Can shift the focus back to Daibochi business fundamentals. It’s in Scientex's interest that the company prospers. We just need to watch that it gets a fair deal from related party transactions.

Given its client portfolio and product innovation like sustainable packaging, the investment in organic & inorganic growths, the company intrinsic value can only grow over time. Any future interest from Scientex is nice to have. When it arises the company can be revalued based on the prevailing conditions. Most importantly a good company long term share price will be supported by its fundamentals.

@Zackmeiser, agree, but buy in stages. Recall the speculated kitchen sink that didn’t happen in last quarter. There is still a chance that management may impair Daibochi Myanmar. In last quarter report they said the “market uncertain and volatile”.

Page 98 of 2020 AR shows the book value is about RM25m, which is worth about 2 quarters of profits. But impairment is just an accounting treatment. It affects accounting profit but not real cash. Should they do impairment in future quarter it could present buying opportunity.

Anyway, if share price is low enough it could also lure long term investors who have earlier sold due to fear of delisting to buy back their shares. The announcement is just out. Scientex owns 71.789% as of last Friday.

@EVEBITDA, you’re too humble. This is just the opinion of a retail investor. It seems that you’re an industry veteran. It’s reassuring when you didn’t find flaw in the logic.

A minor point. Daibochi has a dividend policy “to distribute not less than 30% of the Group’s normalised reported annual net profit attributable to shareholders”.

Unaudited FY21 results show that EPS is 14.37 sen. Therefore the minimum dividend per share = 30% * 14.37 = 4.31sen.

So far it has only announced a 2 sen dividend in Q3. I believe it has not announced further dividend in order not to complicate the takeover exercise.

Assume the exercise is over by tomorrow, may remaining shareholders expect a minimum DPS of 4.31 – 2 = 2.31 sen?

There is no one size fit all investment given everyone has a different return expectation, risk appetite and investment horizon. But I share my personal experience and you decide whether it makes sense for you.

I've bought at price higher than current level, and also at the lows during MCOs. Litrak is just part of a diversified portfolio. I don't expect capital appreciation, but look for regular dividends. As mentioned earlier, I view it like holding a 10 year bond, meaning I plan to hold until concession ends. I expect over the next 10 years it could average at least 8% compound annual return, and hopefully even up to 10%.

It seems that EVEBITDA is a corporate finance expert. He has brought up a good point that through some financial engineering Litrak could be made to return even more, and faster too. But just be mindful that the upside, if realized, is unlikely to be higher than the original offer given by the PH government.

Buy and hold for long long term. Treat any capital appreciation as a bonus. Then one will not get disappointed if nothing happens.

Just my perspective.

Let's think aloud what a rational investor may do on Monday.

Scientex offer expires at 5pm Monday. So first step is to check for Bursa announcement before 9am and during the midday break. There is no need to react to any “surprises”, assuming there is any. Even if there is a revised offer, SC rules dictate a minimum 2 week extension of offer. This provide enough time to watch how fund managers respond before retail investors chart their next step.

On the other hand, say for whatever reason Scientex suddenly announces it has acquired over 90% shares from current 71.78%, it is almost certain to acquire the remaining shares. And SC rule dictates it has to be done on the same term, and can be compelled to do so if necessary. So again, no rush.

Now assume no “surprises” after Monday noon break. It means there is no more price revision. Shareholders and warrant holders who have accepted Scientex offer will get their RM2.70 and RM0.32 respectively in due source, no less, no more. Whatever future development will have nothing to do with them. As discussed earlier, these offerees will not be compensated on differences should Scientex acquires at higher price say 6 months later.

If there is no offer revision, the risk-reward will be tilted against remaining warrant holders. A rational warrant holder may choose to accept Scientex’s offer. They may do so online at https://tiih.online/ in the afternoon but before 5pm closing. Make sure they have registered an account with Tricor.

Anyone who wants to speculate that Daibochi warrant price can go higher before expiry in Jun 2022, on the premise of a higher price in mother share during the next 8 months, may be better off getting RM0.32 from Scientex first, and only later buy whatever warrants still available after Monday. Given Scientex offer for warrant is more favorable than mother share, the warrant price is unlikely to hold after the offer expiry. I feel that speculators may get it cheaper in the future.

In fact I would not be surprised if Samarang, and even Apollo which has acquired warrants possibly for defensive reason, may choose to dump their warrants to Scientex just before closing. After all the purpose is already served. Defense is no longer necessary given Scientex is far away from getting to the 90% mark. It may be better to exchange for some capital from Scientex to either lower their Daibochi’s holding cost, or buy more Daibochi shares later.

As for short term shareholders with a horizon less than a year, they may either hold on for price appreciation hoping that the next 4 quarter results improve along with economy recovery, or to sell to buyers at above RM2.70 assume the buying interest is still there, just like last Friday.

But for long term shareholder like me, I have never intended to sell at RM2.70 level in the first place. The move by Scientex has only reinforced my conviction on Daibochi’s prospect. More importantly, Scientex’s move suggests that it may have a strategic plan to consolidate Daibochi first and later list its entire plastic division at a higher valuation. This will offer strategic flexibility and get rid of any potential conglomerate discount. So I expect Scientex to return when time is ripe.

With such knowledge I'm prepared to top up the shares should it drop back to pre-offer level. I trust Scientex’s insight! Rather than taking the opposite side on a trade by selling to Scientex, it's better to invest alongside with it, together with other long term funds.

