Five months ago, I wrote a post on SAPRNG, when the price of the stock was RM0.4.

https://klse.i3investor.com/blogs/PilosopoCapital/150801.jsp

I quote,

The Gamble

Now, we know from an investor perspective, it’s may be too risky due to the debt, and there are other investments out there with a higher margin of safety.

However, I can see something similar like Airasia in 2001 happening to it. Back when Airasia was sold to Tony for RM1, it had negative equity of roughly RM40 million and the directors had to guarantee 50%. After Tony purchased the company, he also found investors to inject roughly RM123 million into the company.

So, im probably being stupid here. But i can see a very deep pocketed company or individual either buying the company outright for RM2-3 billion and recapitalizing it. 

Either way, there needs to be a major equity injection via rights issue. Or a debt to equity swap, except at the current market capitalization, I dont think that a debt to equity swap will ever go through, if all the debt is converted to shares, all the shareholders will have their shares reduced by 6.26 times. Shahril will end up holding 2.8% or so of a company from 17.5%.

However, from a gambling perspective, if you think this company won’t go bankrupt while they dig themselves out and that the 2 year forgiveness given by the local banks can be extended.

It’s looks very lucrative. (for more info, please refer to my article “The Art Of Gambling in Speculative Stocks.”

Because in this case, its almost as if the majority of your bet is financed by the banks.

While the upwards movement in price of the company due to increased earnings, belongs to you, the shareholder. Even the profit belongs to you!

In Sapura’s case, the enterprise value of the company consist of 16% market capitalization and 84% borrowings. It’s as if the banks are funding and taking on 84% of the risk for your gamble that Sapura will survive long enough to take advantage of an increase in oil price and drilling activity.

In that situation, as an equity holder, it’s a heads I win, tails you (bank) lose situation.

Your only risk, is that the company goes bankrupt. Or the debt is swapped with equity, making your shares worth 6.26 times less in terms of % ownership of the company.

Personally, i dont think the banks will ever push this company into a position where they need to declare bankruptcy, unlike Toys R Us, as unlike Toys R Us, i dont think its under threat from a fundamental shift in the world, or backed by assets worth far more than the company (alot of great buildings and lands).

So the banks should still allow SAPNRG to live long enough to turnaround. But its a very tenous assumption, relying on the goodwill of others to survive.

After that post, someone reached out to me, and I met someone I consider a close friend today. He bought in at RM0.80, and when the right issue came out yesterday, we discussed the issue, his thought process on SAPRNG and how he thinks he could have done better. And what are the things we missed out on.

For the record, I did not buy it at RM0.4

How things turned out

Well, I did not buy, and my friend did not average down. Hahaha, and when it shot up to RM0.9, I couldn’t help feeling like I should have punted a little, and he felt so optimistic about the prospect of oil prices going up.

While it was at the bottom, I remember asking him what he considered the fair value to be, he said he wasn’t that sure, other than at this price, it’s as if he has Tan Sri Shahril and the banks working really hard for him.

When it rose to RM0.9, I remember telling him to sell as the gamble is not so much a gamble anymore.

At RM0.4, market capitalisation was 13% of the company, and the debt 83%. Ie, 83% your gamble is funded by the banks.

But at RM0.9, the bank was only funding 67% of your gamble, not that attractive.

However, he refused as he figured capex in oil and gas should keep rising.

When it later fell, and he went back in the red, he said these immortal words, “As warren buffet once said, a bull market is like sex, it feels amazing until just before the climax!”

For the record, this is just a punt for him. His usual investment method is quite different. He is also one of the smartest people I know.

Hng33 on the other hand, quite smart, after drawing down credit lines with deposits from men in mars and women in venus, and averaging down until is ball shake. (He started buying around RM0.95)

He ran away kuat kuat around RM0.8, despite writing so much about how super valuable the oil and gas wells are, and encouraging everyone to buy more. Goes to show nobody is your friend in the markets.

