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Thursday, July 5, 2007

RAMUNIA Shares and Analyst Recommendations

Further to my article on RAMUNIA-LA, more than one reader mentioned the concern on the potential dilution of shares for RAMUNIA. Also, readers have requested for more analyst information. I will attempt to cover both topics below:

Potential Share Dilution

I have summarized the potential dilution with time frame and other information for easy reference.

A few points worth noting:

1. The above prices are at lunch time today (5 Jul 2007). Prices will vary over time.

2. The first line - mother share of 285m - includes the 45.5m private placement shares recently completed.

3. There are a couple of new share issues this month and in Sep 2007 as noted above (Line 2 & 3). Whilst Ramunia cash coffers are going to be increased by approximately $48m and $68m respectively after the placement of these new shares, there will be some dilution effects since the prices are done at below market price. The new theoretical price (assuming all things equal) should come out at around $1.43, or say 3 sen below current market price as a rough yardstick.

4. The next dilution will occur 20 Dec 2007 from the LA stock. It is important to note that this is not a new issue, but conversion of existing LA stock into mother shares. As such, it is not a true "new information", but something that has already known to the market for a long time (even though it may appear new to some of us). The LA stock also has a certain price and a certain market capitalization. To assume extreme dilution (with nil LA stock value) would be equivalent to "magic", that come 20 Dec 2007, total market capitalization can suddenly dissappear into thin air. To me, that is not rational. So, the theoretical diluted price, assuming lunch time prices is $1.31, or say 15 sen below current market price. This still represents a safety margin of 1.31/1.19 - 1 = 10% approximately gross of brokerage expenses, based on lunch time prices. Note the safety margin has decreased since my last article, since I didn't know about point 3 above at the time. Still, the safety margin does its function, which is to act as a buffer in case I was wrong ... :-)

5. The next 2 dilution will occur on 20 Dec 2009 and 2014, both events are relatively far away.

Approaching 20 Dec 2007

It is worthwhile to ponder a little what will happen to both share prices as we approach closer to 20 Dec 2007. 20 Dec is a Thursday, for some people, around the start of Christmas holidays. Some of you may be wondering what sort of prices should the LA and the mother stock trades on the day before (Wed), or even a few days before then ...

1. Assuming everything equal (and real life is never equal), then, prior to conversion, presumably some mother shareholders would be nervous that prices would fall, and start selling out. Maybe mother price falls a little from $1.46 to $1.45, 1.44, 1.43, etc. It might not happen yet, but as the conversion date gets closer and closer (say end of this year, in addition to this month and Sep dilution), then, we may start to see the effects.

2. Around the same time in 1. above or earlier, the large gap between LA and mother share price induce more and more buyers to buy more LA, driving the LA share price up, from $1.19 to $1.20, 1.21, 1.22 ... reducing the gap... Again, this might not happen much yet, and I suspect we'll see more activity happening as we get closer to the conversion date.

3. Come the day before conversion, I guess there should still be a gap, but smaller than what we see today ($1.46-$1.19 = 27 sen). It's hard to put a precise figure. Immediately after conversion, my expectation is that the reference price for mother share gaps down, and LA cease trading. Holders of LA can either sell out earlier when LA prices rise in early Dec, or wait for conversion to complete, and then sell. I suspect there may be advantages to wait after conversion, since the next conversion is a long time away - 2 years - and the best of Ramunia's future earnings are still to come. I.e. I expect after 20 Dec, the market will be relieved that the conversion is over, and then bid the prices up back to old levels to offset the earlier effects stated in 1. above.

Of course, this assumes everything else is equal, and real life is almost guaranteed to be unequal. So, take the above with a big pinch of salt.

Analyst Recommendations

First of all, thanks to everyone who wrote in and provided me with analyst reports. I have done a compilation of 5 analyst reports below.

A few notes:

1. Interestingly, the analysts actually have differing views on what should be the appropriate number of shares outstanding to use to calculate P/E! Target Prices are usually 12 months, but the number of shares outstanding seem to reflect different time-frames!

2. The latest report is by S&P, with a TP of $1.6. S&P actually assumes 662m shares i.e. exclude the WA due in 2014, as it is a long time away. But that would include the PA, which is due in 2009, which is different from other analysts. I suspect the difference is time-frames. But if one has a 12 month time frame, then, it is borderline ...

