Wednesday, March 18, 2009

Jerneh broke its 1998 low

Background

Jerneh Asia Bhd ('Jerneh') is involved in the provision of general & life insurance as well as takaful insurance. For the corporate structure of the Jerneh, see the diagram below.



The largest shareholder of Jerneh is Kuok Brothers Sdn Bhd, which own 37% of its outstanding shares based on the Annual Reports for FY2007.

Recent Financial Results

From Table 1 below, we can see that Jerneh's financial performance deteriorated after 1Q2008. Its pre-tax profit dropped from RM8 million in 1Q2008 to about RM4-5 million in 2Q2008 & 3Q2008 and then to a loss of RM7 million in 4Q2008. Not much details were given, but the company acknowledged that it made provisison for diminution in value of investment totaling RM37.6 million for the whole of FY2008. This explained the drop in pre-tax profit from RM45 million in FY2007 to a mere RM10 million in FY2008.


Table 1: Jerneh's 8 quarterly results up to 31/12/2008

Historical Financial Results

In FY2008, Jerneh booked in its share of losses in Associated Companies totaling RM14 million- a drop from RM19 million incurred in FY2007. From the Annual Report for FY2007, we learn that this amount came from losses suffered by its JV insurance business in Thailand & the Philippines as well as losses from its new start-up takaful insurance JV with HSBC and its fund management associate, Areca Capital Sdn Bhd. From the two tables below, we can see that share of losses in Associated Companies has been a permanent fixture since FY2002.


Table 2: Jerneh's results for FY2003-2008


Table 3: Jerneh's results for FY1998-2002

Valuation

It is not useful to value Jerneh based on PE multiple, given the huge impairment provision made in the current financial year. Its P/Book is fairly low at 0.35 time (the stock closed at RM0.79). It also pays a dividend of about 5 sen- giving a decent dividend yield of 6.3%.

Technical Outlook

From April 2001 to September 2008, Jerneh had been moving in a range between RM1.40 & RM2.20. In September 2008, it broke below the RM1.40 support. Jerneh has dropped below its 1998 low of RM0.91-92, to making new low for the past few days.


Chart: Jerneh's monthly chart as at March 17, 2009 (Source: Quickcharts)

Conclusion

Due to the years of lackadaisical financial performance, Jerneh does not recruit many supporters. As a result, the stock failed to hold above its low recorded during the Asian Financial Crisis 1998. This is unfortunate because the stock is trading at only 0.35 time its book value, while paying a decent dividend yield of 6.3%. If ever there is a case for a privatization, Jerneh is it. However, I do not think this is likely as the Kuok group may not want to own an insurance group outright. If you have loads of patience, Jerneh could be a good stock for a very long-term investment.

2 comments:

value investing in malaysia said...

Hi Mr. Alex,

that's a good article on jerneh. its great to read ur articles, which available almost every working days - untiring efforts.

imo, jerneh appears cheap, but being a lossmaking company, and as we can see the NPAT declined over the last few years, do you still think its a good buy? Or the company will post even larger loss in 2009? Wouldnt it be better to buy when it is showing some signs of recovering in profits - profit up QoQ?

At what level do you think the KLCI will end in 2009??

Am doing some survey, can find out in my blog. thanks.

Alex Lu said...

Hi Value Investing,

I think your suggested approach is safer as well as not tying down your funds while the "story" is developing. A simple trigger is to buy once the stock had recovered above RM1.00.

Jerneh is weighed down by start-ups and new JVs that have yet to yield positive results. That's the "story".

Good luck.