Saturday, August 7, 2010

A wave of privatisations coming to Malaysian shores: Who's next?? Featuring EPIC, AZRB, TDM, Paramount and CSC Steel

There have been quite a number of privatisation of listed companies in Malaysia. Among the companies being privatised or in the progress of doing so since late last year are:
  1. Tanjong Plc
  2. Measat
  3. Astro
  4. M3nergy
  5. Malaysian Mosaics Bhd
  6. Kretam
  7. New Straits Times
  8. Southern Steel
  9. Titan Chemicals
  10. Hume Industries
The latest candidate is EPIC (RM2.11) as reported in TheEdge Weekly, citing possible reasons of undervaluation and not being appreciated by the market. The takeover price remains unknown. However, the privatisation must have a much higher takeover price than current stock price to go through especially with AZRB holding 20.97% equity stake in EPIC. To recap, AZRB purchased the shares at RM2.40 per share in Oct 2007. It will be hard for AZRB to let go of the shares if the takeover price is not more than RM2.40. Incorporating AZRB's holding costs (AZRB incurred borrowing costs to purchase EPIC) of about 15% (Assuming 3 years at 5% p.a. interest rate), takeover price has to be RM2.76 to enable AZRB to breakeven for its venture into EPIC.

In addition, at RM2.40, PER is undemanding at around 8x-9x for FY2010-11 earnings. Having said that, book value is at RM2.04 with P/BV at 1.03x at current price of RM2.11. As at end June 2010, EPIC has a net cash of RM66mil or 39 sen per share. Terengganu Inc might need to fork out another RM244-305 mil (assuming takeover price of between RM2.40-3.00) to purchase 101.8 million shares of EPIC which are not owned by it. Anyway, I think the takeover price shouldn't be based on book value but more on PER due to its consistent earnings. By attaching PER of 10x, takeover price could be in the range of RM2.80-RM3.00. Will the takeover price be this high? I'm only guessing.

What are the companies which could be privatisation targets? I still feel there are quite a number of undervalued stocks which have been lying low for a long time and not being appreciated by the market. There are still some companies with stable businesses and strong balance sheets which are still trading at PE of less than 7x. So, maybe we could do ourselves a favor by identifying these potential companies? Stable business, good earnings, cash-rich, low peer valuation etc etc.....

Some companies that came to my mind after reading the EPIC news include TDM, CSC Steel and Paramount. If you have any ideas, don't mind sharing with us :)

TDM (RM2.34): 53.1% owned by Terengganu Inc, same shareholder as EPIC. TDM is also cash-rich with net cash of RM133 mil and trading at ridiculous PE of 6.5x only assuming 2010-11 earnings at RM80 million p.a. Book value is at RM2.97.

CSC Steel (RM1.78): 46% owned by China Steel Asia Pacific Holdings Pte Ltd (Taiwan's largest steelmaker with revenue of up to RM16.5bil). Net cash of RM288 mil and PER of around 7x. Net profit was at RM70-90m over the past 5 years except for 2008, the year which they were still able to make RM59 mil net profit despite the severe downturn in the steel industry. Book value at RM2.17. Will the Taiwanese follow Titan's footsteps?

Paramount (RM4.00): Will be very cash-rich if Jerneh Insurance shares are sold. Net cash of RM140 mil with potential to go up to RM280mil or RM2.40 per share when Jerneh is sold. PER around 7x and earnings have been around RM50-60 mil over the past 5 years. Book value at RM4.87. It is 29% owned by Dato Teo Chiang Quan, a member of the Teo family which controls See Hoy Chan. (Actually I don't see any reason for them to list this company in KLSE as Teo family could probably be one of the richest billionaires in Malaysia and it might be easy for them to take the company private. No one knows how much they are worth as most of their assets remain hidden from the public's view.)

PS: Other companies that I glanced through (Look attractive but not necessarily privatisation targets) include Pintaras Jaya, TRC Synergy, Fajarbaru, Insas, Wellcall, TSM Global, Protasco, Kurnia Setia, Harrisons, Faber, Mudajaya (A lot of uncertainty over SC's probe. Could it be that someone want to drive down Mudajaya's share price to buy more of its shares? Could it be related to the privatisation rumours? Who's the one releasing the 'poison letter' to SC? Insider job? Questions questions and questions???) etc.

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.


  1. David, after reading this article, I took a closer look at the financial statements of some of the counters mentioned. Insas particular caught my attention. Insas has been making positive EBIT and net profit during the last 6 years, although these have lessen in the last two years. For the cumulative third quarter 2010, it made an earning per share of 6.4 sen per share. For the last 2 years, its average free cash flow is 90 million. The more interesting part is its balance sheet. For the share trading at RM0.515, it has an asset backing of 1.18. After taking away 340 million of non-current asset, its current asset backing per share is still higher at 72 sen. Its cash and cash equivalent amount to 652 million, which translates into cash backing of 94 sen per share. A classic stock for Benjamin Graham. Shall we join force and raid this company and take it private?
    KC Chong

  2. Thanks KC. I'm just wondering what they are going to do with the money. It is not so good for a company to hold too much cash also as it will reflect that the company doesn't have a strategy or doesn't know what to do with their own resources. This might be the reason why the stock price stays so low. Maybe they should just announce a bumper dividend payout to reward shareholders. Hehe.