RAMUNIA-LA: Another Mispricing?

RAMUNIA is a small cap stock, listed on the Second Board about 2.5 years ago. The company is primarily involved in the fabrication of offshore Oil and Gas related structures, engineering works and provision of offshore services for the Oil and Gas industry. Like most Oil and Gas stocks, the stock price has done well in the past year.

In recent times, the company has also been getting favorable mention in the press. One of the more recent is from the Star (click here http://www.biznewsdb.com/english/newspage/newspage1.asp?ID=7060920&file1=7&bulan=06&kw=Ramunia ). Ramunia’s business prospects over the next few years seems exciting!

Aseambankers is bullish on Ramunia, citing a Target Price of $1.80 (cf. yesterday's close $1.45). It assumes a P/E of 15 times FY08 EPS, which is approximately 12 sen per share. In the latest quarter (Q2/08, Ramunia's financial year ends 31 Oct, not 31 Dec), the company earned 3.4 sen per share, so, Aseambanker’s estimate of 12 sen per share does not seem unreasonable. Aseambanker further noted that “…we believe there is further upside potential to Ramunia's earnings and target price beyond FY08, which is when growth will really kick in as the majority of its yard is expected to be fully-loaded …”. Sounds enticing isn’t it?




However, when I looked at the share price in greater detail since its listing date, I note that the share price was 75 sen when first listed on 28 Jan 2005, sank briefly to all time low of 38 sen (end May 2005) before quickly rebounding and rising above $1 in early July 2005. Since then, the stock price has largely moved sideways between $1 and $1.5 longer-term trading range. Very recently, the stock price broke out, but failed to sustain its breakout and came back within the range … At current price of $1.45, it seems to sit at a higher end of that major sideways trading range. This puts me off from buying the mother stock, even thought its future prospects look exciting!

Fortunately for me, I was recently alerted in investssmart chatbox, that maybe the Loan Stock (which is also listed and is called Irredeemable Convertible Unsecured Loan Stock, or ICULS) is a possible cheaper entry into the mother share … At first, I must admit that I was skeptical, since mistakes and misunderstanding on loan stocks are common, and have been made by more than one participant in investssmart chatbox before. However, for some unknown reason, I found myself investigating deeper to see if the comment had any real value. And I must admit I was surprised with my findings!

The following is an extract of the loan stock’s salient terms (RAMUNIA-LA) from Bursa website (see 25 Jan 2005 announcement, which I convert into Excel):




The key points are highlighted in red above and summarized below.
1. One loan stock will be automatically converted into one mother share at 5 PM, 20 Dec, 2007, which is less than 6 months away.
2. No conversion price mentioned. All seems to be done automatically apparently.
3. A coupon of 1% will also be payable on 20 Dec 2007.

Looking at the share price, I’m surprised to see the LA traded at $1.18, well below mother at $1.45. The difference is 1.45 / 1.18 – 1 = 23%, which looks fairly significant. Why so large, when it is only less than 6 months away? I mean, if one buys mother at $1.18, hold it for 6 months, then, on 20 Dec 07, one should get a mother share which if market price doesn't fall, then, gives a 23% return in less than 6 months.

I thought maybe I had misunderstood the salient terms, and there might be a conversion price to pay, or maybe, there might have been changes made to the loan stock salient terms since 2005 … so, I checked for subsequent updates and couldn’t find any. I also double-checked its annual report and found exactly the same terms and conditions. See extract from its latest 2006 Annual Report Note 7.



So, what do you think? Is our understanding of the salient terms correct? Well, if it turns out to be different, then, I believe LA shareholders can reasonably sue both Bursa and Ramunia in the court of law and probably win!

Then, I had another thought that maybe this might be a temporary phenomena … - maybe the LA stock price behaved more “rationally” in the past. So, I decide to tabulate the historical mother share price against the LA share price over the last 2 years to see if this pattern of discount has persisted for a long time or not … this is what I found:





Mother share price in blue, LA stock price in green, Difference (which is defined as Mother Price / LA Price – 1) in pink.

Huh??? Such persistently high discount?? (Note - it was never negative in last 2 years) Can a stock be mispriced so consistently over the last 2 years? The key point is that the discount was high – around 50%-60% - in 2nd half of 2005, before coming down gradually over time (like a 3-step ladder?). There are smaller fluctuations, and the gap has come down quite a lot in the last few weeks. Still, as of yesterday, the discount still stood at 23%.

