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Friday, July 31, 2015

HLInd: A Strong Rally

HLInd broke above its ascending triangle (ABC) at RM5.00 and flew to RM5.30 as at 4:30pm. All in one day. Its next resistance levels are RM5.40, RM5.70 & RM6.00.

The strong rally on a Friday suggests something "big" is about to be announced. Since it has gone up so much, it is hard to recommend a BUY on this stock. You may consider it if the stock corrects back on weakness towards RM5.00.

 
Chart 1: HLInd's daily chart as at July 30, 2015 (Powered by Tradesignum)

 
Chart 2; HLInd's weekly chart as at July 30, 2015 (Powered by Tradesignum)
Note: 
I used the chart from Tradesignum because it most accurately captured the adjustment in price after the spin-off of Narra Industries.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, HLInd

Supermx: Joining the Party

Supermx is a laggard in the world of rubber glove. Yesterday it broke above the resistance line, AB joining the previous peaks since March last year. With this breakout, Supermx is finally joining the rubber glove rally. Its next resistance is the horizontal lines of RM2.40-2.50.


Chart 1; Supermx's weekly chart as at July 30, 2015 (Powered by ShareInvestor.com)

If you look at the monthly chart, we can see that the stock is in a long-term uptrend line (revised from previous post). Resistance is at RM3.00.


Chart 2; Supermx's monthly chart as at July 30, 2015 (Powered by ShareInvestor.com)

Based on technical consideration, Supermx could be a good trading BUY. Its next financial result (QE30/6/2015) should be announced soon. A good set of numbers could sustain the developing rally.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Supermx.

Spritzr: Bottom-line continued to climb

Result Update

For QE31/5/2015, Spritzr's net profit increased 35% q-o-q & 7% y-o-y to RM7.3 million while revenue increased 16% q-o-q or 5% y-o-y to RM72 million. Bottom-line improved q-o-q due to higher sales volume and reduction in packaging material costs.


Table: Spritzr's last 8 quarterly results


Chart 1: Spritzr's last 36 quarterly results

Valuation

Spritzr (closed at RM1.75 yesterday) is now trading at a PE of 10.6 times (based on last 4 quarters' EPS of 16.5 sen). At this PE multiple, Spritzr is still deemed attractive for a consumer stock.

Technical Outlook

Spritzr is in a long-term uptrend, with support from the 30-month EMA line at RM1.80. If an irregular uptrend line is drawn- connecting the trough- the share price is now at this line.


Chart 2: Spritzr's monthly chart as at July 30, 2015 (Source: ShareInvestor.com)

Conclusion

Based on satisfactory financial performance, attractive valuation and mildly positive technical outlook, Spritzr remains a good stock for long-term investment.

Note: 
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Spritzr.

Luxchem: Bottom-line jumped

Background

Luxchem Corporation Bhd ('Luxchem') is a supplier of industrial chemicals whose principal business activities incorporate the following: -
marketing and distribution of industrial chemicals and materials; and
manufacture of UPRs (unsaturated polyester resins).

Recent Financial Results

For QE30/6/2015, Luxchem's net profit increased by 532% q-o-q or 107% y-o-y to RM9.8 million while revenue was mixed- down 7% q-o-q but up 5% y-o-y to RM161 million. Revenue dropped q-o-q mainly due to lower revenue from trading segments. PBT increased q-o-q as PBT in the previous quarter was depressed by the recognition of Share Option Expenses of RM8.48 million in the Profit or Loss.


Table: Luxchem's last 11 quarterly results (Source: ShareInvestor.com)
 
 
Chart 1: Luxchem's last 11 quarterly results (Source: ShareInvestor.com)

Valuation

Luxchem (closed at RM1.03 yesterday) is now trading at a PER of 9.0 times (based on last 4 quarters' EPS of 11.4 sen).  At this PER, Luxchem is deemed fairly attractive. However, if the Share Option Expenses of RM8.48 million charged off in 1Q2015 is excluded, its full-year EPS would jump to 14.8 sen. This would push down its PER to 7 times. At this adjusted PER, Luxchem looks very attractive.