@EVEBITDA, you’re familiar with the rules! Haha, you've even provided the email to aggrieved FGV shareholders to complain if they believe they have a case. But I've never owned FGV as I'm not a fan. I only look at FGV now to learn some useful lessons.

If you check all the Felda’s shareholding changes in the 6 months after its offer expiry, i.e. Mar-16 to Sep-15, they made multiple acquisitions. Most transactions made in Jun to Aug period could be done at RM1.30, as the chart clearly showed a price floor at RM1.30 then before share price shooting up by end Aug.

But Aug 30 acquisition seems to be above offer price again. Cannot rule out multiple admin mistakes, but there could also be legitimate reasons (or loopholes depending on POV), like the “on-market transaction which is not pre-arranged”. Not sure what it means.

BTW it’s funny to note that FGV shareholders who didn’t sell during the offer period seem to enjoy the RM1.30 “Felda’s put” thereafter, while pocketing the previously mentioned 3 sen dividend.

Not sure what is Scientex’s intention. Of course there could be surprises. But there could also be a more mundane possibility.

As of Nov 3 it has only acquired 71.78% of outstanding shares. Even if it acquires and converts 100% of outstanding warrants (ignoring the fact that Apollo and Samarang have acquired a sizeable quantity), its maximum ownership is only 73.95% of the enlarged share base. It could try forcing the public spread to go below 25% but that could not force a delisting. For example Felda and its PACs have controlled 80+% shares but FGV shares continue to be traded actively. It only adds administrative work for Daibochi management, which indirectly hurt shareholders’ interest including the largest one.

Given the dwindling volume of shares Scientex could possibly acquire as time goes on, it is unlikely to get enough to make a difference in the next 14 + 11 = 25 days. May as well just give up and wrap up the exercise now. If it wishes it could step back to the market to buy at RM2.70 later; and negotiate with those funds in the future given it will need to fork out less money in the next round after pocketing 10% shares at mere RM2.70 earlier.

The arrangement will also serve long term minority shareholders’ interest as they don’t want to sell out at current price, and instead choose to stay on with Daibochi’s growth and let its future business fundamentals to determine the return. After all, Daibochi is a multi-ten bagger stock since its listing. Would be a shame if it stops performing after Scientex came in (so far no such sign).

Of course the above is just one scenario based on deduction. I also have my popcorn ready for any surprise on Monday.

Maybank has adjusted the value of SPRINT downward. As per Aug 2021 report, it values the company at

= 100% of LDP + 50% of SPRINT
= 100% * RM2,259m + 50% * RM674m
= RM2,259m + RM337m
= RM2,596m

https://www.bursamarketplace.com/mkt/tools/research/ch=research&pg...

Back of the envelope calculation for Sprint - after 2022 toll hike, assume average toll increase = (RM1 + RM0.50 + 0) / 3 = RM0.50, at 200k daily traffic, extra annual revenue is about 365 * RM0.10m = RM36.5m.

The extra RM36.5m revenue goes straight to bottom-line as cost remains the same. A 50% interest in Sprint implies ~RM18m profit shared.

So shared profit could indeed double from current level at ~RM20m a year. Maybank's estimate of Sprint's value seems more reasonable. But that assumes traffic will stop falling in future years.

Same assumption should apply to LDP such that its traffic should not continue to drop in coming years (due to other alternatives)

The proposed offer in 2019 can be found here:

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=2964344

LITRAK Holdings value
= 100% of LITRAK (i.e. LDP) + 50% of SPRINT
= 100% * RM2.3b + 50% * RM0.9b
= RM2.75b

Correction: In the best year, shared profit from Sprint was RM22.6m.

For completeness, the shared results from Sprint year by year:

FY2014 RM8m loss
FY2015 RM1m profit
FY2016 RM12m profit
FY2017 RM5m loss
FY2018 RM4m loss
FY2019 RM1m profit
FY2020 RM18m profit
FY2021 RM23m profit

The daily tollable traffic at Sprint is on a downtrend, at -4.3% CAGR from FY15 to FY20 (compare with LDP at -2.3% CAGR over the same period)

FY2014 238,500
FY2015 249,100
FY2016 247,000
FY2017 226,000
FY2018 221,000
FY2019 210,000
FY2020 199,500
FY2021 126,000

Good point on Kesas and SMART

Sometimes I'm mystified by the way bankers performed their valuation.

Refer to the proposal document on 2019 to takeover the 4 highways, LDP was valued at (PV) RM2.3 billion, and Sprint at RM0.9 billion (or RM0.45b for Litrak's 50% interest).

However based on past reports, Sprint was never a much profitable venture. Litrak reported its earning under "share of results of an associate". They were losses in certain years. The best result ever was RM22.6 in shared profit. No dividend had been paid. While there is a last toll hike where (class 1) fare is increased from RM2.00 to RM2.50 at Damansara's Link, and RM3.50 to RM4.50 at Kerinchi Link, Sprint daily tollable traffic from 249k in FY2015 to only 200k in FY2020.

I find it difficult to understand how could Sprint be remotely worth RM0.9billion. Do I miss out something?

“yes they can buy below or at offer price.. not above. its a SC rule not to buy above the GO price”

I understand your point. But as you may check the FGV price chart below, since the RM1.30 offer ended on 15-Mar, FGV share has been traded above RM1.30 for considerable time.

https://klse.i3investor.com/servlets/stk/chart/5222.jsp

Below is the first out of the many filings on Felda shareholding changes since offer closed on Mar 15.