So, dear readers. What do you think? Should the LA stock be priced at 23% discount to its mother share with only 6 months to go?

(I don’t know about you specifically, but I do know that a 23% potential return in less than 6 months is fairly decent to me … - certainly beats F.D.)

What is interesting is that Ramunia haven't paid dividends on its stock yet (and doesn't intend to up to 20 Dec 2007, as far as I know), and yet, the LA stock holders receives 1% coupon ... And yet, the LA trades cheaper than the mother share … ! If this is not mispricing, then, show me one that is mispricing (and we will thank you more for that!).

As with any derivative instruments such as warrant, loan stock, etc., a substantial discount to these instruments is useless if one does not like the mother share during the investment time period. In the case of Ramunia, I’ve been eyeing an O&G stock for quite some time, but have always rejected them because of what I perceive (rightly or wrongly) as “high price” and just slightly insufficient “margin of safety”. But with the loan stock giving me not only 23% discount, as well as 1% coupon as additional safety of margin, I decided to take the plunge and bought Ramunia-LA at $1.18.

As usual, don’t put all your eggs in 1 basket because I could be wrong. In my case, I insist not to invest more than 5% of my stock portfolio in Ramunia-LA, just in case I turn out to be wrong.

Still, a potential gain of 23% in 6 months is not a bad thing if mother share price don’t move … and if Aseambankers Target Price of $1.80 is correct, then, the potential gain could be even greater! If you are considering entry into Ramunia and intend to hold Ramunia for the long-term, then, buy the LA stock instead of the mother … at current price of $1.18, it still looks under-valued.


Disclaimer: I own Ramunia-LA and so my views can naturally be biased. As usual, use your own judgement and invest (buy, hold, sell) at your own risk. Comments welcomed, especially if they are different from mine above.

PS. If you have any other research reports on Ramunia (or any other stocks covered in this blog), I would be grateful if you could pass a copy to me for perusal. Thanks in advance.

PS2. If my understanding turn out to be wrong, don't hesitate to correct me immediately! :-)

Acknowledgement: This one is for "dylan" who first brought the LA stock to my attention. Sorry for brushing aside the idea too soon. You could be right! It seems under-valued to me.

ONASTEL - Some Charts

At investssmart chatbox this evening, someone mentioned that ONASTEL has made a "triangular break-out". Since there was more than one person who aren't sure exactly what that meant, let's take a closer look at the daily charts.

Observations:

1. The key line is probably the top line that connects the 2 recent highs on 9 May ($1.58) and Jun 6 ($1.54).

2. The "triangle" is quite visible on the charts above.

3. This evening's closing at $1.54 appears to have broken the top line. Normally, this is considered a bullish signal.

4. However, I think the "break-out" has actually happened earlier than today, on June 1, when the stock price closed above the 20 day MA at $1.49. But then again, everyone uses different MAs, so, I don't think there is necessarily an exact answer, although ideally, different methods should "converge" and provide a close answer.

5. Volume has been fairly low over the last month (since early May).

6. Personally, I would much prefer to see a much higher volume today than yesterday. This didn't happen today, but let's see what happens tomorrow, to see if there is a really bullish breakout.

Other technical comments:

1. The stock has been on a long-term uptrend since Jan 2006 (see weekly chart below), when it traded below $0.50. An investor who had bought it then would have done extremely well today.

2. Since May 31 (see chart above), the stock has been trading above the 20 day MA. Someone who is late into this stock could have bought it around then, when the price pulled back closer to the MA.

3. The Bollinger Band looks to be narrowing, suggesting that a possible break-out could soon be in the cards ... (although I don't really know exactly when).

4. What I find interesting is the positive "divergence" between ONASTEL good performance today, vs other steel counters and the CI. Today, the CI closed lower by 0.6% (7.55 pts), steel counters like MASTEEL and KINSTEL closed lower by 2.2% and 1.8% respectively, yet, ONASTEL closed higher at 1.3%. Some might say that the divergence is proof that something is happening to ONASTEL ... It's hard to say at this juncture - the divergence extent is not so large, but then, there's no harm either to ONASTEL isn't it? ...

