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.