Reassessing Talam

Talam was one of my better calls in 2006. Below was the posting made almost a year ago on 24 August 2006 when the share price went to 10 sen:

Desperately Seeking Talam
Making Sense & Assessing Risk

August 24, 2006 - When things like Talam happens, what do you do? Talam's shares already at a 52 week low of 17 sen, dropped as low as 10 sen today on huge volumes after both Bursa and the company disclosed that Talam has again delayed finalisation of its annual accounts for year ended 31 Jan 2006. Bursa has warned that failure to submit by 31 August will result in suspension and maybe delisting. The knee jerk sellers would theorise that most companies who delay submission are prime candidates for PN4/PN17, or there is a huge writedown, or need to restate losses for previous years, etc...

Facts
1) The company has a MOU with major financiers to pare down debts by 70% over a 2 year period. Its current debt is RM864.3m. That makes its current gearing at 1.4x, not that exceptionally high that it is unmanageable.
2) Knowing IJM, it would want Talam to clean up its books before doing anything with Talam/K-Euro.
3) It has a good NTA at RM0.89. It will have impairment losses and losses on land disposals, and late delivery charges. Prudent to whack 75% off NTA = RM0.225.
4) Outstanding shares 629.18m. Market cap at RM0.12 means the company is worth just RM75.5m. Even a Main Board shell is worth RM20m.
5) If it fails to submit by National Day, an automatic suspension will be imposed. Talam knows that and acknowledged that, so what gives??
6) The delay has been invoked since end May 2006, so nothing really new here.Why the sell-off?? The delay has been known for sometime. Not having enough employees is a stupid excuse, should not even put that in. Valuation and restructuring stuff, plausible excuse. The market is pricing in a lot of potential bad news. The threat of delisting is just a normal announcement of Bursa, so its not a real threat. Look at the existing PN4/PN17 companies, most are trading higher than RM0.10 and they are in a lot more shit than Talam. These are the facts, make your own assessment. Of course, I could be proven terribly wrong... and end up with just eating kuih talam for a very long time...

Recent News:
April 11, 2007 - Talam sold 25.1 acres of land in Bukit Beruntung to Tesco Stores (Malaysia) Sdn Bhd for RM18,587,052 (US$5.4 million). The net proceeds from the sale will be utilised to pare the group's borrowing and sales related expenses. The sale will reduce Talam's gearing and enhance the development in this location.

March 28, 2007 - The long-delayed RM3.12 billion west coast highway project linking Banting in Selangor to Taiping in Perak will resume and the work will be given to the original contractors, Datuk Seri Najib Tun Razak said today. The deputy prime minister told reporters that the decision to resume the project covering 215.8km was made at today's Cabinet meeting.
The project, mooted 11 years ago, was put on hold due to the 1997 Asian financial crisis. Concessionaires for the project, touted to be the alternative to the North-South Expressway, include Talam Corporation Bhd and Kumpulan Europlus Bhd. In November 2006, Works Minister Datuk Seri S. Samy Vellu said that the Economic Planning Unit (EPU) would re-submit a working paper on the project to the Cabinet.

Things got really interesting yesterday with the news that KEuro may sell its stake in Talam.

August 7, 2007 - In an announcement yesterday to Bursa Malaysia that departs from the norm, K Euro's directors highlighted several observations. The directors pointed out that the two companies – Selasih Jauhari Sdn Bhd and Desiran Johan Sdn Bhd – were private limited companies with paid-up capital of RM2 each, and that they were in no position to ascertain their credibility. It was further highlighted that the K Euro board was not certain the option agreement would be successfully implemented because “there are numerous conditions precedent to be fulfilled”.
The two private companies represented to K Euro were in a position to offer a scheme to enhance the value of the assets of Talam Corp Bhd, an associated company of K Euro. They also said the scheme could enable Talam to generate cash to reduce its borrowings. Should the proposed scheme be unable to meet what the two companies have represented, the boards of Talam and K Euro would not accept it, and the option agreement would lapse. K Euro's board also highlighted that the purpose of the option agreement was to enable the two private companies to submit their proposed scheme to the boards of K Euro and Talam for consideration. In the announcement, K Euro said the option agreement was for Selasih Jauhari and Desiran Johan to acquire a 25% stake in Talam, amounting to 157 million shares, at an exercise price of 30 sen a share.
Presently, K Euro holds 42.94% of Talam, and upon an exercise of the call option, Selasih Jauhari and Desiran Johan would have a 17.94% stake in Talam. The scheme proposed by the two private companies would not increase the borrowings of Talam. Further, the option price was fixed at 30 sen a share but they represented to K Euro that there would not be a reduction in the value it held in Talam, being RM141.4mil, or 51 sen a share, in book value. The granting of the call option is conditional on several approvals, including agreement from the board of K Euro, and the board and shareholders of Talam for the proposed scheme. K Euro said it would now concentrate on its two principal projects: the West Coast Expressway and Canal City.
Sources said while it was announced in June that IJM Corp Bhd would proceed to acquire a 25% stake in K Euro for RM33.1mil cash, or 28 sen a share, the exercise was not completed and as such, IJM was still not represented on the K Euro board. The conditional agreement with Selasih Jauhari and Desiran Johan was, therefore, a decision made by K Euro's existing board.
There might be a desire to enhance the value of Talam, especially since K Euro's stake in it would eventually be diluted anyway, when the convertible instruments in Talam are issued and converted into shares by its creditor banks.
The sources believe the two private companies' proposed scheme might involve an injection of some assets that have yet to be disclosed. They also believe that although the private companies have paid-up capital of just RM2, they are owned by a businessman of means whose identity had remained undisclosed.