Danger Points

In hindsight, they were few things that signalled that one should end the bet. I did not really study it the last quarter as I did not hold any, but looking through the books, one thing stood out.

1. Net current liability

In 2015, the Malaysian banks, mostly Maybank, had a moratorium on the loan, ie they agreed to no demand capital repayment, however, it has been quite a few years, and banks do not give out moratoriums for that long.

In the last quarter, I noticed something very interesting. There was a shift of RM4billion from non current debt to current debt.

This in turn resulted in the Current Liabilities exceeding the Current Assets. Now this constitutes a going concern problem.

In fact, if one were to study annual reports, the auditors will usually raise a note when that occurs, in Note 4.1.

So what happened there? Well for a long time, Sapura energy was barely making enough cash flow to cover just the interest payments, much less capital repayment.

I think Tan Sri Shahril’s initial plan, was to try and get the gas and oil wells producing as soon as possible, which explains the RM2 billion or so poured into PPE.

However, that did not work out. If you were to speak to upsteam oil and gas people, wells do not hit peak productivity that quickly, and usually the rate of extraction is optimized for maximum extraction over life

And so he wanted to list the E&P division. But this will take time, and its unlikey to raise that much given the low earnings of that division. SAPNRG tried to list it at RM7 bil or somehing, but got rebuffed by SC over the retarded valuation perscribed.

When Maybank first gave the moratorium, Sharil posted his 16.5% stake in the company as collateral for the borrowings. At that time, his stock was around RM2.8 per share and worth about RM2.9 billion. Today, it is barely worth RM400 million. That’s an insane reduction in collateral. The banks will not be happy.

My guess, is that the moratorium went out, and looking at the financial position of the company, no bank wanted to extend the moratorium or refinance the loan, much less borrow them more money.

And so, with Maybank squeezing Shahril’s balls very tightly and twisting left and right. We have today, and he has no choice but to do such an insane right issue. Hahah

Applying this elsewhere.

One of the things one would not fail to notice, is how all these companies with horrible economic characteristics tend to rebound so much and so quickly sometimes.

No surprises there, when expectations are so low, no much is need to cheer people up. And if everyone thinks you are going to die, you can bet there will be severe undervaluation of your stock.

And I’ve been studying the steel companies, and wondering how I can improve my thought process to buy Masteel etc at record low prices of RM0.3 back in the day.

Having said that, If not for the tariff etc, Masteel etc could very well be dying today. So many people could have been killed 10 more times if Masteel asked for a right issue like SAPRNG.

I think the key here is to study the capital structures and the tenures of the loans. Assuming it fit the criteria of having at least 80% of your gamble financed by the banks.

Another funny thing I read the other day, was someone in the steel forums wondering why the prices of these stock won’t go up, and he was so mad, he wanted to write letter to the management asking why the stock price wont rise.

Well, it seems self-explanatory to me. Have you seen the debt? Using this record breaking profit figures which is mainly due to tariffs and one of extraordinary events of china shutting down mills in 2015 and 2016, you will still need about 10 years plus to pay off the debt.

Are you sure these record level earnings will maintain for 10 years in this kind of highly cyclical cost based industries? No way mah. Chances are, you're just betting on the sentiment, and greater fools to buy the stock from you when its expensive.

Having said that, I failed to buy Lionind at RM0.4, as I was too young and too stupid. The capital structure was fantastic, and well, there’s really no excuse. It also fit my habit of buying 1-2% positions in NTA companies.

To be fair, my head was infected by TA abit then, and I was very impatient. Oh well. You live you learn.

Conclusion

I hope nobody bough SAPRNG on margin, and if you did, I hope it wasn’t that bad. For those who bought it thinking it’s an investment and for the long term future, I suggest you close your account, and put all the money in FD or china stock index. You will beat 50% of the market immediately.

Yes, there may be one or two very smart guy in there, who can learn from this and be the next super investor or trader . But trust me, its most probably not you, despite how much you think its you. Read up on the Dunning Kruger effect.

Save yourself all that grief and let your wife sleep easier at night, and put in FD or China Index.

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