Technical Outlook

Luxchem is in an uptrend, with support at the 30-week EMA line at RM1.00-1.02.


Chart 2: Luxchem's weekly chart as at July 30, 2015 (Source: ShareInvestor)

 
Chart 3: Luxchem's monthly chart as at July 30, 2015 (Source: ShareInvestor)

Conclusion

Based on good financial performance, attractive valuation and positive technical outlook, Luxchem could be a good stock for a long-term investment.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Luxchem.

Penta: Bottom-line soared

Results Update

For QE30/6/2015, Penta's net profit increased by 86% q-o-q or 102% y-o-y to RM3.3 million while revenue was mixed- up 24% q-o-q but down 10% y-o-y to RM24 million.   The higher sequential revenue  recorded  was  due  to  the increase in  sales from  the  automated equipment  operating  segment which  was partially offset  by  the drop  in revenue contribution from  the  automated manufacturing  solution  operating  segment. Consequently, the  Group achieved a higher profit before  tax  of RM4.0 million as compared to RM1.4 million in the preceding quarter.


Table: Penta's last 11 quarterly results (Source: ShareInvestor.com)
 
 
Chart 1: Penta's last 11 quarterly results (Source: ShareInvestor.com)

 Valuation

Penta (closed at RM0.865 yesterday) is now trading at a PER of 12.7 times (based on last 4 quarters' EPS of 6.8 sen).  At this PER, Penta is deemed fully valued. However, if Penta can sustain its earning based on latest quarterly EPS, then its full year EPS could be 9.8 sen. This will push down PER to 8.8 times; giving room for a potential 20-30% price gain.

Technical Outlook

Penta broke above its horizontal line at RM0.85. Its next resistance will be at the psychological RM1.00 mark and beyond that, at RM1.40.


Chart 2: Penta's monthly chart as at July 30, 2015 (Source: ShareInvestor)

Conclusion

Based on good financial performance, reasonable valuation and positive technical outlook, Penta could be a good stock for a medium-term investment. (For more on Penta, go here)

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Penta.

Wednesday, July 29, 2015

Perstim: Mixed Results

Results Update

For QE30/6/2015, Pertima's net profit dropped 47% q-o-q but rose 63% y-o-y to RM9.3 million while revenue was similarly mixed- dropped 8.5% q-o-q but rose 6.4% y-o-y to RM158 million. The Group’s lower revenue was due to lower selling price coupled with lower sales volume. The Group's profits declined due to lower profit margin coupled with lower sales volume.


Table: Perstim's last 8 quarterly P&L


Chart 1: Perstim's last 44 quarters' P&L

Tin Prices Trend

From the tin price charts below, we can see that tin prices are at its 15-year low. In the past 1 year, tin prices declined from US24000/tonne in April 2014 to USD14000/tonne in June this year. Last 2 weeks, tin prices may have broken above its accelerated downtrend line, R2-R3 at USD14800/tonne. An uptrend in tin prices would lead to higher selling prices, which will translate to higher top-line and bottom-line.


Chart 2: Tin's monthy chart as at July 28, 2015 (Source: LME)


Chart 3: Tin's weekly chart as at July 28, 2015 (Source: LME)

Valuation

Perstim (closed at RM4.70 yesterday) is now trading at a trailing PER of 10 times (based on last 4 quarters' EPS of 47 sen). With a dividend payout of 35 sen, Perstim's DY is at an attractive 7.4%.

Technical Outlook

Perstim is in a long-term uptrend line with support at RM3.80. Its immediate resistance is at RM5.00-5.20.


Chart 4: Perstim's monthly chart as at July 28, 2015 (Source: ShareInvestor.com)  

Conclusion

Based on attractive valuation & positive technical outlook, Perstim is a good income stock for long-term investment.

