Saturday, April 03, 2010

Understanding "Value Trap"

Those who have been in the markets long enough will understand the term "value trap". It is when you buy and hold something for the longest time because there is great inherent value. However the investor does not know when will the hidden values be unlock by management and/or owners.

Hence investors who are wiser will always bear in mind the "value trap", being locked into something for the longest time, sometimes years. I will present two examples:

Kuchai Development

Its basically a holding company. Its got a substantial stake of 26% in palm oil Sg Bagan and a highly attractive 3m shares of Great Eastern (traded now btw S$15-16). All in the total net asset value for Kuchai Development is around RM260m. It has 120.7m shares (50 sen), which makes for a NAV of RM2.15. Guess what's the share price??? Its just 80 sen. How to go wrong?

Technically you have to outlive the owners or wait till they finally decide to do something with their shares.
When looking at a value company, the first thing to check is the shareholdings level. For Kuchai:
Kluang Rubber 41.9%

Sg Bagan 9.38%

Lee Foundation 4.18%

Kota Trading 1.77%

The top 3 are basically the same group of people and they made doubly sure they have more than 50% as that will stop anyone thinking of raiding the company. So if someone comes along and collect shares and then make a G.O. at RM1.60, he/she will not succeed as long as the controlling shareholders do not sell. They will probably sell if someone comes along and offer a substantive premium to NAV, say RM2.60-2.80 or thereabouts.
The value is in the NAV and then the listing vehicle as a value add.

Once the owner controls more than 50%, there's very little you can do. If you can locate a value company and there is ample free float, plus the controlling shreholder holds less than 40%, then I bet you that many vultures will be cirlcling to take over the company, thus narrowing the gap between NAV and the share price.

It might be OK to hold on forever if the company pays a decent dividend, but in Kuchai's case it paid 0.8 sen in 2008 and 0.45 sen in 2009. If you take the share price of 80 sen, that works out to be a paltry dividend yield of 1% and 0.56%. Really no incentive to own this stock.

I really think that there is a strong case for the SC to come down hard on Kuchai because it does not resemble a normal company with on-going businesses. Its strictly a holding company. It does NOT allow shareholders to participate in the growth of the company, it just holds the stakes forever. It does NOTHINg to extract value from their inherent value. Some may say so is Berkshire Hathaway - in Buffett's case, he actively manages his positions, positions will be sold once they reach above fair value and vice versa. Kuchai's position makes a mockery of being a listed counter - anyone in their right mind would be 100x better off to invest directly into Great Eastern or Sg Bagan - there is absolutely no value to its existence.

Pintaras Jaya

The company recorded revenues of RM165.4m in the fiscal year ended June 2008. Its net profit was MYR23.8m in fiscal 2008, or a net EPS of 29.8 sen. For the year ended June 2009, the company recorded revenue of RM130.3m, a slight drop owing to depressed economic conditions, but still managed to eke out a net profit figure of RM11.4m or a net EPS of 14.3 sen. What was key was that the final quarter, or the period Apr-June 09, saw net profit contribution of RM6.238m, which was more than half of the entire 12 month period. The excellent results carried on in the first quarter of the new fiscal period. For the quarter ended Sep 2009, net profit was RM6.288m. It appears that the company has regained traction. If we were to annualise the results, we should be looking at a net EPS of 24 sen for the year ending June 2010.

Pintaras Jaya is a unique company in a dog-eat-dog industry. Its very conservatively managed, and extremely cash rich, you'd think they are in the 4D gaming business. Just their cash balance on hand, if you add their liquid short term investments, comes to RM93.6m, or a net cash per share backing of RM1.17, unbelievable isn't it. Why no one is covering the stock anymore??? At a share price of RM1.60, it literally meant that 73% of the value is in cash already (how big a font can I make this!!!).

Paid Up: 80m shares
NTA: RM2.19

Distributable retained earnings stood at RM96.76m. A share split and/or a lucrative bonus should be in the offing because the company has always been criticised as very good and prudent, but lacks liquidity.

Pintaras Jaya made the coveted list of Forbes Asia's fourth annual 'Best Under A Billion' companies in 2008. Their revenue dipped in 2009 and the company did not make it on the list but as things look, I am pretty sure they will back on the list in 2010.

Dr Chiu Hong Keong, a Malaysian, aged 54 is the founder member of Pintaras Jaya Berhad and was appointed as the Managing Director of the Company since 23 November 1989 and elected as the Chairman of the Board on 18 October 1994. He is a member of the Risk Management Committee. He graduated with a Bachelor of Civil Engineering degree (1st Class Honours) from the University of Auckland, New Zealand in 1977 and obtained his Doctorate of Philosophy degree in Engineering from Monash University, Australia in 1982. He worked as a Geotechnical Engineer with the Victorian Country Roads Board of Australia for a brief stint before returning to Malaysia to join Pilecon Engineering Bhd in 1982 as a Geotechnical Engineer. In 1983, he joined Ho Hup Construction Company Sdn Bhd from 1984 until 1989. He holds a total of 45,636,898 shares (direct and indirect) in Pintaras Jaya.

Name of Shareholders Shares
1 Pintaras Bina Sdn Bhd 29,016,158 36.24%
2 Chiu Hong Keong 11,407,860 14.25%
3 Khoo Yok Kee 5,212,880 6.51%
4 Khoo Keow Pin 5,041,652 6.30%
5 Alliancegroup Nominees (Tempatan) Sdn Bhd
(Pheim Asset Management Sdn Bhd for Employees Provident Fund) 3,000,000 3.75%
6 Chua Hock Chin 1,724,000 2.15%
7 HSBC Nominees (Tempatan) Sdn Bhd
(HSBC (M) Trustee Bhd for Singular Asia Flexible Fund) 1,063,600 1.33%

How do you value such a gem? RM1.17 of the share is in cash, which mean at RM1.60, the company is costing 43 sen only. Let's look at the net EPS again in 2010, its going to be 24 sen, less than 2x PER going forward? I am willing to ride this one for a long time because something is bound to happen very soon:
- the controlling shareholders should just take this company private, I mean you can literally put out a G.O. up to RM2.40 and still be way ahead with nearly RM100m in cash
- the company should be looking for acquisitions to expand its platform as it is being way too conservative, there should be no reason to keep more than 20% of your market cap in cash
- at current valuations, the owners would be very silly to even want to sell any shares, hence it is timely to try and improve liquidity and reward all shareholders, i.e. do a split and a 1-for-1 bonus, which the company can easily afford and should do

Well, the company has a lot going for it but the main owner couldn't really care about the share price. I do think the company will unlock some values but we will not know when as we have the same situation that the owner owns 56% of the company. What sets Pintaras apart from Kuchai was that it paid dividends of 9 sen and 6.4 sen in 2008 and 2009 respectively. At 1.60, that works out to be a dividend yield of 5.6% and 4%. At least investors will be happy to hold onto Pintaras while waiting for values to be unlocked.

The former is really a bad value trap but the latter is not.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.


green said...

Where your pics for Luna Maya?

Voyager8 said...

Is LTKM facing the same problem as Pintaras Jaya?