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3164903

As disclosed, on 19-May Felda acquired 4,107,200 shares in the open market. On that day FGV share was traded between RM1.36 and RM1.39, which was clearly above RM1.30 offer price (In fact should the 3 sen dividend which went ex on 17-Mar be considered, Felda should have been prohibited to buy at above RM1.30 – 3 sen = RM1.27)

Felda clearly paid above offer price in just a little over 2 months after its offer expired!

I know the rules dictate that offer price cannot be lower than past purchase price by itself or its PACs in the last 3 (or 6?) months before the offer. However is there a similar rule that prohibit purchases at higher price in the subsequent 6 months?

If so it would be quite foolish of Felda to commit such an offence. This is a large GLC with access to good advisers. Besides shareholders who had accepted its offer at RM1.30 just 2 months ago could be crossed and complain to SC!

“once offer is closed the offeror cant buy above the offer price dor 6 month”

But this wasn't the case in Felda's offer for FGV. In this case the offer posting date was 12-Jan 2021. The offer at RM1.30 was extended three times up to 15-Mar.

Source:
https://www.bursamalaysia.com/market_information/announcements/company_announcement?keyword=EXTENSION+OF+CLOSING+DATE&cat=&sub_type=&company=5222&mkt=&alph=&sec=&subsec=&dt_ht=&dt_lt=

FGV together with its PACs only managed to acquire about 80% shares. FGV returned to buy in the open market as early as 19-May. Share price chart shows FGV was paying at higher prices than its original offer of RM1.30. The gap between offer end date and open market purchase was only about 2 months.

Source:
https://www.bursamalaysia.com/market_information/announcements/company_announcement?keyword=FEDERAL+LAND+DEVELOPMENT+AUTHORITY&cat=SH%2CCHSH&sub_type=&company=5222&mkt=&alph=&sec=&subsec=&dt_ht=08%2F06%2F2021&dt_lt=

I haven’t read about FGV having to pay the differences to offerees who had accepted its offer at RM1.30 earlier. Perhaps there is no such restriction and obligation in the first place?

@EVEBITDA,

That is a good point.

Based on my own simulation, borrowing on the parameters you’ve provided (~2.5b fresh borrowing @ 5%), Litrak can probably distribute 3.50 to 4.00 up front, and continues with 20 sen annual distribution for another decade. Apply a COE of 8% this exercise can probably add extra 50 sen to the company's intrinsic value.

Without the new debt issuance, investor can expect 60-70 sen annual dividend after current debt is paid down, but the present value of the cash flow is much smaller, may be about RM4.3? That assumes a 8% COE. If COE is set to 10% say due to extra risks like uncertainty in government payment, then it's worth not much more than current price.

Nonetheless that's probably a bear case scenario. Overall it feels like a good investment despite limited upside as discussed earlier.

Yeah, it's enough incentive for Gamuda to do something, especially if it needs the cash to fund other projects. However given Gamuda also owns Kesas and SMART, does it make sense to monetize all four highways in a single exercise? Given that will involve other stakeholders and more complicated, will it take extra long to complete, especially should some parties want to get clarity on Highway Trust first?

@EVEBITDA,
Thanks for the correction. I must have missed out the clause. This is what written on Code on Take-overs and Mergers, Rule 12.03 (3), “An offeror shall not revise a take-over offer or cause a take-over offer to be revised after the 46th day”

Adding to what you’ve explained that the offer must be kept open on the 46th day before it can be revised, doesn't it mean an offer can and only can be revised on the 46th day, and not on any other days? It seems very restrictive.

BTW I have another question. Assume the current offer expires by Nov 8 as scheduled, will the Offeror be obliged to pay the difference to original offerees who have already accepted, should the Offeror later acquire from open market or through another GO at an even higher price than RM2.70? What are the conditions involved?

Thank you for another very well written piece with detailed analysis and a lot of useful information.

Comparing Public Packaging against its peer Master Pack, and Muda Holding (which also has paper mill operation), PPHB appear to to have lower valuation at ~5X historical PE versus ~7X for the other two. This is despite past 10 year record showing Public Packaging managed to achieve better ROE and net margin.

I wonder whether it has to do with Public Packaging poor dividend records. Unlike its peers it has not paid dividends for almost 10 years before some token of appreciation recently. My view is given its ROE is just about matching cost of equity, a good manager would have returned a higher percentage of earning to shareholders.

Any thought on the comparison across there few corrugated packaging companies, and also comparison across flexible plastic packaging companies (besides the sustainability issue)?

@rohank71, your past comments show you’ve participated in a few recent takeover stocks. You must be quite used to the procedures.

I agree it looks like the offer is not extended as there is no announcement which is required 2 days before the offer expiry. However, based on Malaysian Code on Take-Overs and Mergers 2016, a price revision is still possible, in theory at least. According to Rule 12.03, the offeror can announce a revised offer no later than 46th day from the date of offer document. After that the offer needs to be kept open for at least another 14 days.

https://www.sc.com.my/api/documentms/download.ashx?id=72152df0-c094-4ff2-8e5c-989bcd667be5

I shall assume this will not happen, and plan for the various post-offer scenarios accordingly. Will return to this point at another time.

Meanwhile I observed an interesting trade pattern before the market close today. Looking back at today transaction records, Daibochi shares were bought from sellers continuously at above RM2.70 for almost the whole day.

These were the last four transactions of the day.
16:40:19 PM 50,000 shares bought at RM2.71 to RM2.73
16:42:55 PM 3,000 shares sold to buyers at RM2.70
16:43:41 PM 2,000 shares bought at RM2.72
16:50:00 PM 3,000 shares sold to buyers at RM2.70

At 16:40:19 PM, the buyer snapped up 50k shares queued at RM2.71 and RM2.72, and reached RM2.73.

