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.



Blogger michale wong said...

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3:31 PM  

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