Monday, December 27, 2010

Syed Mokhtar stocks 'kena goreng': Missed out DRB-Hicom? Missed out TWS? No worries, don't miss out BERNAS (RM2.83; Target: >RM4.20)

From the way Tradewinds (TWS) is moving up for the past two weeks, we can clearly see that this is the right stock that will continue to rally in the coming days and weeks. This is going to be the darling stock of KLSE next year. In every bull run, there are always a few Superstar counters. TWS might be one of them.

Here comes Bernas, a subsidiary of TWS which owns 70% stake in its paid up capital of RM470m. Share price of Bernas rose fantastically last Friday and caught the attention of all Malaysians who invest in KLSE. It went up by more than 50 sen in one day and was the top gainer.

Let's look at the business of Bernas .It has a near monopoly business of rice in Malaysia. Its profit was quite unpredictable for many years due to its inability to raise the price of rice which was a controlled item in Malaysia for many years. When the price of rice went up in international market and the government did not allow it to raise the selling price of rice locally, it lost money in that particular quarter or that year. Thus, it used to be a laggard stock for a long time and very few people wanted to buy and keep it. Nonetheless, since TWS bought the majority stake of 70% at the end of last year, things started to change. The present government is more flexible in allowing the company to raise the price of rice locally when the price of rice in international market goes up. Thus, from now onwards, its business and profit will be more stable as shown by its three quarter results this year making near to RM50m profit in each quarter!

It will make close to RM200m net profit this year. Based on the closing price of RM2.83, the EPS and PER are just 42 sen and 7x only. In other words, even with current share price of RM2.83, the share is still considered cheap as compared to many other food companies which have PER of at least 15x. Look at F&N, QSR, KFC, all are industry leaders. Bernas is another industry leader. It has no business trading at current levels. At PER of 10x, the share is worth at least $4.20 and at PE of 15x, it will be $6.30.

In addition, Bernas is very generous in its dividend payment. It paid a 24% dividend last year, giving a net yield of 6.5%. It has a near monopoly in the rice industry in Malaysia and thus has the ability to set the selling price of rice in Malaysia. It also has 30% stake in Gardenia Bakeries which is one of the most popular bread manufacturers in Malaysia and 45% stake in United Malayan Flour. Thus, it is a gigantic food company generating a turnover of more than RM3b per year and making profit of RM200m yearly. How can its share price stay low for a long time? Incomprehensible!! It has just started to roar and will continue to do so just like other food companies like QSR and KFC.

Thus, I think it will become another Superstar just like its mother TWS. Syed Mokhtar counters are getting very 'garang' and hot lately. DRB-Hicom and TWS have moved up substantially, though I believe there's more upside, Bernas is just starting to move up. Therefore, don't miss out on this possible winning stock!!

By William Koay