Note: 
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Perstim.

SEG: Dividend Could Be Wrongly Reported?!

Result Update

For QE30/6/2015, SEG's net profit dropped 26% q-o-q but rose 18% y-o-y to RM8.0 million while revenue was similarly dropped 3% q-o-q but rose 5% y-o-y to RM65 million. Lower sequential revenue & net profit is in line with the general trend where the first quarter results are normally stronger that the second quarter. However, it is encouraging to see that the performance is better than last year.

 
 Table: SEG's last 8 quarterly results

 
 Chart 1: SEG's last 29 quarterly results

Possible Error in the Financial Accounting Statements (FAS)

The company again reported that it will be declaring a dividend of 7%. I believe that it is an error, because the same quantum of  dividend was declared last quarter and paid out in this quarter. The accountant may have made a mistake between a proposed dividend and a payment of dividend. See the Note to the latest FAS and the announcement for the dividend that paid out.


Diagram 1: Note on Dividend in FAS for QE30/6/2015


Diagram 2: Announcement on Dividend Entitlement for June 2015
 
Valuation

SEG (closed at RM1.42 yesterday) is now trading at a PER of 35 times (based on last 4 quarters' EPS of 4.2 sen). At this PER, SEG is deemed expensive. However, its DY is fairly attractive at 10% (assuming a dividend payout of 14 sen).

Technical Outlook

SEG has found a support at RM1.40. It is trying to form a base from which the stock may stage its recovery in the future.


Chart 2: SEG's monthy chart as at July 28, 2015 (Source: ShareInvestor.com)

Conclusion

Based on good financial performance and decent dividend yield, SEG could be a good income stock. Due to the possible error on the proposed dividend, the share price may move higher. Do not chase this move.

Note: 
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, SEG.

Tuesday, July 28, 2015

The Sacking of Gani Patail (UPDATED)

The market is filled with excited talks about the Cabinet reshuffle, including the sacking of our Deputy Prime Minister. To me, what's more critical is the sacking of Gani Patail. As Attorney General, Gani was one of the 4 persons tasked to investigate the transfer of a large sum of money into our Prime Minister's personal bank accounts. And, in our system of government, the AG is the person empowered to institute criminal prosecution. Though poor health was given as the reason for his termination- a reason that surprised even Gani - the true reason could be less gratuitous and more unpleasant. After all, Gani could well last until October this year, when he is due to retire. Gani's sacking could trigger a constitutional crisis.


(Source: Malaysiakini)

A constitutional crisis is in the far end of  a spectrum of outcomes for the 1MDB scandal; the end that's marked as the bad outcomes. If things spun out of control, this could lead to major unrest that could endanger lives and properties as well as threatening our democratic system of government. I sincerely hope that everyone involved would step back and place the country & the rakyat first before they take the next course of action.

I just saw this unbelievable news: 3 members of the Public Accounts Committee- its chairman Datuk Nur Jazlan Mohamed, Datuk Seri Reezal Merican Naina Merican and Datuk Mas Ermieyati Samsudin - have been appointed as deputy ministers. These 3 persons were involved in the investigation of the 1MDB affair! You can draw your own conclusion. This is a sad day for Malaysia!  

Mieco: Time to take profit

Yesterday, it was announced that the new major shareholder of Mieco, Purnama Kuantan, has ceased to be the major shareholder when the conditional letter of agreement in relation to the sale & purchase of Mieco shares due to failure to fulfill condition precedents to the transaction since July 20 (here). Purnama Kuantan- linked to Datuk Mohamed Moiz J.M. Ali Moiz of BRDB Development Sdn Bhd ("BRDB") - had earlier acquired 56.76%-stake in Mieco from Ambang Sehati Sdn Bhd and BRDB (here). The latter companies are also controlled by Datuk Mohamed Moiz. 