But 2 minutes before pre-closing, a seller sold just 3k shares at RM2.70. This was followed by buyer snapping up the 2k shares queued at RM2.72. But at 16:50pm closing, seller sold another 3k shares at RM2.70.

I was perplexed by the trade pattern. If I were the seller, my objective would be to maximize gain by selling at a higher price if possible. I would queue at RM2.72 or even RM2.71 given there were continuous buying interest throughout the day. Why the small quantity sales at RM2.70 which only happened just before market close? Not once, but twice! It had the effect of setting the market closing price at RM2.70 instead of RM2.72.

This might be a minor point. I'm just curious about the psychology behind.

Shareholders who consider selling or accepting offer take note . The already extended once offer is scheduled to expire by 5pm 8 Nov (next Mon).

UOB will announce further extension, if any, by “at least 2 days before the Extended Closing Date”, i.e. 2 days before 8Nov. Not sure in calendar day or trading day.

So far there is no announcement yet. Keep an eye by end of today.

@Ttw570501, you truly have my respects! Few investors, even those who claim to be long term like me, could have your patience! Your holding period has not only exceeded me, but also all those funds not to mention Scientex.

Do you track the total return? I suppose it’s easily a few thousand percents.

Your holding cost is virtually nil now. Whether at current 2.7, or if it drops back to 2.4, or up to 3+ doesn’t really make much of a difference to you in percentage return.

May I know the reasons that you still consider cashing out? It’s not that Daibochi has entered a declining phase considering its 125m acquisition of MPP is paying off and another 100m investment in capacity expansion?

You didn't sell a single share during the slow period a couple of years ago. Why now?

@Ttw570501, why after Nov 8? For all we know Scientex may have given up and not extending beyond? :)

Actually by looking at the declining trading and acceptance volume, most investors have already made up their mind. They have either sold or decided to stay. Few remain undecided at this stage.

@ITCHYLEG,

My take on the stamp duty. Agree it has dented market sentiment. But short term only as the market is forward looking. In fact much of the market impact has already been priced in after Monday trading.

Just look at Bursa Malaysia, arguably one of the most affected counter. Not only that it's subject to 33% prosperity tax (its pre-tax profit in FY2020 was half a billion), but the expected trading volume deduction directly hits its revenue and hence bottomline. But take a look at its share price. It closed at 7.51 on last Fri, just before budget announcement. The last 3 days of tradings show its share price has already settled at around 7, or about 7% lower. This is the market verdict on the double whammy impact (prosperity tax + stamp duty) on one of the most affected companies.

Back to Daibochi. First the budget is quite irrelevant to its business, which is what long term investors should care about. For short term speculative interest (if still any left) Daibochi trading volume is very low to start. Don't see the effect of the RM200 cap removal. The primary concerns for warrant holders should be, before time runs out by next Jun, will Scientex revise its offer, or will Daibochi delivers good results in the next 3 quarters to boost its share price higher such that it's comfortably above RM2.8 - 2.9 range. The trading volume in warrants should be a secondary concern.

However the difference lies in you said you owned 2 million warrants. There are only about 27 million outstanding warrants. In an early announcement, Scientex declared as of 21-Oct it received 7 million confirmed acceptance plus about 4 to 5 million unconfirmed acceptance. Including earlier position at 3 million, Scientex should have about 14 to 15 million warrants as of 21-Oct. Assuming Appolo and Samarang continue to hold on to their combined holding at ~6.5 million, it means as of 21-Oct the number of warrants not controlled by these three parties are 29m - 14.5m - 6.5m = 8 million.

Given you owned 2 million of them, you effectively cornered about 25% of the remaining market!

This is indeed a risk. But the risk seems to be rather unique to you.

@Ttw570501, I notice you've just joined i3 today. Are you a current Daibochi retail shareholder? The info is actually contained in the physical document sent to you.

The question is can Scientex get 90%?

Daibochi's second largest shareholder Apollo has topped up its shares to 9.54%. It also holds > 3 million warrants to be converted to more shares if necessary.

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3193300

The other major shareholder Samarang has topped up its position to 5.26%. Their actions tell the market how do they think of the RM2.70 offer.

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3197921

The budget may have dampened any speculative interest in WB. However I don’t see any effect on the mother share which is now held by long term investors. Business wise Daibochi pre-tax profit is sub 100m so it doesn’t attract the 33% prosperity tax. Besides the F&B market it serves is a stable growing market which is not dependent on any stimulus measure. The boring nature of the business is where the attraction lies.

1.5 million warrants is a big sum for a typical retail investor (assuming you’re one). If it is a substantial part of the portfolio, I will do the same too. Or at least I will switch some warrants to mother shares.

As mentioned before I’m risk adverse. While there could be upsides between now and the warrant expiry in Jun 2022, there is always an element of gamble. Warrant holders are at the mercy of macroeconomic situation (though not necessarily the budget, where the effects will be short term as market prices in the impacts including the 2022 prosperity tax for large companies).

Unlike warrant holders, long term shareholders have time on their side if their companies are sound and growing, which I believe Daibochi is. Whether there is an improved offer from Scientex or not, and whether the offer is in 2021 or beyond, to me they are just the icing on top of the long-term growth in company value. I won’ sell unless the price is right, and in fact will top up if opportunities arise.

