Tuesday, March 30, 2010

Lion Asiapac declares a 15 cents special dividend.

“First they ignore you, then they laugh at you, then they fight you, then you win.”

Mahatma Gandhi

Perhaps MOS was premature in expecting a payout as early as Feb 2008. Even though we are value investors accustomed to the long journey, this has been a particularly interesting one. We also offered several updates in Sep 2009 and Dec 2009. But ultimately, we are just glad that that the minorities are having their day in the sun.


Saturday, March 27, 2010

Never Ask a Barber if you need a Haircut

MOS almost fell off the chair laughing after reading comments made by leaders on the Asian property space.

One director from a prominent HK developer argued that bubbles are good for the market. Another appeared to suggest that the non release of sites at low prices to developers in government auctions has contributed to the exuberance today.

These remarks remind us of Chuck Prince's 2007 comment. Prince, the former chairman and chief executive of Citigroup said in July 2007 that "as long as the music is playing, you’ve got to get up and dance. We’re still dancing.".

We always like to say that it is never wise to ask a barber if you need a haircut. Or the fruit seller if his oranges are sweet. The wider implication to all this is that it is tantamount to establish one's interest or agenda behind each pitch.

For so long as interest rates are low and the apparent recovery is taking root, demand for apartment units will continue to move quickly. Developers who are in the business of selling units will, understandably, launch units to feed the frenzy.

So investors/individuals have to be discerning. Shrewd property investing requires one to have a very long time horizon and a through analysis of demand and supply conditions; and not just buying shoe box size units because they are affordable at today's low rates. Examining "what ifs" are necessary too: What if the unit cannot be rented out? What if rates go up? etc etc.

Whilst we are at it, we would like to draw attention to the first line of Prince's complete quote which is less often run: “When the music stops, in terms of liquidity, things will be complicated."


Tuesday, March 23, 2010

How far out do you look?

Investing, by definition, means forgoing present consumption for future returns. It is worrying how far we, as a market, has strayed from this definition. The average holding period of securities listed on NYSE has, from memory, been falling over time. The recent holding period for a stock could be as short as six months.

This plays into the hands of value investors who truly are able to cast their return expectations further out into the future. The telling statistic also suggests that true blue value investors will continue to hold their own, when their performance is measured over an entire market cycle.

We are strong proponents of time arbitrage. In January 2007, MOS highlighted the gross undervaluation of Malaysia listed Keck Seng. As pointed out then, the failure of the market to recognise its hidden value of its assets which, as we wrote then "is obfuscated from the casual eye.". These assets include:
  • not marking to market its securities portfolio;
  • holding its property assets at cost which goes back nearly 20 years old.

Then, it was speculated that the catalyst to unlocking the value would be a REIT although we had surmised that "the REIT is unlikely to occur in the foreseeable future". For those who have a longer time horizon, the development of the Iskandar Development Region would play into the hands of Keck Seng as it holds several plantation plots in Southern Johor, albeit away from the "action" currently.

Besides the tax credits which has to be used by 2013, the more immediate catalyst driving the stock up today is the need for the company to comply with revised accounting rules that require it to mark to market its securities portfolio.

Under FRS139 which has been effective since Jan 2010, listed companies are required to fair value their equity investments and reflect unrealized gains/losses in their quarterly statements. This will make the earnings more volatile if the securities portfolio, when classified as trading securities, is large compared to the core business.

In the case of Keck Seng, examining the notes to its financials show that the market value of its securities portfolio is RM672 million. This translates to an uplift to book value of about RM1.80 per share. This implies a RNAV of about RM6.80.

As you would imagine, this takes into account only the revaluation of the marketable securities portfolio. The bulk of the revised value lies, however, in the property portfolio. In 2005, Keck Seng sold 180 acres of plantation land in Ulu Tiram to the government at RM251,000 per acre. If its entire land bank in Ulu Tiram, Bandar Baru Kangkar Pulai, Pasir Gudang and Tanjong Langsat (carried at 1980 prices) is simply revalued to those 2005 prices, Keck Seng's NTA would increase by another RM9 per share!

Its commercial properties are also grossly understated on the books. Menara Keck Seng at the prime Bukit Bintang stretch is likely to be carried only half of current market values. We can probably say the same for its properties in Singapore (last valued in 80s), and hospitality assets in Canada and Hawaii. The hotels were last revalued in 1997 and 2000.

Standing at 2007, reflecting our conservative self, we wrote that there may be "up to 40% upside" from RM3.50. The current market price of Keck Seng has way surpassed our estimates. In fact, from the above analysis, it does suggest that the RNAV seem wide - from a range of RM6.80 to even a whopping RM16 if the property portfolio is completely revalued. What intrinsic value that will eventually be crystallised perhaps lies in the investor's time horizon.


Monday, March 22, 2010

Run Keck Seng Run

Bursa Malaysia listed Keck Seng, whose core businesses include managing oil palm plantations and property development, has been surging of late. Market watchers are anticipating the conglomerate to dole out more dividends soon. At end 2009, the firm had cash of RM332.6 million and is debt-free. It reportedly also has high unutilised tax credit of RM427.6 million to be franked as dividends before end-2013.


Sunday, March 21, 2010

Welcome to the "World of Innovation"

Innotek specializes in precision component manufacturer. The SGX listed firm produce small tiny metal components which are building blocks for numerous devices which we use daily.

The group was known as Magnecomp previously. It has restructured heavily in recent years. One of the moves was to acquire the remaining 17% in Mansfield Manufacturing in April 2008. Following this acquisition, Innotek, through Mansfield owns ten modern manufacturing facilities, including eight in China, one in Netherlands and one in the Czech Republic.

Currently, Innotek serves customers in the consumer electronics, office automation and automotive industries. It recently reported full year results for 2009. For the full year, Innotek reported a 14% decline in revenue to S$361 million.

What analysts, however were looking out for was confirmation of a bottom line turnaround. Innotek delivered. Net profit surged sharply into the black to S$9 million compared to a loss of S$6 million in 2009. This follows from the return to profitability of Mansfield. With EPS at 3.24 cents per share, its PER is 15x. Whilst this multiple appears high, note that further compression will occur as the business improves out of the trough. So paying what appears to be peak multiples for trough earnings and on a before ex-cash basis appear reasonable.

With stock price only at S$0.50 and NTA at S$0.86, Innotek is trading under book at less than 0.6x. Management appears determined to correct this.

For the second year in a row, shareholders are rewarded with a 5 cent dividend. With the stock at 50 cents, this translates to an astounding 10% yield! This is paid out of its huge cash pile of approximately S$0.28 per share. Whilst this may drop as the group seeks acquisition targets, management is likely to retain sufficient cash for working capital requirements as well as for future payouts.

Second, management has also embarked on a share buyback program. The completion of the program is likely to drive the NTA per share to over S$0.90 share, thereby steepening its discount further.

Analysts are also increasingly engaged as management seek to correct the steep discount. For example, it was recently shared that Innotek intends to pursue opportunities in the automotive and medical related sectors which offer higher margins.

In a nod to Innotek's tagline "World of Innovation", buyers now are, by virtue of its fat dividend, paid to wait for the sharp discount to close. As value investors, we find that certainly most inventive!