I don't know how a "restructuring" of shareholding among Datuk Mohamed Moiz's group could fail to be consummated. I also equally surprised that this fact was not disclosed earlier since it was knwon on July 20 and only announced to Bursa Malaysia on July 27 (here).

Since the share price has rallied significantly, I think it is a good idea to take profit on this trade.


Chart: Mieco's monthy chart as at July 28, 2015_9.45am (Source: ShareInvestor)

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Mieco. 

Monday, July 27, 2015

FTSE China A50 broke July 9 low

Today, Chinese stock market plunged again. It broke below the recent low of 11067 recorded on July 9. In fact, it was trading below 11000 right now. See Chart 1 below.


Chart 1: FTSE CHINA A50 d20150727_3.00pm (Source: investing.com)

From Chart 2 below, we can see that 11000 is more than a psychological support; It is also a strong horizontal support. We will have to wait and see whether the Chinese Plunge Protection Team can salvage the market right now.


Chart 2: FTSE CHINA A50 d20150727_3.00pm (Source: investing.com)

As expected, the call & put warrants are trading with big losses and gain. This is an arena for the die-hard or professionals where the volatility is astronomical. If FTSE CHINA A50 could not recover from 11000 mark, the put warrant prices will continue to go up. If  FTSE CHINA A50 can recover from 11000 mark, the put warrant prices will drop back sharply.


Table: CHINAA50 Call & Put Warrants as at 3.30pm 
 

Friday, July 24, 2015

CCB: Bottom-line soared

Background

Cycle & Carriage Bintang Bhd (‘CCB’) is the largest dealer of Mercedes-Benz motor vehicles in Malaysia, involved in retail and after-sales service.

Its After Sales centres will provide vehicles complete care, from routine maintenance work to complete restoration of your vehicles plus retailing Mercedes-Benz Merchandise items.

Mercedes-Benz Sales Rising

Based on latest Motor Vehicles sale data (up to the month of May), we can see that the Mercedes-Benz sale volume has risen substantially. It is currently sitting in 7th position- rose from 15th position in July 2014. It managed to chalk up a sales volume of 3970 in 5 months of this year as compared to 3876 for the first 7 months of last year.

Diagram 1: Malaysia's MV Sales for May 2015 & July 2014 (Source: MMA, via MotorTrader)

Worldwide, Mercedes-Benz sales volume rose 15.7% to 960589 for first 6 months of the year. In Asia-Pacific ex-Japan & China, the sale volume grew by 25.5% to 86629.

Diagram 2: Mercedes-Benz's Global Sales for 1H 2015 & 2014 (Source: Media.Daimler)  

Recent Financial Performance

CCB's top-line and bottom-line rose gradually over the last 3 years. That steady increase suddenly went exponentially. The reason given for the improved top-line and bottom-line are:

  • Unit sales up 46%
  • Higher earnings from Mercedes-Benz operations 
  • Dividend received from Mercedes-Benz Malaysia (“MBM”)
 
Chart: CCB's last 12 quarters' P&L (Source: ShareInvestor.com)

Valuation

CCB received a dividend of RM11.2 million from MBM for 1H2015. In FY2014, it did not receive any dividend from MBM due to poor financial result. In FY2013 & FY2012, CCB received dividend totaling RM11.2 million respectively, in 2 equal tranches. Does this mean that CCB may receive another dividend of RM11.2 million from MBM this year? If so, CCB's FY2015 EPS could be as high as 57 sen. CCB (closed at RM3.46 yesterday) is now trading at a PE of 6 times. In addition, CCB may pay out dividend again after suspending in FY2013 & FY2014. It paid out dividends totaling 10 sen in FY2012 & FY2011. If it does the same in FY2015, the DY for the stock is 2.9%.


Diagram 3: CCB's 1H2015, 1H2014 & 1H2013 P&L (Source: Company via Bursa website)

 
Diagram 4: CCB's FY2014, FY2013 & FY2011 P&L (Source: Company via Bursa website) 

Technical Outlook

CCB has broken above its downtrend line at RM2.20 in May. The share price could potentially test the "horizontal" line ('AB') at RM6.00.