Hong Kong regulators have tightened regulations on investment-linked insurance policies. Insurance companies are told to stop charging consumers excessively high fees and surrender charges.

https://www.scmp.com/business/banking-finance/article/3154479/sfc-tightens-regulation-investment-linked-insurance

Is the situation similar in Malaysia, and therefore one day our local regulator may take action too?

Personally I have an investment linked policy bought many years ago at a time I had little investment knowledge. Looking back I feel it was a poor decision.

Felda's failed privatization of FGV in early this year may offer us some lessons.

Originally Felda owned 21.24% of FGV. Together with its PACs they owned 36.61%. In Dec 2020 their stakes increased to 50.49% after acquiring 13.88% shares from KWAP and Urusharta Jamaah. The acquisition triggered a Mandatory Offer. Like Scientex, Felda did not intend to maintain the listing status of FGV.

Source:
https://www.theedgemarkets.com/article/felda-ups-stake-fgv-3512-proposes-take-fgv-private-rm130-share

Note that Felda’s RM1.30 offer were also deemed fair by analysts at that time.

Source:
https://www.theedgemarkets.com/article/feldas-rm130-offer-fgv-shares-deemed-fair-analysts

Felda extended its offer period up to three times, for a maximum allowable offer period of 60days.

Source:
https://www.bursamalaysia.com/market_information/announcements/company_announcement?keyword=EXTENSION+OF+CLOSING+DATE&cat=&sub_type=&company=5222&mkt=&alph=&sec=&subsec=&dt_ht=&dt_lt=

By the end of the offer period in mid Mar 2021, together with its PACs, Felda managed to up their shareholding by ~30% to 80.99%. But they failed to reach the 90% threshold.

Source:
https://www.theedgemarkets.com/article/felda-fails-garner-enough-acceptance-take-fgv-private

Interestingly towards the end of offer period in late Feb, FGV share started trading above the offer price of RM1.30. Price shot up right after the offer period ended. It went to as high as RM1.67 and only briefly traded below RM1.30 for the last 7.5 months. It closed at RM1.49 today.

The price chart is here:
https://www.bursamarketplace.com/mkt/themarket/stock/FGVH/charts

This was probably helped by high CPO price. It’s also interesting to note that initially Felda stood at the sideline. But it started buying in the open market from Jun onwards at prices much higher than the original offer of RM1.30.

The last transaction was recorded on Oct-28. As of now Felda has acquired 67.15%. Together with its PACs their holdings are at 82.52%.

Source:
https://www.bursamalaysia.com/market_information/announcements/company_announcement?keyword=FEDERAL+LAND+DEVELOPMENT+AUTHORITY&cat=SH%2CCHSH&sub_type=&company=5222&mkt=&alph=&sec=&subsec=&dt_ht=08%2F06%2F2021&dt_lt=

I’m not sure who are holding the other 17.5% of shares. If Felda were to launch another offer in the near term, it will have to at least match the highest price it paid in the open market recently.

While Scientex/ Daibochi scenario is not exactly the same as Felda/ FGV, I believe there are parallels that can help us to foresee future developments.

Seven weeks have passed since Scientex announced its plan to take Daibochi private. Below is a summary of Scientex’s shareholding over the past 7 weeks.

Week --> Percentage
Pre-announcement --> 61.88%
End of week 17-Sep --> 65.32%
End of week 24-Sep --> 66.12%
End of week 1-Oct --> 66.45%
End of week 8-Oct --> 66.86%
End of week 15-Oct --> 67.50%
End of week 22-Oct --> 71.17% (note: before the end of original offer period)
End of week 29-Oct --> 71.35%

Scientex has extended its offer period once in a press notice on 21-Oct. Barring unforeseen circumstances, Scientex is likely to announce the second extension by this Thu (4-Nov). This may be followed by the final announcement on third extension by 18-Nov.

Before Scientex can reach an agreement with the fund managers who are holding out, it is only logical for Scientex to collect as much shares as possible in the maximum allowable 60 day offer period.

@EVEBITDA,

Revisiting your earlier comments. Earlier you mentioned if they issue new bond they may increase reserve by revaluing the concession to fair value. What is the purpose of revaluation? Is it a necessary accounting treatment such that the equity becomes higher and the resulting debt to equity ratio lower?

The next question is will such revaluation be considered as a gain, and more importantly a taxable gain? If yes, if performed next year will the entire gain fall under 2022 where the 33% prosperity tax (cukai makmur) apply?

@wsb_investor, thanks for the feedback. What are the examples of profit release?

For medical repricing, aren't the projected higher premiums in future years meant offset by the higher expected medical cost, such that the net effect to EV is about zero? Would regulator intervene if insurance companies increase their profits by charging higher premium than necessary (to contain medical cost inflation)?

@wsb_investor,

Can the EV be calculated approximately as Jun 2021 EV = Jun 2020 EV + NBV created during the interim 12 month?

Given Maybank estimated Jun 2020 EV as RM2.6b, and the NBV during the last 4 quarters is only RM300m, such calculation will only yield an EV of RM2.9b instead of RM3.3b.

I suppose changes in interest rate do not affect the EV greatly as you've explained the management will ensure asset-liability matching, right?

Besides how could EV increase by 3.3/2.6 - 1 = 27% in the 12 month period during the pandemic?

I'm mystified by how analysts estimate the EV.

Thanks for the good sharing.

I've read about the alleged insider trading and the commotion during one AGM many years ago. It was also once a KYY stock meaning share price going through roller coaster ride.

