Saturday, October 29, 2011

EAH Still Looks Too Cheap At This Juncture

In my Sept 14 posting, I blogged EAH as one of my picks under the heading -  Shopping List:


" .... 3) EAH - I spoke to management and they are well on track to doubling their net profits this year. The DDSB acquisition is a big plus. Up to RM0.32 is OK.."
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I also came across this blog -alphachart.blopspot with the following .....EAH...Another Selective Buy

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EAH is the other stock that I bought into due to its low risk technical reading. It falls within the group of potential stock in penny stocks which would see selective action in this market.
All in all, CCM and EAH still represent "finger food" trades and defensive play for Reflexivity portfolio with a relatively low equity exposure of ~12%.


Continue to watch the market closely, the next pivot point will prove utmost important whether my big picture bear outlook is confirmed (80% chance) or disproved (20% chance). 
2 Comments:


alwayswin111 said...
Hi alpha chart What is your target for Eah?
OCTOBER 20, 2011 11:40 PM
Alpha Chart said...
Hi, I see an easy 20-30% return.
Image Detail As things stand now, I must say that I do agree with Alphachart comment of an easy 20-30% return. 
In fact I believe EAH short term trading range to be in the 38c-43c trading range, and should eventually move to 44-49c range in the longer run. Here's why..
I spoke to management recently and they indicated that EAH have secured a rather healthy order book of approximately RM42 million, which is very impressive for a smallish  ICT business solutions provider. The order book should last them for at least the next two (2) financial years.
EAH is also one of the few recently listed ACE counters whereby it is still trading above its IPO price.
Despite recent turbulent markets globally, EAH shareholders who subscribed to the shares during the IPO should still be a happy lot especially when their investment is trading approximately 20% premium to their investment of RM0.25 during the EAH IPO. In terms of financials, for the latest FYE 2010 and the latest quarter ended 30 June 2011, EAH recorded revenues of RM20.7 million and RM14.8 million and profit before taxes of RM4.1 million and RM3.1 million respectively. The table below further illustrates the historical financial performance of EAH:-

FYE 2008*
FYE 2009*
FYE 2010
1H 30 June 2011





Revenue (RM'000)
8,289
13,892
20,711
14,805





Profit before tax (RM'000)
2,020
3,677
4,053
3,096





Profit after tax (RM'000)
1,944
3,641
4,081
3,095





Shareholders' funds (RM'000)
4,194
9,735
23,434
26,529





No. of shares ('000)
155,001^
155,001^
155,001
155,001





Earnings per share ("EPS") (sen)
1.25
2.35
3.35
2.00





Net assets per share (RM)
0.03
0.06
0.15
0.17





Borrowings (RM'000)
-
-
636
597





Gearing ratio (times)
-
-
0.03
0.02





Return on equity (%)
46.4
37.4
17.4
11.7





Notes:-
*  Based on proforma figures as the group had only been in existence in February 2010 while EAH was listed on 20 July 2010.
^  Assuming the number of shares in issue after the listing of EAH, for comparison purposes. The issued and paid up share capital of EAH has increased to 203.45 million upon completion of the acquisition of DDSB Sdn Bhd in July 2011. Image Detail
As depicted in the table above, the financial performance of the group has been improving on a year on year basis and the revenue and profit before taxes has recorded annual CAGR of 35.7% and 26.1% respectively for the past three years. The group further has negligible borrowings / gearing. The EPS of the Company based on its latest audited accounts for the FYE 2010 and the annualised EPS for the FYE 2011 (based upon its latest quarterly results for the six months ended 30 June 2011) stood at 3.35 sen and 3.99 sen respectively. The Company’s order book inclusive of DDSB currently stands at RM42 million and the group has tendered for numerous projects with various government bodies and GLCs, estimated to be worth around RM100 million in total, which the Company is confident of at least winning a few.  Besides, EAH had recently, in the month of July 2011, completed the acquisition of 51% equity interest in DDSB Sdn Bhd (“DDSB”) for a total purchase consideration of RM19.4 million which was satisfied through the issuance of new EAH shares of RM 0.10 each at an issue price of RM 0.40 per EAH share. DDSB is principally engaged in information technology, consultancy services and software development. The acquisition of DDSB is pegged at approximately 5.63 times the cumulative profit guarantee provided by vendors of DDSB of RM13.5 mil for the FYE 2011 and 2012 (the portion attributable to EAH is RM6.8 mil / on a yearly basis the profit attributable to EAH based upon its 51% shareholding in DDSB amounts to RM3.4 million per annum).   The acquisition of DDSB is also expected to be earnings accretive. The acquisition of DDSB has enabled EAH to diversify its earning base further and add value to its existing business operation. He added that with the addition of DDSB in the group, EAH is confident of the group’s continuous growth, building a strong market position with a sustainable business model. The order book of DDSB currently stands at RM24m In my view, the Company should acquire the remaining 49% of DDSB, its a no brainer with DDSB's healthy order book, the profit guarantee of RM13.5m should be easily met. Assuming EAH buys the balance of DDSB in 2012, we can expect EAH's total earnings in 2012, say EAH hit RM7m PAT, and DDSB attains it profit guarantee of another RM7m, to be at least above RM13m, which would be really impressive for an ACE company.    Moreover, I like EAH's rather shrewd and prudent acquisition criteria - Mohd Sobri also added that EAH is constantly scouting the market for more acquisitions, companies with strong earnings and profits after tax. The CEO added, “We will only acquire companies who add value to our group's overall business and are PE accretive, and will preferably pay for such acquisition with the issuance of new shares. Our selection criteria of the type of companies we acquire are very stringent and prudent”.   Image Detail
Who is to say that the Company wont find another buy such as DDSB around the corner soon. If they finds another DDSB, their earnings should soar, and most likely would its shareprice. I do see a  gem in the making in EAH. Oh, btw, EAH also made the latest Forbes Best 1000 Companies in Asia Under $1 Billion.