My Two Sen:
- Things were going along hummingly for IJM when they went through with the injection of IJM property division into RB Land. Everything seems to be OK with KEuro as well and Talam was supposed to be next on IJM's plate. KEuro and Talam were operating AS IF they were under the IJM umbrella already. For example: Talam appointed IJM as the contractor /jv partner to resume its various stalled developments such as Taman Puncak Jalil, Putra Perdana, Kinrara Section 3, Bukit Beruntung, Lagoon Perdana, Sierra Selayang and Ukay Land. All that activity has been happening since late last year.
- IJM will almost control Talam anyway through its probable acquisition of KEuro as the latter controls 43.1% of Talam.
- Thanks to a stronger property market, Talam should be able to dispose off its hotel, shopping mall investments and hospital for RM200m-RM250m.
- Talam's NTA per share is at 52 sen (revised from 89 sen last year).
- Major land assets: 400 acres Bukit Sentosa 3 valued at RM258m; 260 acres Puncak Jalil valued at RM159m; 1,284 acres at Batang Berjuntai valued at RM146m; 2.16 acres at Larkin Centre, Johor Bahru valued at RM37m; 67 acres at Bukit Sentosa 1 valued at RM38m; 58 acres at Bukit Sentosa 2 valued at RM33m; 340 acres at Tanjung 12 valued at RM43m; 50 acres at Danau Putra valued at RM51m; 401 acres at Ulu Yam valued at RM25m; 120 acres at Saujana Putra valued at RM58m; the killer asset is 2,500 acres at Bukit Beruntung valued at RM624m; 40 acres at Ukay Land valued at RM45m; 90 acres at Sierra Ukay valued at RM27m; 10 acres at Kinrara 3 valued atRM39m; 80 acres at Lestari Puchong valued at RM109m; 1.5 acres Yin Hai Complex, Jilin, China valued at RM56m; Marcourt Hotel, Jilin, China valued at RM123m; Menara Maxisegar valued at RM58m; Pandan Indah Medical Centre valued at RM40m; etc.
- IJM probably was not going to buyout Talam as by virtue of buying KEuro, it also controls Talam and will get the benefits of the development works under Talam. However, with the presence of the new potential buyers, IJM may be forced into making a bid to control Talam.
- While Talam has its debts to work out, it has a good extensive landbank. Those assets probably rose in attractive ness over the last couple of years from being unwanted to "hey, looks kinda interesting now". The killer asset is Bukit Beruntung, whoever wants to be a player for the next 10-20 years will need this vehicle. The race course will be shifting from Sg Besi to near Bukit Beruntung sometime the next few years, could be interesting for a long term player.
- Methinks IJM will come in aggressively to control Talam, after all save yourself a lot of time to accumulate the assets under Talam. In order to propel RB Land /IJM Property to be a major player, NOT controlling Talam seems to be a bit silly. This is quicken IJM's resolve to control KEuro asap so that they do not sell their 43% stake in Talam. If IJM is going to control KEuro, it will not cost them much to also control and clean up Talam - this strategy could be to force IJM to quicken its acquisition of KEuro and stop them demanding so much from the jvs and contracts under Talam, and take Talam private.
- The danger is in the 2 companies submitting the proposal to KEuro. Esp RM2 companies, man, you know these RM2 companies will be very influential vehicles. Maybe I should use my RM2 and also submit a proposal to KEuro.
- Any way you cut it, Talam is in play and players will be looking hard at Talam's landbank, not many like them around despite's Talam's debt crisis. If IJM loses indirect control of Talam, it may lose out on the development contracts and jv opportunities. An aggressive bidding war could send the share price closer to 60 sen. More upside for Talam surely.