However I'm not too concerned about corporate governance. Recent year records show that the management strives a good balance between dividend distribution and above cost of capital growth with retained earnings.

I agree furniture exporters to the US has benefited immensely from trade diversion away from China. Besides the production cost in Vietnam has been rising over the years so it hit competitors including Chinese producers there.

But the reliance on foreign workers in Malaysia could be the Achilles' heel
for this industry, especially for Lii Hen which exports 90% to the US. Automation will also be difficult especially for the final assembly process. One never know when will US find faults in the labor practice as already experienced by companies in glove (WRP, TG, Supermax), plantation (Sime Plantation, FGV) and EMS (ATA IMS).

I see that you've been writing on other YOCB and Success. Please keep up the good analysis and sharing!

I get your point now. 2.5b capital repayment is a lot of money. But recall in the MOF offer in 2019, Litrak was valued at 2.75b (2.3b for LDP + 50% of 0.9b for Sprint). Given the concession has shortened by 2 years since and after 240m dividend paid during the interim, the two numbers match nicely.

If the 2019 offer were to go through, Litrak would probably have been delisted by now; shareholders have gotten back their money; and the government owns the assets now.

Under the scheme you mentioned how will it work out? Does it mean Gamuda use the borrowing to privatize Litrak and in the process also raises 1b+ fresh cash for itself?

The extended maintenance business under a trust arrangement is probably a nice to have only. Excluding depreciation, the pre-Covid annual operating expenses is about 60m. Even with 15% markup the profit is only 10m a year, which is dwarfed by the scale of capital involved here.

I don't understand your point about penalty payable to present bond holders. Can you elaborate?

Yes the management should replace equity capital with cheaper debt capital. How much can it possibly borrow? As of 2QFY22 the equity is RM1.2b and HDE asset RM1.1b. Does RM1b fresh borrowing make sense? That will translate to debt/ equity ~1X.

Before Covid annual EBIT was about RM380m. Current Sukuk has a profit margin up to 6%. Assuming 6%, the first year finance cost for RM1b borrowing is about RM60m, implying a interest coverage ratio of about 6X. Does these figures make sense?

Not too sure how to calculate the savings for shareholders. Assuming 10% cost of equity, should the approximate saving = (10% - 6%) * RM1b * 4.5 years (average duration) = RM180m, or about 30 cents per share?

If Litrak goes for fresh borrowings, I suppose it will have to forego the option of highway trust. You're right the cashflows are similar. But a trust coupled with extended concession will give the certainty of highway management and maintenance work beyond 2034 (although in current form it may still win maintenance work after concession has ended). I wonder whether they may prefer one form over another?

Good point. For simplicity, I shall assume the gain from last toll increase for Sprint in 2022, and Sprint's remaining contribution from 2031-34, will be offset by gradual decline in LDP tollable traffic which actually peaked in FY2015. The FCF of ~70 sen per annum is about right considering there is minimal capex. Of course, after discounting to present value, the current share price is either about right or just slightly undervalued depending on the discount rate used.

I expect most of the FCF will be paid out as dividend given that Gamuda needs cash to fund its infrastructure projects such as the Penang South Island (assumes it goes ahead). Besides given government's fiscal constraint, future bidders of government projects like MRT3 will be expected to shoulder most of the financing.

Speculation over Highway Trust notwithstanding, there is probably little room for capital appreciation. However I like to think of the stock as a 10 year bond that can be held until maturity.

Current low interest rate works in its favor. Unfortunatley the future interest rate direction can only be up. I worry less about political risk or a resurgence of Covid than a sustained bout of inflation which will force BNM to raise interest rate. Unlike typical companies Litrak cannot raise its price (tolls). Just like bond, sustained high inflation can be its biggest enemy, although the possibility may be on the low side.

@EVEBITDA,
The Sukuk repayment is RM200m a year based on schedule laid down long ago. Litrak will be debt free in 2 year time and dividend will increase. As you’ve pointed out concession expires in early 2030s. So the cashflows are quite predictable post Covid related traffic disruption.

However there are two uncertainties. One is the Highway Trust. Second is assuming Highway Trust doesn’t work out, what will the parent company Gamuda do before concession ends to prevent Litrak from becoming a cash company? Will it inject new businesses or rather let it delisted? What is the value of a listed status?

Your thoughts on this?

In a research report today TA Securities has a Buy call on BAT Malaysia. The valuation method is based on DCF too. TA assigns a perpetual growth rate of 3% to BAT.

Recall in the so called Independent Advice Circular for Daibochi, TA assumes Daibochi perpetual growth rate will be stuck at (nominal) rate of 2% to 2.5% from 2026 onwards.

In other words, TA has assumed that the tobacco company (aided with the prospect of vaping) will have a better long term growth prospect than the packaging company that supports MNCs in the food and beverage sector!

Up to 22-Oct, the penultimate day of original 21 day offer period, Scientex has acquired 71.17% of total shares. This represents an increase of 9.29% from its original position of 61.88% on 13-Sep when it announced the takeover.

Among the 9.29% shares added, 4.39% (14.38 million) were through acceptance, and 4.90% (16.08 million) were from open market purchase. Of the 4.90% purchased, 2.33% was bought on Day 1 on Sep-14.

The acceptance peaked on 20-Oct. EVEBITDA is probably right that Public Mutual has not accepted.

