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Risk Arbitrage of Perak Corporation Berhad kcchongnz
Risk Arbitrage of Perak Corporation Berhad kcchongnz
Perak Corporation Berhad (PCB) operates in three segments: infrastructure, which is engaged in maritime services in respect of the development of an integrated privatized project and encompassing operations of multi-purpose port facilities, operation and maintenance of a bulk terminal, sales and rental of port related land and other ancillary activities; township development, which is engaged in the township development of real property and ancillary services, and management services and others.
A proposed selective capital reduction and repayment exercise of PCB was made by Perbadanan Kemajuan Negeri Perak (PKNPk) and three other parties who collectively own 53% of PCB (herein called non-entitled shareholders) on 6th January 2013 whereby the entitled shareholders of PCB will receive RM3.90 per PCB shares held. With the share price of PCB at RM3.68 now and the offer price of RM3.90, there is an upside potential of 5.7%. Assuming the whole process takes another 4 more months to complete, the annualized return would be about 17%, not a bad risk arbitrage.
Risk Arbitrage of PCB
Borrow RM36900
Buy 10000 shares of PCB at RM3.68
In four months time, sell PCB at RM3.90, get RM39000
Pay bank interest at 5%, or RM610
Profit RM1500
But wait. Is it really a risk arbitrage, or a little risk but high potential gain strategy in investing in PCB at current price? Think about the followings:
- This deal is announced by the major shareholder, the state-owned corporation, PKNPk which already owns 52% of PCB and supposedly knows the value of PCB well.
- The book value of PCB is RM5.20 as at 31st December 2013. This value is already grossly under stated as many of the land it holds haven’t been re-valued yet for a long time.
- I remember reading that the revalue tangible asset of PCB is more than RM12.00.
- My own personal Graham net net valuation of PCB is worth RM3.82 as shown in appendix.
- PCB itself present a plausible earnings and cash flow based investment with stable quality earnings as shown in Table 1 below, irrespective of this corporate exercise.
- Some minority shareholders are collaborating to demand for a higher offer price close to its book value, which considering the above, is more reasonable and fair.
|
Table 1: Earnings and cash flows |
|||
|
Year |
2013 |
2012 |
2011 |
|
EPS, sen |
26.08 |
38.10 |
29.60 |
|
CFFO/share |
59.07 |
79.08 |
17.22 |
Let say the final offer price is the average of the book value (5.20) and the present offer price (3.90) of RM4.55. The absolute return would be 23.6%, or an annualized return of 71%, really not bad at all. Of course we can only hope for it for the time being.
A probabilistic estimate
Based on the information given above, we can carry out a probabilistic estimate of the price for the selective capital reduction exercise as shown in Table 2 below:
Table 2
|
Value based on |
Per share |
Probability |
Wt Price |
|
Re-valued tangible asset |
12.00 |
0% |
0 |
|
Net asset backing |
5.20 |
20% |
1.04 |
|
Offer Price of SCR |
3.90 |
60% |
2.34 |
|
Present price |
3.68 |
10% |
0.37 |
|
Before announcement |
3.00 |
10% |
0.30 |
|
Expected outcome |
|
100% |
4.05 |
The likely outcome of the SCR is RM4.05 per share as shown in the above table. This offers a 10% upside in three months, or an annualized expected return of 30%.
Isn’t this type of low risk cash offer arbitrage opportunity hard to come by?
K C Chong in Auckland (19th March 2014)
Appendix: Graham net net valuation of PCB
BS value Weight Net net value
|
Cash and bank balances |
158,585 |
100% |
158,585 |
|
Other investments |
110,580 |
100% |
110,580 |
|
Land held for property development |
14,658 |
100% |
14,658 |
|
Investment properties |
5,067 |
100% |
5,067 |
|
Port facilities |
85,744 |
75% |
64,308 |
|
Property development costs |
132,330 |
100% |
132,330 |
|
Trade and other receivables |
121,233 |
75% |
90,925 |
|
Inventories |
7,729 |
50% |
3,865 |
|
Property, plant and equipment |
110,256 |
50% |
55,128 |
|
Other asseets |
26,380 |
0% |
- |
|
Total assets |
772,562 |
635,445 |
|
|
Total liabilities |
(177,564) |
100% |
(177,564) |
|
Minority interest |
(75,903) |
100% |
(75,903) |
|
Net asset |
519,095 |
381,978 |
|
|
Number of shares |
100,000 |
100,000 |
|
|
NAB |
5.19 |
3.82 |
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Discussions
Be the first to like this. Showing 20 of 20 comments
I like this risk arbitrage.... bought before scr announced and after as well.. The problem is if scr doesnt go through and no new offer, prepare to sell fast or hold it long term... Look at Ireka after scr rejected.... better ready to offload some before egm to protect some profit...
2014-03-19 19:50
53% held by the controling shareholder is too far form the 90% needed for compulsory accetpance by MI. If the controlling shareholders holds 75% to 80%, they normally would take time to close the gap by buying up in the open market, thereby pusing up the price a bit and narrowing the buy-sell gap. This is the case typically if they have the intention to raise the offer price later. The 5.7% is the probability of the SCR not going through as assessed by the market. It is not totally riskless, and therefore not arbitrage by definition, strictly speaking.
2014-03-20 01:37
That is why there is a "risk" infront of the "arbitrage". Question is what is the risk vs the reward.
2014-03-20 02:09
I thought is 90% of remaining 47% that are non-interested, and not 90% of total shareholders?