 Chart 2: CCB's weekly chart as at July 23, 2015 9Source: ShareInvestor.com)

 
 Chart 3: CCB's monthly chart as at July 23, 2015 9Source: ShareInvestor.com)

Conclusion

Based on good financial performance, fairly attractive valuation & positive technical outlook, CCB could be a good stock for long-term investment.

Note: 
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, CCB.

Thursday, July 23, 2015

Feel the Fear ... and Do it Anyway!

Recently, I read an interesting article entitled “Release the Condor” written by Jeffrey Saut, a renowned fund manager. In his article, Jeffrey explained how the phrase “Release the Condor” came about. To wit:
A long time ago in a galaxy far, far away, there was an advertising company trying to come up with a video commercial to introduce Buick's new car. After a number of the ad company's proposals were turned down, they came up with the idea of the car cruising on a road down the side of a mountain with an eagle superimposed flying over it. Buick loved it. There was, however, one problem; you cannot capture, or tame, an eagle. Therefore it was decided to use a condor. Here too there was a problem, the ad agency could only find one captive condor in the world; and, it was at a zoo in Lima, Peru.
After arrangements were made, the camera crew showed up on a cliff in the Andes Mountains to film the commercial. With all cameras rolling the call was given to "release the condor." But instead of soaring into the sky, the condor plummeted hundreds of feet to its death because after years of captivity it had forgotten how to fly. Subsequently, any time something bad was about to happen, or something bad had just happened, advertising companies shouted "release the condor!"
The condor story has nothing to do with the rest of this post. I have included it here because I love the story. In the same article, Jeffrey share this gem of investment advice from J.P. Morgan CEO James Dimon, who recently told reporters anxious for news exactly what they didn't expect to hear. In Jeffrey's words:
Everything is fine, so stop freaking out. Indebted Greece is on the ropes and might leave the euro, it's true. China's main stock market index recently went into free fall… Why worry about these things? They won't really change the investing world much. "You have to separate the financial markets from the economy," Dimon said when quizzed about China. "You can't expect any economy to have perpetual growth at 10%." Does Dimon know something we don't know? Yes ... and no. More accurately, he has come to accept a basic fact about stock markets and the news cycle that all long-term investors should recognize - that there is no real link between specific "disastrous" events and the performance of the stock market.
Then, Jeffrey brought in a similar idea from a recent article published by Horizon Kinetics:
This concept espoused by Jamie Dimon is what we attempted to convey in last month's Gleanings report titled "Feel the Fear ... and Do it Anyway." As expressed repeatedly in these missives, "The equity markets do not care about the absolutes of 'good' or 'bad' but only if things are getting better or worse, and things are getting better!" Yet, it is human nature to worry about the "good" and "bad" things that constantly bombard investors. However, as a successful investor, "[You need] to accept a basic fact about stock markets and the news cycle that all long-term investors should recognize - that there is no real link between specific 'disastrous' events and the performance of the stock market."
Meanwhile, back to Malaysia, the political situation, which was absolutely bad, managed to get even worse. Last week, the shit hit the fan when BN-controlled Government brought out a video confession by Lester Melanyi, a Sarawak journalist who claims that the 1MDB scandal is really a conspiracy, built on falsified documents, intended to topple our Prime Minister. This serious allegation runs smack against the earlier serious allegations of the theft of billions of ringgit from the national wealth fund, 1MDB.

The 1MDB story is now moving into high gear. The arrest of directors of 1MDB-linked companies that had allegedly transferred fund into our Prime Minister’s personal accounts and the resignation of Lim Kok Wing as our Prime Minister’s PR advisor seem to suggest that our Prime Minister is having a tough time. On the hand, the police’s threat to arrest those named by Lester Melanyi as well as the travel restriction put on DAP’s Pua & PKR’s Rafizi seem to suggest that the battle is joined.