Date Acceptance % of Total
6-Oct 1,117,800 0.34%
7-Oct 0 0.00%
8-Oct 6,480 0.00%
11-Oct 27,496 0.01%
12-Oct 44,060 0.01%
13-Oct 225,140 0.07%
14-Oct 1,362,560 0.42%
15-Oct 234,239 0.07%
18-Oct 103,787 0.03%
20-Oct 6,985,900 2.13%
21-Oct 1,684,632 0.51%
22-Oct 2,585,849 0.79%

Scientex is entitled to three rounds of 2-week extensions. Barring major changes, acceptance and purchase volume are likely trend lower in coming weeks.

The next milestone for Scientex is to cross the 75% mark. It will need another 12.53 million or 3.83% shares. Let’s see how long does it take; or whether it can achieve that within the maximum allowable offer period of 60 days.

The acceptance of Chua’s remaining 34,000 shares has come in this morning. Given there is warrant acceptance, we should see Scientex's latest position on warrants in the evening announcement, if not today may be next Mon.

One question. Any idea why so far there is no reported acceptance of warrants? I suppose warrants are not exempted from disclosure?

@EVEBITDA,

Thanks for your response. You've made a good point. It makes sense that the acceptance should pick up when the original deadline of 25-Oct approaches. Just that I noticed the spike on 20-Oct was unusually sharp.

Date No. of Accepted Shares
6-Oct 1,117,800
7-Oct 0
8-Oct 6,480
11-Oct 27,496
12-Oct 44,060
13-Oct 225,140
14-Oct 1,362,560
15-Oct 234,239
18-Oct 103,787
20-Oct 6,985,900

Based on 2020 Annual Report, the largest retail shareholders held slightly below 1 million shares each. The top 9 of them held in 7m+ shares in total.

If the near 7 million shares recorded on 20-Oct are indeed from multiple retail shareholders including large block holders, they are likely to come in from multiple brokers. If brokers only started to submit en masse from 20-Oct, it’s possible that some of them may submit a day or two later. Let’s observe whether there is a spread in acceptance for the next two days, characterized by multi-million acceptance each day.

It will also be interesting to check the shareholding list in the next annual report to find out who have gone and who have added their positions. At least to fulfil my curiosity.

The third item is Scientex has extended its offer deadline from 25Oct to 8Nov. But that is the least surprising one out of the three items I mentioned.

Why would Scientex not extend the offer period? It’s allowed to take the advantage given by the listing rules. Besides more than five weeks have passed it has not even reached 70% let alone the 90% necessary for compulsory privatization.

Expect Scientex to continue its 14 day extension multiple times until its time is up in early Dec. It will collect whatever cheap ticket it can get at RM2.70 from impatient shareholders or those who are scared by the delisting story.

By the 45th day of first offer date, which is around mid Nov, Scientex will have to decide whether to raise its offer price before current offer runs out of time. Of course it also has the option to come back with a new round with a different price at a later date.

The next question is, if there is a revised offer, is it within or after 6 months (from 4-Oct)?

Form cost saving point of view, it will partly depend on the acceptance level in current offer. If acceptance is low, a revision will not cost too much extra money to pay the difference to shareholders who have already accepted at RM2.70. If acceptance is high, it is more economical to postpone the second round to 6 months later since Scientex can escape the obligations to pay earlier shareholders who accepted at RM2.70.

More importantly, the cost saving depends on the price it’s ready to pay holdouts like Apollo and Samarang. If a high price is foreseen, Scinetex may want to postpone the negotiation to next year and focus on collecting cheap tickets for now.

But as long as Daibochi privatization is strategic to Scientex, which I guess is for the option of a separate listing of the consolidated plastic division, I believe Scientex will still come back to the negotiating table. Even though it may have to pay a dearer price to Apollo and Samarang, there will be fewer shareholders left to pay!

In short, self interest dictates that Scientex is likely to drag on for a while, especially if it cannot secure Apollo and Samarang for the time being; but will come back again later.

Minority shareholders who can’t wait may choose to move on. But for long term shareholders like me who are anyway confident of Daobochi business fundamentals, growth and values; and not counting on this privatization in the first place; time is on our side!

Second item is Scientex has received a large acceptance of 6,985,900 shares dated 20Oct (Wed).

The volume represents 2.13% of total shares. This is an unusually large volume - larger than the combined acceptance volume of just 2 million shares in the previous 7 trading days. This large volume is likely to come from a large fund.

The fund is unlikely to be Apollo or Samarang, which have added their holdings earlier. Besides Apollo and Samarang will have to disclose their positions if they sell.

Checking against the 2020 Annual Report, the most likely candidate is Public Mutual, which as of Oct 2020 owned at least 24 million shares (7.33%) under four separate funds. May be the different fund managers have coordinated to sell partially. It’s also possible that one of them, most likely Public Islamic Select Treasures Fund, has singlehandedly disposed most of its shares.

It’s not a surprise if certain fund manager(s) may want to dispose partial/ full holding given it’s hard to sell millions of shares during normal time. The liquidity issue highlighted by someone in this thread, though not a concern for small shareholders like me, is a real challenge for fund managers who have big position and cannot afford to hold for the long term. The message of liquidity risk posted here is real, though targeted at those fund managers (but guess they don't have time to read such forum; and they already know anyway).

Coincidentally the acceptance of Public Mutual on 20Oct comes just a day after @EVEBITDA highlighted the possibility on 19Oct (a non-trading day), though he subsequently clarified my query that it was just his assumption and not from any insider source.

Luckily even if Public Mutual surrenders their entire 24 million shares holding (7.33%), the public spread of Daibochi is still at ~25% rather than the 10% as feared. Based on Bursa Listing Requirement I shared earlier, Apollo’s and Samarang’s holdings are considered public. There will be no compulsory delisting as Scientex may hope for.