2014-03-20 15:32
A probabilistic estimate of SCR exercise price
Based on the information given above, we can carry out a probabilistic estimate of the price for the selective capital reduction exercise as shown in Table 2 below:
Table 2
Value based on Per share Probability Wt Price
Re-valued tangible asset 12.00 0% 0
Net asset backing 5.20 20% 1.04
Offer Price of SCR 3.90 60% 2.34
Present price 3.68 10% 0.37
Before announcement 3.00 10% 0.30
Expected outcome 100% 4.05
The likely outcome of the SCR is RM4.05 per share as shown in the above table. This offers a 10% upside in three months, or an annualized expected return of 30%.
2014-03-22 09:46
A review of risk arbitrage of Prkcorp
As the SCR date is getting closer, it is a surprise that the share price of Prkcorp is not converging to the offered SCR price. Why?
As it likely that the exercise would not be carried out? I don't see why not because it was proposed by the major shareholders, and I don't see why the minority shareholders do not take it up.
As Prkcorp reported a loss in the last quarter of 2m, could it be the reason why the share price not going up? But the investment thesis of Prkcorp is the SCR; you are going to be paid RM3.90, not how much earnings it makes. Only this time it is more likely minority shareholders will take up because of the loss.
Let us revised a little on probabilistic estimate of the price for the selective capital reduction exercise as shown below:
Value based on Per share Probability Wt Price
Re-valued tangible asset 12.0 0% 0
Net asset backing 5.14 15% 0.771
Offer Price of SCR 3.90 65% 2.535
Present price 3.64 10% 0.364
Before announcement 3.00 10% 0.300
Expected outcome xxxx 100% 3.97
The likely outcome of the SCR is RM3.97 per share as shown in the above table. This offers a 7% upside in two months, or an annualized expected return of 41%. So why not?
2014-06-17 17:24
KC. how do u know when they will call the AGM ? Whether it s 2 months or 3 months away ?
2014-06-17 17:48
GENERAL MEETINGS: NOTICE OF MEETING
PERAK CORPORATION BERHAD
Type of Meeting AGM
Indicator Notice of Meeting
Description Notice of Twenty-third Annual General Meeting of Perak Corporation Berhad
Date of Meeting 27/06/2014
Time 09:30 AM
Venue AmanJaya Convention Centre
Casuarina @ Meru Hotel
No. 1-C, Jalan Meru Casuarina
Bandar Meru Raya
30020 Ipoh, Perak
Date of General Meeting Record of Depositors 20/06/2014
2014-06-17 17:54
KC SCR is not on the agenda of the AGM . Based on original circular on 15 Jan, they would call an EGM for this. Also if there is still a 7 pct discount with only 2 weeks to go I would be worried.
2014-06-17 19:02
Hi NOBY,
How you know there is only 2 weeks to go?
Based on the original circular on 15 Jan, it estimated the exercise should be completed by end of Q3.
2014-06-20 10:18
II, I am not saying it will be 2 weeks to go. I m telling KC that it cant be 2 weeks to go judging from significant discount to offer price.
2014-06-20 10:24
Hi Mr. Chong and NOBY,
Mr. Market give some discount on this coutner. Take a look.
It is too bad that I have fully invested for the allocation to this counter.
http://klse.i3investor.com/servlets/stk/chart/8346.jsp
2014-07-17 13:59
If I follow buying at RM3.68, I will lose 41sen or 11%. How does market return past 7 months?
2014-10-29 22:27
Posted by donfollowblindly > Oct 29, 2014 10:27 PM | Report Abuse
donfollowblindly 2 posts
If I follow buying at RM3.68, I will lose 41sen or 11%. How does market return past 7 months?
I really cannot understand your new identity, "don'tfollowblindly". Why did you follow? Followed what? Followed somebody telling you to buy at 3.68? Who asked you to buy?
If you didn't follow, why the need to write your comment here? Want to put down put me down? Finally found one stock that I wrote about which came down in price so much?
But when I talked about the net net investment strategy on Perak Corp (not asking you to buy), it was 2.82. Now it is 3.27. How come others made so much money, and you follow blindly and lost 41 sen? Read the article in the link below.
http://klse.i3investor.com/blogs/kcchongnz/62515.jsp
Unbelievable! Incredible!
2014-10-30 05:38
Mr. Chong did mentioned in the blog title that this is a "Risk" Arbitrage but not "Risk Free" Arbitrage.
Please don't follow blindly and understand what is the risk you are taking when invest in the stock market.
2014-10-30 12:31
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
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VERY VERY GOOD. PERAK CORP WAS ONE OF MY FAVOURITE COUNTERS AT 60 CENTS. IN THOSE DAYS OF YEAR 2009 WHEN PERAK CORP WAS RANGE BOUND BETWEEN 40 CTS TO 60 CTS NO BODY BOTHERED WITH PERAK CORP.
THESE WERE THE REMARKS OF NAY SAYERS
1) MANY YOUNG PEOPLE HAVE LEFT PERAK FOR CITIES LIKE KL & SINGAPORE. SO ONLY OLD, OLD PEOPLE REMAIN IN KAMPONG PERAK. SO PERAK CORP NO USE LAH!
2) WHEN I POINTED OUT THAT PERAK CORP HAS 1,000 ACRES PRIME LAND IN LUMUT & ALSO CASUARINA HOTEL. THESE ARE THE NEGATIVE REMARKS THEN.
HA! LUMUT? LUMUT HAS A NAVAL BASE THERE. DANGEROUS PLACE WITH GUNS AND BOMBS. BETTER STAY AWAY.
FOR THOSE WHO BOUGHT PERAK CORP IN THE WINTER OF DISCOURAGEMENT IS NOW REAPING THE PRECIOUS FRUIT OF SUMMER.
HOORAY TO GRAHAM NET NET VALUE INVESTING!
2014-03-19 15:37