From a reader "Lex",
"Hi Seng, I came across Investssmart chatroom and your blog accidentally early this year, ...
I am new in stock market invest and started to trade around end of year 2005. I know nuts about FA and TA. But can understand certain accounting term like NAV or NTA. I invest by buying low and hold (with certain percentage of stop loss) then sell once the price move up around 15% ...
Currently, I holding ... Ramunia LA @ RM1.159 and Ramunia WA @ RM0.855 which I slowly accumulated starting early this month. Of course the reason I start to invest in Ramunia is after go through your blog on Ramunia. I also agree and believe that the future of global oil and gas sector is very promising and got great potential that crude oil price will hit US$100 per barrel.
I still have around xxx capital set aside for share investment, and I plan to use all of it to invest in either Ramunia LA or WA for short term and long term.
Are you able to advise is it wise to do so? As I don't have time to monitor a few counters and so far each time I invest, I bought 1 or the most 2 counters only. Thanks."
________
Dear Lex,
Thanks for your email. I hope you won't mind me replying here, as it may be useful to the other readers with similar questions as you are. I have taken the liberty to remove any data that might identify you, as well as the more sensitive numbers relating to your actual stock and cash holdings. My thoughts follows. Please treat these as merely second opinion. At the end of the day, I am not a licensed investment advisor, I do not charge any fees, and it is your hard-earned money which is at risk.
Ramunia-LA vs Ramunia-WA
1. At the time of writing, Ramunia closed (prior day) at $1.42, Ramunia-LA $1.10, Ramunia-WA $0.865. At these prices, I still prefer the LA best, and would avoid both the WA and the mother share.
2. The reasons I would avoid the mother share is because come Sep 2007 and 20 Dec 2007, I expect the mother share price to fall as a result of the planned share dilution.
3. The reasons I would avoid the WA is because I expect the WA price to track mother reasonably closely. If the mother price falls, the WA should fall also. Worse, since the WA provides gearing, I expect the WA to fall proportionately larger than the mother. If I'm not buying the mother, I am certainly not buying the WA.
4. It may be counter-intuitive as to why when 20 Dec 2007 comes, both mother and WA falls but LA rises. The reason is simply because the rules of the game says that 1 LA stock gets to convert into 1 mother share, and for all intent and purpose, 1 LA stock is equivalent to 1 mother share comes 20 Dec 2007. As the LA price is significantly below current mother price, I expect the LA price to go up come 20 Dec 2007.
5. I would consider disposing some/all of the WA during strength before the planned September dilution.
6. There may be a smaller outside chance that the mother share might rise after the 20 Dec 07 dilution process completes causing the WA to rise proportionately faster than mother. That I cannot fully discount either as I do not have a reliable crystal ball into the future. Notwitstanding this, I would still prefer the LA, since in my opinion, the potential reward does not appear to fully offset the potential risk.
Asset Allocation
You mentioned you are planning to use all (100%) of your capital to just hold 1 (or 2) stocks. There are 2 separate issues here: 1. Asset Allocation (100%% invested in stocks), and 2. Diversification (1 or 2 stocks).
For the first part, I'm afraid I don't know you well enough to know whether you are still working, whether you expect to be a net saver over the next 6 or 12 months say, your savings rate or access to other sources of savings, your liabilities / planned expenditure, etc.
But assuming you don't plan to increase your capital, then, 100% of capital into stocks is not prudent. Whilst the market is bullish right now, noone really knows when the party will end. Especially if you do not have a history to time the market successfully.
In the Intelligent Investor book, Graham advocates a 50/50 asset allocation. In other words, if you have $100,000 to invest, consider investing $50,000 into stocks and the other half into bonds (or for practical purposes, fixed deposits and cash). Especially since you don't have time to monitor the market.
Under this approach, the defensive (or busy) investor may choose to review his portfolio say on weekends or every fortnight, and updates the % invested in shares.
If after a period of time, the % invested in shares has risen to say $60,000 at the next review date then, the total portfolio is now $110,000 (= $50,000 cash + $60,000 stock). The stock % is now 60/110 = 54.5% which exceeded 50%. The investor could consider rebalancing to 50/50 by selling approximately 4.5% x 110,000 = 4,950 or say $5k the following week. This would then result in stocks of $55k and cash of $55k, or roughly 50/50.
Conversely, if the % invested in shares fell to say $40,000 at the next review date, then, the total portfolio is $90,000 (= $50,000 cash + $40,000 stock). The cash % is now 50/90 = 55.6%. The investor could consider rebalancing to 50/50 by buying approximately 5.6% x 90,000 = $5k the following week. This would then result in stocks of $45k and cash of $45k, or roughly 50/50.
Of course, this is not the most optimal strategy to maximize returns. But Graham is of the view that it forces the investor to buy when prices are depressed, and to sell some when prices goes up, thereby, doing the right thing not to get a poor investment result.
The 50/50 approach may be tailored depending on your risk apetite and individual circumstances and preferences. E.g. if you expect to have say $10,000 worth of future savings coming in over the next 6 months that you plan to commit into stocks, then, you might start to consider this as part of your cash holdings in the above calculations. In other words, effectively, you have tilted towards $55k stock /$45k cash (since actual cash is only $45k and exclude the $10k cash which has not yet come in), or 55% stock, 45% cash allocation.
You may also choose not to act when the stock % is only a small variation from your 50% target, since the amount to rebalance may become too small.
You may also vary the % invested in stocks (from 50%) to another figure such as 55% or 60% especially when market prices has fallen and you are really bullish about the stock market in the future. However, this is potentially riskier since it is inherently difficult to predict future market movement, and more of your wealth is at risk should your assessment turned out to be wrong.
Diversification
You mentioned you would like to hold just 1 (or 2) stocks.
My general advise is to not to this, even if Warren Buffett himself have personally recommended a stock to me (which he won't).
Why? Because there are no guarantees in the stock market. Despite the best research today, noone can reliably predict the future, and that includes what is going to happen to the company and the stock price during the investment period. Owning a single company is not prudent. One of Buffett's famous quote (and I am paraphrasing him, in a similar context of employing leverage) is that even if there is a 99% chance of enhanced profits, and just a small 1% chance of having a terrible result, he would not take that risk. I think the same principle applies here, when it comes to being 100% invested (instead of 50/50 suggested above).
Perhaps an exception could be considered if the stock is a closed-end fund such as I-Capital, or a carefully selected mutual fund outside the stock market, since the funds in theory holds a diversified group of stocks. For the former, I would consider spreading my buys across lower prices if I am considering entry. For the latter, you need to consult a professional investment adviser.
If you still want to select stocks yourself, consider diversifying into 5-10 stocks at the very least. Apparently, Graham recommends 10 to 30, even though he himself holds nearly 100+ stocks. If you have $100k of capital, and plan to invest $50,000 into stocks, 5 stocks means roughly $10,000 investment each. The actual amount invested can be varied slightly around these rough yardsticks, to make it round lots, or to reflect your varying degree of confidence in the stock.
Other Comments
As this is already a lengthy reply, I think I will leave it at that, even though I have some relatively minor difference in opinion on stop loss when applied to sound, fundamental stocks, or on your sell targets.
Disclaimer: As usual, please treat this as merely second opinions. Always use your own judgement, consult a professional if you are still unclear, and invest (buy, hold, sell) at your own risks since at the end of the day, it is your own money.
Showing posts with label RAMUNIA-LA. Show all posts
Showing posts with label RAMUNIA-LA. Show all posts
Tuesday, July 31, 2007
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.
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.
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.
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.
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