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Thursday, June 28, 2007

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.

14 comments:

zen said...

seng, I read in the edge newspaper, its conversion price is 0.5 , What does it mean? Is it 0.50 sen ?

juicy said...

what happen when Sime take overRamunia say at 1.60. LA will
miss out

ccdev said...

bro, noticed that ramunia is considering a restricted rights issue. If that happens, mother share price will be adjusted downwards but LA will stay the same. That is a risk, right or am i missing something?

KCC said...

Seng, I reached the same conclusion as you that there is no conversion cost for the LA from reading the Bursa announcement.

Just to be sure, I checked The Star business section, and lo and behold, the ex-price for Ramunia-LA is stated as 0.50 !!

I referred to SinChew, and the "conversion method" is stated as 0.50LA, which when compared with other ICULS, I interpret it to mean conversion price of RM0.50

So which is right? Where to get final confirmation - write to Ramunia or talk to our remisiers ?

dvd said...

You might want to consider the dilutive effect when ICULS conversion takes place. Shouldn't be a problem if prices are much higher by Dec. but mother might come down in Dec in anticipation. Worth a bet though especially if you believe in its long term prospects.

I think your reading is right and the 50sen conversion price is satisfied by the 50sen nominal value of each ICULS.

Seng said...

Dear all,

Thanks for your prompt comments. I'll address each of your comments below.

zen, kcc,
This is the million $ question. In this situation, I would like to think that the most reliable source should be Bursa and the Company Annual Reports, not the Edge, the Star, SinChew or any other newspapers ... newspapers are known to be occasionally wrong in their reporting. I do note Ramunia par value is $0.50 though, but it doesn't say anywhere in Bursa nor Annual Report that there is an "exercise price" or a "conversion price" of $0.50. This is a possible risk, but in this case, I think the newspapers are likely to be wrong (but I cannot eliminate the possibility that maybe there is a tiny chance that I could be wrong!). Certainly, do always consult your brokers as they are the professionals. If they refer to newspapers instead of Bursa, then, I suggest you to fire them immediately. :-)

juicy,
Personally, I seriously doubt this since RAMUNIA-LA is mostly equity and has a tiny debt component. At least, that is evident in the Balance Sheet. I'm not as confident as you are that the LA will "miss out". But if you do feel this way, then, better not to invest.

ccdev,
That's true, and it's a calculated risk. I note that current shares outstanding is 285m at $1.45. The proposed rights issue is 68m at $1. Private placement 46m at $? (either $1.45, close to that, or $1? ). Taking a prudent scenario that potentially 114m shares could be placed at $1, then, this gives a new diluted price of (285 x 1.45 + 114 x 1) / 399 = $1.32.

If the private placement is done close to market price of $1.45, then, the new diluted price is $1.37.

Both prices are still higher than $1.18 yesterday.

But if one likes Ramunia, is it better to enter via mother right now at $1.45, or via LA at $1.18? It seems to me the LA is still the cheaper way of entering Ramunia, if one has a long-term horizon.

Of course, another way is to simply wait for the share price to fall ... and takes the risk that the share price might not fall to your target level and so one misses out. That's very acceptable too.

kcc,

Yes, there will be a dilutive effects when additional 164m LA shares comes in ... The effect will be mother price comes down after Dec 20. Using current prices, one estimate of the new mother price after dilution may be from $1.37 above to $1.32 (or from $1.32 above to $1.28.) This assumes mother at $1.45 and LA at $1.18 face price.

Yes, I think it's worth a small bet too (certainly, not more than 5% of one's stock portfolio) since the company and the industry (O&G) long-term prospects over the next few years seem promising. In terms of considering which is the cheaper entry, it still seems to me the LA is still the cheaper entry as of yesterday ...

Thanks all,

Seng.