5. If one already has exposure in ONASTEL, should one consider pyramiding tomorrow? That I think depends on one's personal style. For me, I prefer to add during pull-backs, so, I will probably not "pyramid" tomorrow. In any case, if one is thinking of doing this, then, you'll need to set your own stop loss level in case something unexpected happens (although I'm not expecting this to happen).

Other quick fundamental comments:

1. ONASTEL is a steel counter with fairly decent fundamentals.

2. Q1/07 (Quarter ending 31 Mar 2007) earnings are decent at $22.7M. At $1.54, the stock is capitalized at $585M. If we simply annualize Q1/07 earnings (and this is definitely inaccurate, but serves as a rough guide), then, the stock is trading at a P/E of 6.4, which is not over-valued.

3. FYE2006 earnings = $71.4M, which implies a P/E of 8.2.

4. Q1/07 earnings of $22.7M is a substantial improvement over Q1/06 earnings of $1.8M. On a forward basis, there is good reason to think that ONASTEL should post much higher earnings for 2007 than 2006. The P/E is likely to fall below 5-6 with improved 2007 earnings. I believe most analysts (that follows ONASTEL) is probably going to say that this is a fairly undemanding P/E.

5. ONASTEL balance sheet is not perfect, but reasonably decent. Borrowings are at a fairly low level, although at one stage, it was in a net cash position. Nevertheless, it still looks reasonably decent compared to some of its peers.

6. Whilst ONASTEL future earnings prospects looks bright over 2007, and possibly extending to most of 2008, beyond that, I expect it to be secularly cyclical, i.e. some lean years mixed in between some really good years.

7. ONASTEL just announced a decent dividend of 10 sen per share less 27% tax. Ex-dividend date is 27 June, which is less than a fortnight away.

8. ONASTEL AGM is going to be held this Friday, 15 June. There may be some speculative activity happening, to boost the share price up prior to AGM, although this is only a speculative conjecture, and the recent share price increase might be due to the dividend effect.

Concluding Remarks

If you currently own ONASTEL like me, I am planning to enjoy the ride (up and down). This is because, my original purpose of buying ONASTEL is based on fundamental considerations (and not technical), although I use technical considerations to assist me in my entry and exit timing. If I believe the fundamentals are deteriorating, then, I would not hesitate to exit (despite good technicals), but chances are the technicals are probably going to show me danger signals first, if past experience is indicative of the future.

I am probably unlikely to sell yet, as today's closing is rather bullish and there's no immediate danger sign yet (although with TA, the signals can easily change potentially overnight).

I am unlikely to pyramid up tomorrow, but that's only because I prefer to buy during pullbacks, even if it means missing an opportunity. Nevertheless, it will be interesting to see if there are many (or any?) buyers buying on this "triangular break-out" tomorrow.

The stock has a reasonably sound set of fundamentals, although bear in mind the stock price has run up signficantly since Jan 2006 (but so has the stock market). The risk/reward is no longer as favorable as last year, although steel prospects still looks good, and the company looks set to produce a spectacular 2007 earnings result over the next 3 quarters, compared to 2006.

Disclaimer: I own ONASTEL, and so, my views can naturally be biased. Please use your own judgement and invest (buy, hold, sell) at your own risks.

CRESBLD: Commentary

I used to trade this stock before, but has since disposed it at a decent profit. Recently, there was an interest in the stock in investssmart chatbox. As I had some time this weekend, it may be worth taking a closer look to see if this is a stock that can be purchased / held from a private business investing perspective.

QUARTERLY EARNINGS



Quick Observations:
1. Last close $1.12 (with implied market cap of $139M).
2. Q1/07 EPS grew decently from Q1/06 EPS - 0.063 vs 0.045 or 40% growth.
3. P/E = 1.12 / 0.184 = 6.1. Looks low.
4. P/NTA = 1.12 / 1.52 <>
5. A traditional equity analyst may recommend a Buy / Strong Buy, based on the above observations. E.g. Bursa eResearch.