Despite the current explosive state of Malaysian politics, I couldn’t help but be amazed by the resilience in our stock market. If you look at the index charts below, you could see that many of them – not just the blue-chip laden FBMKLCI - have recovered from the recent low. In fact, almost all of them are pushing against their respective intermediate “downtrend”. This doesn’t look like a market that is unduly worried about a potential collapse of our government. In fact, this market looks decidedly sanguine - unperturbed by our messy politics – and in search of the next investment idea.


 
Chart 1: FBMKLCI's daily chart as at Kuly 21, 2015 (Source: ShareInvesor)

 
Chart 2: FBM70's daily chart as at Kuly 21, 2015 (Source: ShareInvesor)

 
Chart 3: FBMACE's daily chart as at Kuly 21, 2015 (Source: ShareInvesor)


Chart 4: FBMSCAP's daily chart as at Kuly 21, 2015 (Source: ShareInvesor)

Based on the above mildly positive near-term technical outlook, I think that we can increase our exposure to the market slightly. My preference is for value stocks with good dividend yield, such as BJToto. Hopefully, these condors will fly. Good luck.

Wednesday, July 22, 2015

Kenanga's Third Quarter Market Outlook

Kenanga has just issued its 3rd Quarter Market Outlook, entitled "NO MORE EASY MONEY". The gist of the report is as follows: 

Temporary Bottom? Despite inspired by the Malaysian Sovereign Rating upgrade, we do not rule out that a temporary bottom could have formed as the recent price corrections were steep in nature and the “Discount” between FBMKLCI to its consensus index target has widened to 7.5%, which is the -2SD-level below its trailing 3-year mean of 4%. Moreover, we gathered that the “Premium” of FBMKLCI valuation, as per consensus Fwd. PER, has also been narrowing against regional peers. Besides, we also believe the decline in average foreign shareholding of FBMKLCI could taper off. This is because the average foreign shareholding is still on an uptrend since early 2013 and the recent decline in the average foreign shareholding has been deviating from its regression trend significantly, which could suggest an “oversold” condition, at least in the short-term.

Nonetheless, downside risk remains intact. Owing to both domestic and external uncertainties, coupled with the negative technical picture and weaker investment sentiment as well as higher market volatility, persistent foreign outflow could be a concern despite the reasonably strong domestic liquidity. Besides, we also notice that the market dynamics are highly correlated to share financing as well. So far, FBMKLCI and its Fwd. PER have been declining in tandem with the lower percentage of Loan for Share Financing to Total Loan. Should this lending continue to decline, this will put pressure on the equity market.

Therefore, we have lowered our index target lower to 1,810 (from 1,845 earlier) on lower target FY16E PER (18.4x vs. 19.0x earlier) and minor earnings and target prices adjustment. This target is also backed by FY15E earnings growth of 2.5% and a stronger growth of 7.8% in FY16E.

Focused Sector & Stock Picks. We continue to like high-yielding stocks such as BJTOTO (OP, TP: RM3.72). Stocks in resilient sectors such as Telco, Healthcare, Education and Consumer F&B will also be our preferred choices. Among these sectors, we choose TM (OP, TP: RM7.80), TOPGLVE (OP, TP: RM7.90) and SASBADI (TB, TP: RM2.68) as our 3Q Top Picks. While the weakening trend of ringgit remains favourable to exporters, we are selective and prefer laggards. As such, we select TOPGLVE as our Top Pick from glove sector for the quarter. Nonetheless, we do see further upside for some exporters such as MPI (OP, TP: RM8.90) and SLP (OP, TP: RM1.76) despite their superb performances. Of course, we also continue to focus on our other Overweight sectors like Construction and Logistics. MITRA (OP, TP: RM2.35) and CENTURY (TB, TP: RM1.19) are the chosen ones from these sectors. Other Top Picks are ARMADA (OP, TP: RM1.55), BJAUTO (OP, TP: RM3.14), and PESTECH (OP, TP: RM6.11) despite our Neutral rating on Oil & Gas, Auto and Power Utility sectors. For short-term traders, it is worthwhile to consider bottom-fishing stocks, especially big caps, which are trading near their respective 52-week lows. We believe these heavily bashed down stocks could stage a quick rebound from their recent lows.