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. 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.
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Friday, October 28, 2011

How To Fix This Major Thing (Important Posting)

Many observers seem to think that the spate of management buyouts, General Offers, privatisations of listed companies is a good thing. Of course this is a very bad thing. If it was infrequent, then we can say it may be positive. The rate at which it has been happening means that investors are not according the "right valuation" for these counters.


If you still think this is not a problem, then you must be aligned with BN. The main troubling aspects which led to this: corporate transparency (or lack of); too many injudicious RPTs; trampling over minority interests (too many to mention); institutionalised corruption and leakages; and mismanagement of resources and GLCs. All that are important contributors, but none is as significant as the crowding out effects by local funds holding way too much stocks.


If you can track the amount of shares held by the big boys, namely EPF, PNB, etc... over the last 10 years, in particular over the last 5 years, you'd have a very good idea what has been happening. This crowding out effect causes foreign institutional investors to continue to avoid or reweight their exposure to the detriment of Malaysian listed counters. They feel that the index is overly "controlled", susceptible to "manipulation", and a dire lack of free float.


The more the local funds control, the easier it is to push through sweetheart-deals, which is not palatable to most investors. Even local private investors have been feeling the same way. Ask anyone you know, they are mostly holding A LOT LESS STOCKS NOW compared to 3 years or 5 years ago. The disillusionment is palpable.


EPF and PNB can say that they have way too much funds inflow and just have to keep upping their stakes. You and I know the dangers of that. Every year they could actually trade some of their shares higher by 5%-10%, close it higher and pay out dividends - although it is not as sinister as it sounds, this resembles a Ponzi scheme. Till it it gets to a stage where it is so easy to move the shares 5%-10% every year and the dividends keeps everybody's mouth shut. Who is there to whack the shares down if the fundamentals don't really match up?


We must have a roadmap to reduce all local fund holdings to less than 20% as they are not in it to "control or run companies" (hello, PNB, what are you doing with SP Setia???). All listed GLCs should have the government holding no more than 35%, why the need to hold more???


We also need EPF to energise their rules for allowing individuals to do their own investing, this will reduce the burden every year for EPF. Right now, the scheme is good, allowing individuals to invest in "qualified funds on their own". However, something must be done to the stupidly high 3% fee to do so. A more reasonable rate should be just 1%.  Do you know that most of these type of funds in the US charges less than 0.5%, some are even entry free as they have yearly management fee. The second part is to make all the "qualified funds" to charge no more than 0.75% fees a year.


So, there you have it, we will not know what hit us until one day all the "decent companies" are privatised, and we are left with GLCs and punting stocks. What a wonderful stock market we would have then!!! 

Wednesday, October 26, 2011

Hibiscus Flowering

Hot from the desk of RHB:

 
Hibiscus announced that it has entered into a conditional share subscription agreement (proposed subscription for 76.9m new shares and 22.1m existing shares) with Lime, representing in aggregate 35% of the enlarged issued and paid up share capital for a total cash consideration of USD55m.
 
Lime Group currently owns 100% of three concessions in UAE and Oman i.e. RAK North Concession, Sharjah Concession and Block 50 Oman Concession. Based on Aker Geo valuation on the concession the current net risked recoverable resource for the three concessions is 200.7mmboe.
 
