Since the inception of Axcapital’s writings, our top two picks have done exceedingly well, with Hextar (5151) share price rising by 26% since 22 Jun (3 months) and Scope Industries (0028) rising by 39% since 25 Jul (2 months), while the KLSE has remained flat in the past 3 months.  Our next pick is a short-term trade that could potentially double before end-21 – and that is Fajarbaru Builder. Fajar is a well-run small-cap construction company (RM300m), that also has interests in plantation, timber and property development. It is trading at trailing P/E of 10.5x and pays a dividend yield of 2.2%. This is the boring part.

Now comes the interesting part….

Corporate developments

In March 2021, former transport minister Tan Sri Chan Kong Choy of MCA was appointed chairman of Fajar. At the same time, we have seen the emergence of prominent tycoon, Tan Sri Datuk Ta Kin Yan into Fajar. Tan Sri Ta started steadily acquiring shares in Fajar since Jul 2020.

1 month later after Chan Kong Choy’s appointment as Chairman, in April 2021, Fajar announced a 1-for-1 rights issue and 1 free warrant (for every rights share) in April at 10 sen/share.

In fact, since the rights announcement, Tan Sri Ta has continued to acquire a further 4.5m shares (1.2% ) in the open market, therefore increasing his stake from 8.8% to 10% in Fajar. The other long-time major shareholder (9% stake) in Fajar is Tan Sri Kuan Peng Soon, who is deputy Chairman of Fajar and Star Media Group.

Now, regular followers of Axcapital know that our proven mantra is, “When insiders buy big, we must buy along!”

We have established from above that Tan Sri Ta remains convinced of Fajar’s prospects to continue pouring money into his stock.

Now, Axcapital can theorise why this could be taking place… including:-

1. Upcoming Budget 2022 on 29 Oct 2021…surely expansionary in nature that can only benefit the construction sector, as it is the only  raison-d’etre for pump priming and kick-starting a post-covid economy; and
2. Election play… given that the major shareholders in Fajar are perceived to be MCA-linked personalities;

However, theories aside, Axcapital believes that heavy Insider Buying preludes a major catalyst in share prices or major catalyst in corporate developments that are positive to share prices.

The most recent case-study in point best illustrates this…. TAFI exploded 400% in a similar exercise just a few months ago

Tafi (7211) was an equally boring and quiet stock with a 3-for-5 rights issue announced in Mar 2021. In 4 months from May to Sep, the stock exploded post-right issue by 400% from 62 sen to a peak of RM3.05. And the best part was that major shareholder Andrew Lim (an insider, again!), bought heavily into Tafi for 3 whole months after the announcement of the rights issue. This deal mirrors the Fajar deal, and serves as a prime example of what can happen when Insiders believe in their stock.  

So how should investors trade Fajar?

1. Subscribe to the Fajar-OR (7047OR) – only until 30 Oct. It was last traded at ex-rights at 33.5 sen
2. After buying the OR, investors should pay 10 sen to subscribe for the rights issue (please contact your broker for details on how to do this)
3. So the effective cost for investors is 43.5 sen (33.5 sen plus 10 sen) for one share of Fajar and investors will be given 1 free warrant.

Recall that the cum price of Fajar was 80sen (see attached chart).  Assuming a post-insider-buying news catalyst after rights (which we have seen in Tafi and Scope), and that Fajar’s price rises up to close only half of the ex-price gap to 60 sen….

An investment of 43.5 sen might return 86 sen…

1. One share at 60 sen
2. One free warrant  (5 years expiry and exercise price of 43 sen): Estimated fair value of 26sen

Equals 98% return on investment of 43.5 sen (in 3 months)

If Fajar’s share price follows the trajectory of Tafi, then the returns could be even more astronomical, given the impact of the additional free warrant to investors who subscribed for the rights issue (Tafi did not have a free warrant).

For those unfamiliar with OR conversions.... they could potentially still make over 50% in 3 months

However, for retail investors who are not comfortable or who find it cumbersome to purchase the OR and go through the entire conversion process, they could simply just purchase Fajar's existing mother share at 39 sen. Assuming the stock price does trade back to our hypothetical scenario of 60 sen, these investors could still realize a gain in excess of 50% over 3 months. Tan Sri Ta himself had purchased close to 1m shares of the Fajar mother share after it had gone ex-rights... meaning the INSIDER is still confident of the company's prospects. 

Disclaimer: The views presented  herin does not constitute a recommendation or solicitation to buy or sell the securities mentioned herein. All information and opinions expressed are subject to change without notice. The publisher may from time to time have a position in the securities mentioned. This publication is based on pulicly available information and any information from sources are believed to be reliable but we do not make any presentations as to its accuracy or completeness.