Monday, July 22, 2019

Scomi: Blue Sky Scenario in a Gloomy Market?

Over the weekend, we have a "promising" write-up in The Star newspaper about Scomi's prospect. (here). It is premised on the entry on new and well-connected shareholders and the huge contracts in the rail sector in the next 5-10 years.

I am not entirely convinced by the story. These are my doubts:
1) I don't believe Scomi rail expertise is exceptional. If its workmanship is up to the standard, Prasarana would not have disputes with Scomi for the trains delivered in 2011 (here). One may argue that Prasarana must be reasonably happy with Scomi's train since it has recently awarded additional contract to Scomi (here). I have to admit that the latter statement does negate my earlier statement but stranger things have happened in Malaysia. 
2) The bigger contracts, such as ECRL and possibly HSR, are beyond the reach of Scomi. There are a few MRTs and/or LRTs in the pipeline but the competition will be very stiff. Scomi will have to prove that they have the products to compete.  
3) Why did IJM choose not to takeover Scomi, and use it to bid for contract? Remember IJM bought into Scomi in 2012 to gain entry into O&G business as well as the transport solution business, such as rail infrastructure (here). Alas, IJM has given up on turning around Scomi and put its stake up for sale in early 2019 (here). That says a lot about Scomi.
In my previous post, I computed the "true" net assets per share wrongly. The number of outstanding shares is not 120.239 million, but 1093 million. Thus, the "true" net asset per share should be RM0.003. This will give you a Price to Book Value of 33 times (computed by dividing share price of RM0.10 by the "true" net asset value per share of RM0.003). If that's not expensive, I don't know how expensive looks like! It is fair to say that Scomi is a stock to be avoided!

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