TOTOMASTER said...

errmm....

fyi, there r 2 securites issued by ramunia, ICULS & ICPS... one being a loan stock and the other being a preference share, one will be converted 1 : 1 without incurring any charges and the other will be a top up of $0.50...

for the ICULS, it'll will be converted to mother 1 : 1 FOC (some might say)... :)

by end 2007, there will be an additional 164 million RAMUNIA (ICULS) shares flooding the market... diluting it big time... by 2009, another 64 million RAMUNIA (ICPS) will come in again... by 2014, again another (hopefully will be the last) 237 million RAMUNIA (WA) coming in.... blardee hell 700 million RAMUNIA shares in the market...

some say an issue is on da way (guess its not the last dilution)... hmmm...

of coz.. unless RAMUNIA does miracle and increase its profit in a big way, else u will see peanuts...

Lets say at current, annualized profit @ ~ RM32 million, 238 million shares @ RM1.43... PE is around 10x

After Dec 2007... RAMUNIA has to make a profit of ~ RM56 million to stay at the PE 10x... by 2009 ~ RM64 million & by 2014 ~ RM100 million... fuiyoo...

so end of the day... can a long term idea work on RAMUNIA? u think RAMUNIA can do some kind of "magic" trick to boost its profits?

hey guys... just for discussion sake... i might not be wrong but i'm not always right... :)

Seng said...

Dear totomaster,

To me, one of the reasons why I think Ramunia failed to breakout, despite the general O&G sector breaking out, is the concern on Ramunia's large number of shares outstanding. The potential dilution is large, as you hinted.

But stock valuation is rarely one-dimensional. For example, you've used a P/E of 10 for an O&G stock. I wonder if you could recommend another O&G stock with a P/E of 10 at the present time.

In the backdrop of rising global demand and prices in the O&G sector, the profits of the sector has been booming. The escalation doesn't seem to be stopping, according to most analysts. Stock prices has also risen to reflect this. The question will always be whether stock prices has outran improved fundamentals. Using a constant P/E of 10 has a serious disadvantage in this context.

Notwithstanding this, my article focuses on the large LA mispricing, not the mother share. I trust my article DIDN'T claim that the mother has been mispriced in a large manner. The purpose of showing Aseambankers Target Price of $1.80 is to suggest that after 20 Dec 2007, there seems to be reasonable likelihood that Ramunia mother share may maintain its price within a reasonable band around current prices. The key question for all investors in the LA stock is whether the size of the band is smaller or larger than the entry price gap indicated by the LA.

To me, the nature of the LA is similar to a European Option with 6 months expiry. At $1.18, the market is valuing the LA option as not only worthless, but Mr Market is even willing to pay the holder a potential gain. In a large Options Market such as the US, such a large "negative premium" is very rare. The main point in my article is whether Mr Market is rational here (in terms of valuing the LA at negative premium)? If you think Mr Market is rational, then, best not to invest, but in my case, I think he doesn't seem to be acting very rationally, and so, I am taking a small punt here.

Cheers,
Seng.

iwanna said...

I like the spirit of sharing here. Everyone brings something to the table and you pick what you like, just like a pot luck party. I've been a silent reader all this while and benefitted a lot from all your sharing. Your input have certainly help a lot of people grow in their knowledge in eqiuty investments, expended our horizon. Most of us, if not all, still have lots of room for improvement in this field if we belive in continuous learning. We shared a common goals (I assumed) to learn from each other (more brain is better than one) to profit from the stock market. Thank you so much guys for your sharing especially uncle Seng. Learning and making money at the same time must certainly be fun. Let's enjoy it and don't take ourselves too seriously. Welcome differences - most important sources for growth and success, and make full use of it. Let synergize!

TOTOMASTER said...

so wat makes u think Mr. Market will not adjust the mother price towards its ex-date?

thus, making the ICULS, ICPS & WA conversion looks fairly price. there is a reason y it has not moved to its FV so far...

Seng said...