Even if it’s a mere coincidence, the lesson is I'll need to pay more attention to EVEBITDA’s future assumptions! Very good foresight and timing indeed.

There are three notable items from the filings today.

First is more of a curiosity. The PAC Chua Lay Peng has accepted Scientex offer. That is not a surprise by itself.

However the filing shows Chua has surrendered only 6,600 shares. According to earlier offer document Chua actually owns 40,600 shares.

What has happened to the other 34,000 shares? Have they been sold to the open market earlier for a mere extra one sen of profit? Or is Chua still holding on for a better opportunity?

Adding to the earlier value calculated from Gordon Growth Model, the value per share = RM14.83 + RM1.93 = RM16.76.

This is close to the current market price at about RM17.

Of course, Gordon Growth Model is a simplistic method. Besides like any other discounted cashflow method that projects cashflows into eternity, any slight change in assumptions could give vastly different result.

Another factor not considered is the tariff for Regulatory Period 2 (RP2) for Year 2023 to 2025. The future tariff as determined by Energy Commission in 2022 will affect share price.

Putting aside these factors, if one believes the assumptions used are reasonable, then current market price should also be reasonable. If the price is right, it will mean over a long period of time, a long term shareholder who purchases PetGas at today price can expect an annual rate of return of about 8% (the cost of equity).

However, there is still value to be extracted from PetGas. The company has an overly conservative balance sheet which is slightly net cash. Given its stable operating cashflow, it should be able to assume more debt without compromising on its financial health.

Based on the latest Financial Position as of 2QFY21, net cash = RM3,455m – RM3,306m – RM147m = RM2m. Its cash and borrowings are roughly in balance.

Shareholders’ Equity = RM12,745m. Assume its optimal net debt to equity ratio is 30%, it can release RM12,745m * 30% = RM3,824m of capital as future special dividends.

Dividend by number of shares, potential special dividend per share = RM3,824m/ RM1,979m = RM1.93

(Note: Capex per year is slightly above RM1 billion. I assume it will fund next 3 to 4 years of capex mostly with borrowings, and return the excess operating cash received in the form of special dividends.

If that happens, can expect 48 to 64 sens of special dividends per year for next 3-4 years, providing a one time boost of dividend yield from RM0.74 / RM17 = 4.4% to 7.2%- 8.1%.

Rightfully the assumed future special dividends should be discounted back to present value based on 8%, but I just ignore the effects)

Given FY2020 DPS = RM0.72, FY2021 DPS is projected to be RM0.72 * (1 + 3%) = RM0.7416
Applying the Gordon Growth Model, value per share
= next year dividend / (COE – growth rate)
= RM0.7416 / (0.08 – 0.03)
= RM14.83

Next is cost of equity (COE).

PetGas is stable company, a reliable dividend stock with good corporate governance. It enjoys gas distribution monopoly. Its revenue and profits are shielded from gas price fluctuation as it’s largely determined by Regulatory Asset Based pricing, and the long term gas processing agreement with its parent company Petronas.

Besides the demand for natural gas is likely to persist for at least several more decades as gas is the cleanest form of fossil energy. The Energy Commission projects gas demand to increase from 2030 onwards by replacing coal in power generation.

Based on above I will assign my own standard of “good” company COE which is 8%.

Cross check my choice against CAPM model:
Beta = 0.75 (average of Reuters 0.87, and Market Watch 0.65)
Risk free rate = 3.6% (based on latest Malaysia government 10 year bond yield)
Equity risk premium = 5.9% (based on Damodaran)
CAPM COE = 3.6% + 0.75*5.9% = 8%, which coincidentally fits almost perfectly at this moment.

The characteristics of PetGas are earning growth is slow but stable. It distributes most of its earnings as dividends with quarterly distributions. This means the simple Gordon Growth Model can be used.
https://www.investopedia.com/terms/g/gordongrowthmodel.asp

Past dividend records show that
1) From FY2007 to FY2010, DPS was RM0.50.
2) In FY2015, DPS was RM0.60
3) In FY2020 (latest full financial year), DPS was RM0.72 (excluding special dividends)

Using a CAGR calculator, its shows that dividend CAGR over the past 10 years is 3.7%, and over last 5 years is also 3.7%. The dividend has been growing at a nominal rate of about 3.7%. For context, in the 2010’s decade Malaysia GDP grew at about 4% to 5% in real term, or about 6% to 7% in nominal term.

Malaysia GDP growth rate will slow gradually in coming years (in Sep World Bank projected 5.8% in 2022 and 4.5% in 2023, in real term). So I shall make a bold assumption that PetGas future dividend growth rate is at a constant 3%.

It’s important to note that Petronas Gas is predominantly a utility company, not an oil & gas company. Don’t be deceived by the name “Gas”. The CEO already explains in The Star article I shared that its revenue and profits will not be much affected by gas price volatility.

In the research reports I read most analysts use the Sum of the Parts (SOP) valuation method – valuing different businesses independently and sum up the value.

I will do a sanity check on PetGas fair value based on a simpler approach. The starting point is I believe the current share price is not grossly over or undervalued. For a large cap company like PetGas, which is followed by many analysts and owned by many institutions, any major gap between price and value cannot persist for long. Opportunities will be identified and exploited, and share price corrected.

Based on current market price, I shall work backward to understand what are the assumptions behind. If the assumptions make sense, then the current market price will also make sense.