Based on prevailing dollar/boe 2P reserves for the oil majors, we derived the current average NAV/boe of US$5/boe. 2P reserves suggest higher potential of discoverable reserves as compares to the fields own by Lime Group which are still in the development and appraisal stage. We note that industry is currently factoring in 50-70% discount to the $/boe 2P reserves and thus this imply a $1.50 - $2.50/boe range for Lime Group reserves. Based on this valuation, this suggest a potential valuation of RM326m รข€“ RM544m (share price range of RM0.78 to RM1.30) for Hibiscus (35% stake in Lime Group). This presents a potential upside of 16-93% from current price level. Please refer to following for the workings:
 
Current Valuation of E&P players based on reserves    
Dollar/boe 2P reserves (oil and gas)     
       
CompanyUpstream NAV ($m)SEC Proved 1P (mmboe)Wood Mackenzie 2P reserves (mmboe)Upstream NAV/1P Reserves ($/boe)Upstream NAV/2P Reserves ($/boe) 
Exxon Mobil
          308,638
         24,853
               47,331
12.42
6.52
 
Chevron
          186,217
         10,545
               29,181
17.66
6.38
 
ConocoPhillips
            85,281
           8,310
               16,118
10.26
5.29
 
Occidental
            63,294
           3,363
                 7,693
18.82
8.23
 
Marathon
            18,226
           1,640
                 3,983
11.11
4.58
 
Hess
            21,399
           1,537
                 4,199
13.92
5.10
 
Murphy
             8,443
             456
                 1,559
18.52
5.42
 
Suncor
            34,749
           3,899
                 9,357
8.91
3.71
 
Canadian Natural
            27,541
           3,824
                 8,319
7.20
3.31
 
BP
            98,747
         18,071
               34,194
5.46
2.89
 
RD Shell
          169,204
         14,273
               37,472
11.85
4.52
 
Total
            84,347
         10,676
               21,207
7.90
3.98
 
   Average
12.00
4.99
 
* Source: Wood Mackenzie     
       
Sensitivity Analysis      
Discount to NAV/2PNAV/Net risked recoverable ($/boe)Net risked recoverable resources (mmboe)Hibiscus Stake in LimeValuation in RMmShare Price (RM/shr)Upside to current price of RM0.675
30%
3.49
200.7
35%
761.1
1.82
170%
40%
3.00
200.7
35%
652.3
1.56
131%
50%
2.50
200.7
35%
543.6
1.30
93%
60%
2.00
200.7
35%
434.9
1.04
54%
70%
1.50
200.7
35%
326.2
0.78
16%
       
*current field under development and appraisal (akin to Lime's assets) are valued at $1.50-2.50/boe by analysts.
       

  





A special purpose vehicle cannot be valued on its listing, which is why I said nothing. You ride on the management's perceived networking skill, experience and ability to deliver what they said they aim to do. There is always ample time to move into Hibiscus. Naturally, I think the management team is highly qualified.
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Managing director Dr Kenneth Gerard Pereira has 21 years in the oil and gas industry and started off as a field engineer in Schlumberger. Independent non executive director Zainol Izzet bin Mohamed Ishak was previously CEO of Sapuracrest, and is now CEO of Perisai Petroleum. Head of Petroleum Engineering Dr Pascal Josephus Petronella Hos, and Petroleum Economist Ir Mohd Iwan Jefry Abdul Majid have held extensive positions in many oil and gas companies.


Hibiscus will acquire 35% equity stake in Lime Petroleum for US$55 million
 Lime Petroleum has 3 concessions in 2 countries in the Middle East and is expected to add, at least, another concession before the end of this year
 Hibiscus will manage Lime Petroleum Group’s operations, which allows the company significant influence in the delivery of its business objectivesthree assets in two countries, which are Oman and the UAE
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The Middle East contains more than 50% of the world’s oil reserves and approximately 40% of the world’s gas reserves. The Middle East has a strong refining capacity of 7.9 million bbls per day (as of 2009) and a well developed oil and gas infrastructure. UAE is the third largest oil and gas liquids producer in the Middle East and the world’s fourth largest net oil exporter with a daily production of around 3.2 billion bbls per day. 


Oman is the largest non-OPEC producer in the Middle East with a daily production of around 800,000 bbls liquids and 2.4 billion cubic feet of gas in 2009. Crude oil output in Oman has increased year-on-year since 2008. Most of the oil and gas production in Oman is onshore with increasing focus on gas production in recent years, while offshore fields remain largely unexplored.


Shares and warrants are subject to SC moratorium up to the QA for management. Under their 3-year service contracts, any member of the management or non independent directors who resign or dispose of their shares can only do so at a 30% discount to the market price, and sell only to the remaining management team members. The team cannot participate in the distribution of proceeds from the QA or the liquidation of the SPAC. No directors’ fees will be paid until the QA is completed and there will be no adjustment to the remuneration package or introduction of performance
incentive schemes prior to the QA.
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The terms of the deal appears to satisfy all of the important guidelines:
• IOR (Improved Oil Recovery) / Service Agreement 
• Proven basin
• Good data availability
• Good fiscal terms
• Political stability of country of location
• Stable Partners

From raising cash in a listed vehicle, we now have the projects, which appear to be "reasonably good". They are not in some gawd-forsaken place. They have reputable partners (including Schroders). They have management contracts which will mean direct management of the projects.


The deal can be termed as a good platform and as such should lure in fresh institutional investors. Now that the wheels are turning, the warrants, which are exercisable at 50 sen, will soon be converted and plough back into the company for further investments.
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You still cannot value where the shares should be trading at, but certainly not at current levels now that they have a decent proposal.