If you to a more visual presentation of Kenanga's 3rd Quarter Market Outlook, checkout the short video clip.



Digging through the Market Strategy Report, I came across 2 long-term charts that warn us to be cautious in this market. I have appended them below:

1) Based on cycle analysis, FBMKLCI could be in a down time cycle.

 

2) As per Elliot Wave Theory, FBMKLCI could have peaked in 2014 at 1896.



A market caught between a possible down cycle and a potential peak is market where easy money is getting scarce. Thus, we have to be very careful in our stock selection as well as putting money at risk in this market.

Tuesday, July 21, 2015

Perwaja: A Cautious White Knight Found!

Last week, we have the announcement of  the Regularisation Scheme of Perwaja and its subsidiaries  (here). The newspapers in reporting the scheme seems to put more emphasis on the entry of a white knight - Chinese conglomerate Tianjin Zhi Yuan Investment Group Co Ltd ("Zhi Yuan")-  to help revive the company (here and here). I hope to expand a bit on the scheme to enable shareholders to decide whether they want to go through with the exercise or exit the stock early.

The scheme in brief looks like this:


Diagram 1: Perwaja's Proposed Restructuring Scheme

The essential parts of the scheme are:
1) The Balance Sheet Restructuring, where 95% of its par value of the shares capital and the entire share premium, will be offset against accumulated losses.
2) Recapitalization, where a Special Issue of RM1.7 billion (in 4 tranches) to Zhi Yuan and a 4-for-5 Rights Issue of up to RM534.4 million, will be carried out. 
3) Debt Restructuring where total liabilities of RM2.238 billion will be first reduced by waivers to RM1.683 billion and then replaced by Term Loans, Installment scheme and shares. See Diagram 2.

Diagram 2: Perwaja's Proposed Debt Restructuring

The Special Issue of RM1.7 billion will be staggered over 30 months from the date of fulfillment of all conditions precedent to the restructuring scheme:


Diagram 3: Proposed Zhi Yuan's 4-tranche investment in Perwaja

There are two things that I found 'interesting' about the white knight and its investment in Perwaja. Based on the write-up given, we learned that Zhi Yuan is a small company by Chinese standard, It has a registered capital of RM303 million and 2000 employees. More importantly, it is not stated anywhere that it has experienced in the business of manufacturing steel products. This raised questions of the sponsors' financial capacity and managerial expertise.


Diagram 4: Brief Write-up on Zhi Yuan

Secondly, Zhi Yuan, which would have 2.5 billion shares out of 3.06 billion shares at the "entitlement" date of the Rights Issue (ignoring new shares to be issued for the unlikely conversion of Perwaja-WA), will be entitled for 2 billion Rights shares. It is only willing to subscribe for 500 million Rights shares.  The responsibility of finding takers for 1.5 billion Rights shares will fall on Perwaja. Who would want to sink in RM300 million if the sponsor seems rather reluctant to do so?

This level of caution - plus the staggered capital injection in 4 tranches by Zhi Yuan - doesn't inspire confidence.


Diagram 5: Zhi Yuan's Rights Issue Subscription

If you go to Perwaja's announcement of Changes in Shareholdings (here), you will see that its director, Pheng is slowly disposing his stake in the company (here and here). After all, the share price has risen from RM0.10 in early April to just under RM0.30 today.

I think you would do well to follow in Pheng's footsteps in reducing or disposing off your investment in Perwaja.

Note: 

In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Perwaja.