3. Aseambankers report is 28 June, which is still fairly recent. The TP is $1.80. Aseambankers assume 807m shares outstanding, which exclude PA, but include WA. This approach treats the PA holders under "minority interest", and takes a fully diluted shares at 807m. I can understand this approach too as preference shareholders are assumed to be paid first, and whatever profits left belong to ordinary shareholders. The time frame is definitely after 2014.

4. AmResearch report is dated 5 June, slightly dated. The TP is $1.95. AmResearch assumes nearly 1 billion shares outstanding, i.e. the time frame is after 2014.

5. ZJ Advisory report is dated, on 18 Apr. The TP is $1.41. ZJA does not include ICULS, i.e. only 556m shares. This is probably a weak assumption.

6. OSK report is the oldest, dated 18 Oct. The TP is $1.51, but because it is a very old report, one should not put much weight on it. In fact, RAMUNIA year end is 31 Oct, and so, its estimate of 2006 PAT of $22.8m is actually over-stated. Actual is $16.8m based on Bursa announcement dated 8 Jan 2007, but unaudited. We can expect slightly different results after audit. In fact, even the 2006 PAT differ slightly between the analysts - I suspect the analysts were given different figures after auditing and after company visits. S&P 2006 PAT include minority interest.

So, 5 different reports, with 5 different Target Prices. How do we make sense of this? To me, a few principles:

1. Superficially, all gives target prices which are higher than current LA stock price of $1.19. Superficially, there is comfort in this sense.

2. All 5 analyst predicts much higher PAT for 2007 vs 2006, as well as 2008 vs 2007. What is happening here that is causing all 5 analyst to be so bullish about Ramunia's future prospects? To use the word of one reader, do all 5 analysts believe in "magic"?

3. Point 2 highlights the fact that RAMUNIA is widely regarded as a growth stock by the market. The market is willing to pay a very high trailing P/E. Based on my standardized number of shares outstanding for all 5 analyst of 556m shares (i.e. using a time-frame up to 6 months), the trailing P/E ranges from 37 to 66!

4. One key principle in investing in growth stocks is to be certain of its future growth! This is because if the company fails to deliver the higher earnings, then, the market will not be kind to the stock, and the stock can expect a large price fall. This is definitely a high risk/high return play.

5. The O&G sectors is currently a market darling sector. Make no mistake about it. Even fellow bloggers and investment community are generally bullish about O&G at this point in time. Could they be wrong? Your guess is as good as mine.

6. But if the company delivers the earnings growth, then, the 2007 P/E falls to 14 to 22 range, and the 2008 P/E falls further to 8 to 14 range.

7. So, it all boils down to how reliable are the analyst projections for 2007 and 2008 earnings for Ramunia specifically. In other words, why are the analysts so bullish about Ramunia's future prospects? For this, stay tuned to a future article, if I have the time ... :-)

Disclaimer: The purpose of this article is not to promote RAMUNIA. Please read an earlier article on RAMUNIA-LA for context. I own RAMUNIA-LA, and so, my views may be biased. Always use your own judgement, and invests (buy, hold, sell) at your own risks.


Iceman said...

Hi Seng,

just to let you know that, I check with my dealer from OSK, he told me that for the RAMUNIA-LA, should be 2LA convert to 1 mother share, this same as the information from the Sin Chew Jit Pao, Maybe you can check through again.

Seng said...


Sorry, but check what exactly?


Seng said...

Dear iceman,

I have reread your comment again, and I note that perhaps what you meant is "2 (two) LA needed to convert into 1 (one) mother share".

Is this what you mean?

Please note I don't read Sin Chew Jit Pao, so, I can't check that newspaper. Perhaps other readers who read the paper can comment whether the paper indeed says that.

Notwithstanding that, I refer you to the Company's latest Annual Report, Note 7, point (a) where it specifically state:

(a) Conversion ratio - on the basis of 1 (one) ICULS for 1 (one) new ordinary share ...

So, the Company Annual Report state 1 for 1. Reading Bursa announcement also implies 1 for 1. See my previous article.

I suggest you ask your dealer to check again with his/her manager, whether it should be 2 for 1, or 1 for 1. Note that at least 4 readers have mentioned to me that they've checked with their dealers, and confirmed to me that my understanding is correct. You are actually the first and only reader who said it should be 2 for 1.

Please feel free to correct me, if I have misunderstood your question.


Moola said...


Extremely good write-up.

There is also a mini discussion here on Ramu-LA here.



Yew Khim said...

I have checked with my broker from K & N Tegnana.

he too said no conversion price.

have also invested a bit on Ramunia LA.