Crouching Tiger, Hidden Assets

The coat of arms of Malaysia consists of a shield guarded by two tenacious tigers. And Keck Seng (M) Bhd (KS MK) (KUL:KSG) (RM3.50) is a company domiciled there which is engaged in the diverse businesses of oil palm cultivation, milling and refining, property development and ownership.

Over the years, the company has accumulated several crown jewels. It has a cash horde of RM320 million, a portfolio of marketable securities, little debt and several property assets in the form of an office tower in central Kuala Lumpur and three hotels in Toronto, Quebec and Honolulu.

Much of the value of these assets is obfuscated from the casual eye. For example, the marketable securities portfolio has not been marked to market while its property holdings are held at prices which are nearly 20 years old. On a conservative RNAV basis, it is trading at 0.65x book, and P/S of 1x. Furthermore, as KS is required to comply with revised accounting rules that require it to mark to market the securities portfolio which it is currently carrying at cost, it is likely to report a sharp jump in EPS; leading to a low forward PER of 2x (1.3x on a PER (ex cash) basis) if any tax effects are ignored.

In June 2006, KS announced its intentions to set up a REIT in the next two to three years. Assets that KS may inject include Menara Keck Seng – a office building located in Kuala Lumpur’s prime GT, Regency Tower and Tanjong Puteri Golf Resort. But MOS is of the view that the formation of the REIT is unlikely to occur in the foreseeable future. As evident from the foregoing list, the bunch of buildings is a diverse current group with no coherent theme as yet. So KS may need time to acquire or construct other buildings before sponsoring a REIT.

Two developments are likely to give its property development arm a boost and eradicate the rumored oversupply situation in Johor. First, the Malaysian government recently announced measures to allow foreign ownership of properties. The “Malaysia, My Second Home Programme” is a government initiative allowing foreigners to live in the country on a social visit pass with a multiple entry visa. They can now own or invest in houses costing more than RM250,000 each without having to secure Foreign Investment Committee’s approval. In this regard, there is reportedly interest from the oil rich Middle Easterners to invest in Malaysia, a fellow Muslim country. Johor, being the state closest to developed Singapore, should figure high on a potential property investor’s list. Second, KS’ land bank which is largely in Johor may benefit from the positive sentiment arising from the Iskandar Development Region (formerly known as the South Johor Economic Region) – an ambitious blueprint unveiled in the 9th Malaysia Plan to develop the state into a hub for leisure and business in Peninsular Malaysia. It is expected that some 800,000 jobs will be expected over the next 20 years at the IDR. With the migration of people from other states to Johor in search for jobs, residential demand should be boosted.

Finally, there is growing interest to use palm oil as a biodiesel to serve as an alternative to petrol. This may further catalyse investor interest in KS as it holds several such plantations.

In a nutshell, we estimate that there may be up to 40% upside [to its RNAV value] when the market takes note of the above factors.