Dear totomaster,

No, no, no ... I've never said Mr Market will not adjust mother price near LA ex-date (20 Dec 07).

See my comment earlier to kcc above, where I mentioned there will be some dilutive effect, and provided some estimated prices after the dilution on 20 Dec 07.

The key question to determining profit (from buying the LA at $1.18) is what is the new mother price on 20 Dec 07 after dilution. That is an open question today, because you have moving targets. On one hand, there is dilution. On the other hand, there is the mother's business performance which is expected to continue to improve. My hypothesis is that the present 23% discount you are observing between the LA and mother is a bit too big (which is why I bought the LA at $1.18). In fact, mother price can come down a bit, and there is still profit opportunities. Profit is only lost if mother drops below the LA buy price. In my case, that's below $1.18.

Based on a report by Aseambankers which I recently had access to, apparently Ramunia has just completed a private placement of 45.5m shares at $1.20. This may explain why Ramunia recent share price fell from $1.6x to $1.4x. In the short term, price movements can be affected by many factors, and I have no doubt my explanation is only one factor. Notwithstanding that, the key question is whether you think mother share will fall to below $1.18 by 20 Dec 07 after dilution.

If not, and if you have a 20% p.a. target (or 10% return in 6 months), will mother price fall to say 1.18 x 1.1 = $1.30 by 20 Dec 07 after dilution (to achieve approximately 10% in less than 6 months)? If you think it is reasonably safe, then, there is a good chance that you will achieve your 20% p.a. profit target ... only you can answer this question for yourself.

I trust this is clear.

Regards,
Seng.

grahamsmun said...

I think the issue here is whether we are comfortable with investment in Ramunia.
If yes !

Then it is better to invest thru Ramunia-LA with added margin of safety of 26% discount

Yam said...

I think Seng has done an excellent analysis. I have been monitoring Ramunia for the past one month and bought and sold the shares (mother shares to be exact). The reason that I came across this blog is because I feel that the LA is priced below what it's worth based on the the mother share price. This prompted me to do some research online. After reading few articles, I come into conclusion that it's indeed a 1:1 conversion, which means that the LA or ICULS will be converted to the mother share come Dec 2007. I believe the main reason that it's lagging behind its mother share price is the dilution effect which will not only arise when the conversion happends, it's also happening as RAMUNIA holdings is issuing news shares for acquisition and private placement (not to mention ESOS + conversion of warrants). The aforesaid is the associated risks with the LA , but if one were to invest into the company for its growth propect LA is definately a better buy. A point to note is that back in Nov 2006, Sime Engineering was in negotiation with Ramunia to take the company private, one of the sailent point is that the offer price for the ordinary share is at 1.30 and it would also allow LA holders to convert the shares before the maturity period and accept the MO at the mother share price ( I guess this is one the developments that would counter any market correction etc). That is my one cent worth of thought ..

Yam said...

I think Seng has done an excellent analysis. I have been monitoring Ramunia for the past one month and bought and sold the shares (mother shares to be exact). The reason that I came across this blog is because I feel that the LA is priced below what it's worth based on the the mother share price. This prompted me to do some research online. After reading few articles, I come into conclusion that it's indeed a 1:1 conversion, which means that the LA or ICULS will be converted to the mother share come Dec 2007. I believe the main reason that it's lagging behind its mother share price is the dilution effect which will not only arise when the conversion happends, it's also happening as RAMUNIA holdings is issuing news shares for acquisition and private placement (not to mention ESOS + conversion of warrants). The aforesaid is the associated risks with the LA , but if one were to invest into the company for its growth propect LA is definately a better buy. A point to note is that back in Nov 2006, Sime Engineering was in negotiation with Ramunia to take the company private, one of the sailent point is that the offer price for the ordinary share is at 1.30 and it would also allow LA holders to convert the shares before the maturity period and accept the MO at the mother share price ( I guess this is one the developments that would counter any market correction etc). That is my one cent worth of thought ..