future prospects in China and Singapore, its Intrinsic Value is already around $4. If you believe the company that it's share fund will grow to $1B in 2 years time (and by then, I expect both its China and Singapore prospects to be listed), then, its Intrinsic Value will be worth over $6 in 2 years time. To me, it has a high level of believability.

Recommendation: As this is not an easy company to understand (unless one wants to study its annual report carefully), and as the quarterly earnings reports don't actually present a true and fair picture of OSKVI net worth, it might take some time before the market appreciates the true value of OSKVI. My strong recommendation is not to invest more than 5% of your stock portfolio in it, as it has the potential to tie up your capital. Still, the downside risks seem low, and upside gains potential seem high, and the stock pays a nice dividend.

Disclaimer: I own OSKVI, and naturally, my opinion can be biased. Comments welcomed. As usual, use your own judgement and invest at your own risk.

Acknowledgement: Special thanks to "kiddy" in investssmart chatbox who first highlighted OSKVI to me. I won't be able to always analyze all stocks recommended to me, but do keep them coming. Thanks!

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