BALANCE SHEET



Quick observations:
1. I must admit I am rather worried looking at the Balance Sheet.
2. Amount due from Contract Customers has ballooned by $136M (Q1/07) - $99M (Q1/06) = $37M.
3. Total PBT (Profit Before Tax) over the same period is less than the increase, at $36M. In other words, the entire profit in the last 12 months is smaller than the increase in the Amount due from Contract Customers alone ... so, what is this amount anyway?
3. Receivables increased by $77M (Q1/07) - $55M (Q1/06) = $22M. Hmmnn ... not sure I like the look at this too.
4. Amount due to Contract Customers is very, very small, in comparison to the amounts due from the same class of customers ... again, not sure I like the look of this.
5. Payables increased. Normally, a good sign, but in view of the potential cashflow problems of this company, is this a sign that company is having difficulty paying their debts promptly? ...
6. Long term debts increased ... again not a good sign.
7. Total debts increased ... again, not a good sign, since debt has increased by $143M (Q1/07) - $92M (Q1/06) = $51M, whereas the capacity expansion (say those represented by PPE increase) is much smaller, at $15M. The debts seemed to be needed in order to provide interest free loans to 2. and 3. above, which is not usually a sign of a company with superior business economics.


Amount Due/From Contract Customers

Since this is a large and important item, let's see what the latest Annual Report (2006) has to say about this.




Quick Observations:
1. So, what do you think?
2. For me, I'm afraid I am none the wiser, as to who represents these contract customers, why there is such a significant increase, when can we expect these debts to be fully settled, has there been sufficient provisions set aside for possible bad debts, age of these debts, etc. In other words, I have many question marks about this very large and possibly most important item. Why is a most important item given so little information? Certainly, if one were to consider buying the company in its entirity, one should direct one's due diligence team to investigate in detail what this item is.

Trade Receivables





Quick Observations:
1. According to the company, the maximum trade credit term should be 60 days.
2. According to my simple Receivable / Revenue ratio check, the latest receivable averages at around 87 days, which seems longer than the 60 days ... No explanation given ... hmmnn ...
3. So, what do you think?
4. Personally, I don't like the look of this. I wonder why the company bother to state in its annual report that maximum trade credit term should be 60 days, when it is probably irrelevant here. Is this negligence by the company? Or a deliberate attempt at misleading investors? Either way, I don't like what I'm seeing here.

Liquidation Valuation

I have done 2 scenario. Both scenarios assumes that not all the asset values stated in the balance sheet are worth their stated values. On the other hand, the scenarios assumes that the entire liabilities are real, as stated in the Balance Sheet. The company is likely to disagree with my basis, but the purpose of this valuation is a personal one, to form an opinion as to the degree of "margin of safety" in CRESBLD.

Case 1 assumes 100%, 95%, 75% of Cash, Receivables (including amount due from Contract Customers), Fixed Assets less Intangibles respectively.

Case 2 assumes 100%, 85%, 60% respectively.

The results (the liquidation price per share) is shown in the Balance Sheet above.

Quick observations:
1. Liquidation prices are well below Net Assets (NA). There are several reasons for this.

• NA included a large amount of Intangibles ($67M, or $0.54). NA is $1.52, but when one exclude this item, the NTA = $1.52 - 0.54 = $0.98.


• NA assumes that 100% of the Receivables and Fixed Assets are worth their stated values. Whereas, Case 1 and 2 assumes a smaller % than 100%, to provide a measure of prudence.

2. Liquidation price 1 = $0.35.
3. Liquidation price 2 = $0.06. Oh dear, so small compared to current market price of $1.12 ...
4. Both liquidation prices seemed to be trending south ...
5. I feel rather uncomfortable with the entire picture.

CONCLUSION

At last close of $1.12, CRESBLD is capitalized at $139M. If a private investor were to purchase the company in its entirity, what would the investor get in return?

Well, what seems certain is that there will be debts of $143M that comes together with the company. I'll be owning assets that I am uncertain about on its value as stated in the Balance Sheets. Worse, the entire business enterprise will be generating Profit Before Taxes that is smaller than the increase in values of certain items such as Amount Due From Contract Customers and Receivables ... Yes, the traditional equity analyst and fundamental ratios such as P/E and P/NTA looks low and compelling. Yes, many equity analyst have called CRESBLD a Buy / Strong Buy, with fairly high Target Prices. However, from a business investing perspective, I am unlikely to "buy and hold" this company, based on the above observations.

Disclaimer: The above merely represents a personal view from a business perspective investing. As a "fusion investor", I have traded stocks before based on non-business perspectives when the odds and the risk/reward ratio favors such a trade. As usual, comments welcomed on the above stock. Always use your own judgement, and invest (buy, hold, sell) at your own risk.