GPacket-WB: Stuck in Neutral

Over the past few days, GPacket has risen from 40 sen to 55 sen. Meanwhile GPacket-WB has risen from 10 sen to 12.5 sen. What's the problem?

The main terms of this warrant are:

• Exercise price: 40 sen
• Expiry date: 24 November 2023 (1584 days to expiry)
• Exercise ratio: 1-to-1

Based on the share price of 55 sen and the warrant price of 13 sen, GPacket-WB is now trading at a discount of 3.6%.

Given the sharp rise  in the share price and the discount in the warrant price, it makes sense to take a trading position in the warrant.

Update: This situation will eventually be resolved with either the share price dropping or the warrant price rising. A price convergence will happen when people start selling the shares and buying the warrants or they start to convert their warrants to shares and upon receipt of the shares, they start selling shares. 

Chart 1: GPacket-WB's daily chart as at July 24, 2019_11.00am (Source: Malaysiastock.biz)


Chart 2: GPacket's daily chart as at July 24, 2019_11.00am (Source: Malaysiastock.biz)

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!

Scomi: The White Knights Are Having Second Thought!

Yesterday evening (July 18), Scomi surprised investors when it proposed to revise its current share capital from RM224.96 million to RM3 million, instead of the earlier announced RM 40 million. For more, go here. 

The revision was made less than 12 hours after it was announced that Wan Azmi and the ex-Renong MD will inject new capital into Scomi based on a restructuring involving inter alia a proposed share capital reduction which entails the reduction of the issued share capital of the company from RM224.96 million to RM40 million. For more, go here. 

When a company reports a drop in profit from tens of millions of ringgit to a mere few thousands ringgit, you know they are trying to avoid reporting a loss. 

Similarly when a company reduced its capital from hundreds of millions of ringgit to a mere RM3 million, they are trying to avoid reporting that it may be worth nothing- or worse than nothing.

Imagine if you are a savvy corporate man like Wan Azmi, you won't want to get into a messy situation when the whole business environment is a buyer's market. This means the rescue deal may collapse any time. 

****

You may say, all these are pure conjecture. Then, let's look at the numbers.

Assuming the revised reduced capital of RM3 million is the true book value of Scomi, we can compute the "adjusted" price to book value of the stock by dividing RM3 million with the outstanding shares of 120.329 million. This will give you the book value per share of RM0.025. 

At the current price of RM0.105 (as at 10.34 am), Scomi is trading at an “adjusted” price to book value of 4.2 times (computed by dividing 0.105 by 0.025). That's a very rich valuation to peg onto any stock, let alone a distressed stock. For your information, Gamuda's PBV is 1.3 times. Thus, it is a good price to sell now.

Based on the above, you may want to take advantage of the “euphoria” to get out.  

Zhulian: Earnings Soared

Result Update

In QE31/5/2019, Zhulian's net profit rose 81% q-o-q or 62% y-o-y to RM19.5 million while its revenue rose 33% q-o-q or 19% y-o-y to RM52 million. Revenue rose y-o-y mainly attributable to higher sales both locally and in Thailand. Profit before tax rose y-o-y mainly attributable to higher sales with diligent cost control and higher share of profit from an associate.


Table: Zhulian's last 8 quarters' results


Graph: Zhulian's last 51 quarters' results

Financial Position

Zhulian's financial position as at 31/5/2019 is deemed healthy with current ratio at 6.1x and gearing ratio at 0.07x. It has no borrowing but cash in hand of RM159 million (or, 35 sen per share).

Valuation

Zhulian (closed at RM1.44 yesterday) is now trading at a trailing PER of 10.8x (based on last 4 quarters' EPS of 13.39 sen). If the cash in hand is deducted from share price, Zhulian's PER will be reduced to 8.1x only. In addition, Zhulian paid dividend of 10 sen last 4 quarters, which translates to a dividend yield of 6.9%.

Technical Outlook

Zhulian is trading in a range of RM1.35 & RM1.45 over the past 3-4 months. There is no sign that the sideways movement is likely to change in the near term.


Chart 1: Zhulian's weekly chart as atJul 17, 2019 (Source: Malaysiastock.biz)


Chart 2: Zhulian's monthly chart as atJul 17, 2019 (Source: Malaysiastock.biz)

Conclusion

Based on improved financial performance, satisfactory financial position and fairly attractive valuation, Zhulian could be a good income stock for long-term investment.

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.

Market Outlook as at July 8, 2019

Last Friday, FBMKLCI pulled back to its medium-term uptrend line, SS at 1677. It rebounded to close at 1683. MACD is poised to do a negative cross-under. At the same time, +DMI and -DMI are starting to converge. Thus, it is critical the market should get more buying support early this week, failing which we may see a bearish MACD cross-under and a longer consolidation in the market. We will have to wait and see how this will turn out.

Chart: FBMKLCI's daily chart as at July 5, 2019 (Source: malaysiastock.biz)