MEGB: Good things come in three?!

Background

Last week, MEGB announced that it received "a notice of request from Strategic Ambience Sdn Bhd, a wholly-owned subsidiary of SMRT Holdings Berhad to conduct due diligence on the Company and its subsidiaries for a period not exceeding 30 days from the date of approval by the Board, with a further extension of 15 days upon request. The Due Diligence Request was pursuant to an undertaking from Mr. Siva Kumar a/l M Jeyapalan, a major shareholder and an Executive Director of the Company committing to accept any offer which SASB either by itself (or by companies related to it) in conjunction with another person may make for the purchase of Mr. Siva’s entire shareholding in the Company consisting 123,656,700 ordinary shares of RM0.20 each in the Company."

Later, we learned that SMRT will be teaming with Creador (a private equity fund) to acquire the 32.9% stake in MEGB from Siva Kumar. For more, go here. Creador is a fairly successful fund manager which invests in consumer stocks. For more on Creador & its founder & CEO, Brahmal, go here.

Results Update

Yesterday, MEGB announced its results for QE30/9/2014. It returned to profitably after 11 quarters of losses. The turnaround happened because of an extraordinary gain of RM13.7 million from the disposal of investment in HKEX. If this gain is excluded, MEGB's losing streak would continue for yet another quarter.

  Table 1: MEGB's last 8 quarterly results


Chart 1: MEGB's last 22 quarterly results 

Valuation

There is no denying that MEGB is a stock with good asset backing. Malaysia Finance has posted an article on this, where it computed MEGB's assets per share at RM1.02 (here). Being a loss-making concern, the PB is the only valuation matrix that we can look at since we can't compute its PE.

Technical Outlook

Yesterday, MEGB broke above its horizontal line at RM0.65. This is a strong resistance and yesterday's breakout could set the stage for a rally to RM1.00-1.20.


Chart 2: MEGB's weekly chart as at Nov 20, 2014 (Source: Tradesignum)

My take on MEGB

Once in a while, we come across a stock that ticks all the right boxes and becomes a "screaming" BUY. Before you jump into this stock, you must consider:

1. Why is Siva Kumar willing to sell MEGB at a price that is "almost a steal"? He knows the company better than anyone else?
2. You could remember that Siva Kumar tried to sell off his stake in MEGB in a call-and-put option agreement with one Gary How of Hong Kong in March this year (here or here). In that agreement, Siva Kumar has a put option to sell his then 27.96%-stake at an even higher price of RM1.10. Why did he choose to terminate that option?
2. Can SMRT turnaround MEGB? We need to consider the highly competitive environment in the education field which has affected even a good education group like SEG.
3. How did MEGB manage to make such a substantial profit from its HKEX investment? Bearing in mind, this is from a company that's struggling to put out the fire in its backyard.
4. What would happen if MEGB fails the Due Diligence test?

Conclusion
Based on positive news flow and technical breakout, MEGB could be a good trading BUY. However, I must caution that MEGB has been a very tricky stock from day one. Nothing about this stock is simple. Thus, I believe what we have been seeing for the past 10 days in MEGB must be taken with more than a pinch of salt. If you choose to trade this stock, you must exercise careful discretion.

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, MEGB.