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.

Got to thank Scientex for that. Its inept threat of delisting forces me to learn.

I read your very first forum comment dated just two days ago. It seems that you’re bullish on KPJ. Yeah, you can consider switching from low conviction Daibochi to high conviction KPJ. All the best!

OK, so the Public Mutual’s acceptance is just another scenario.

Nothing is for sure in investment as well as in life. There is always another scenario around the corner that has not been considered. So my sincere advice remains unchanged. Anyone with low risk tolerance is better off selling now rather than agonizing over N other possible scenarios which may or may not happen.

BTW how do you know Public Mutual has already accepted Scientex offer? From insider source?

Refer to Bursa Listing Requirement. According to the latest version of Chapter 1, updated as of 1 Oct 2020.

The definition of “public” is

***********************************

(a) in relation to a corporation, means all persons or members of the public but excludes -

(i) directors of an applicant or a listed issuer and its subsidiaries;

(ii) substantial shareholders of an applicant or a listed issuer except where such a shareholder fulfils all the following requirements in which case such shareholder may be included as a “public” shareholder:

(aa) such shareholder’s interest, directly or indirectly is not more than 15% of the total number of shares of the applicant or listed issuer;
(bb) such shareholder is not a promoter of the applicant or listed issuer; and
(cc) such shareholder is either –
(A) a statutory institution who is managing funds belonging to contributors or investors who are
members of the public; or
(B) an entity established as a collective investment scheme, such as closed end funds, unit trusts or investment funds (but excluding investment holding companies);

(iii) associates of directors or substantial shareholders of an applicant or a listed issuer;


***********************************

Source:
https://www.bursamalaysia.com/sites/5bb54be15f36ca0af339077a/content_entry5ce3b50239fba2627b2864be/5ce3b58c39fba2646fab55b3/files/MAIN_Chap1_NewIssOrs__1Oct2020_.pdf?1601521305


Based on (a) (ii) (aa), neither Apollo nor Samarang hold more than 15% of Daibochi shares.

Based on (a) (ii) (cc) (B), Apollo and Samarang are collective investment scheme.

Therefore the holdings of Apollo and Samarang are part of the public shareholding.

Nonetheless, given you have many concerns, even though not valid in my view, if I were you I would have already sold the shares to have a peace of mind.

@EVEBITDA, don’t really understand your questions.

If the concern is about Daibochi stops trading should Scientex acquire >75%, you may check out this list of companies that have failed to meet the public shareholding spread, but continue to be traded for years.

https://www.bursamalaysia.com/market_information/announcements/company_announcement?keyword=PUBLIC%20SHAREHOLDINGS%20SPREAD&cat=&sub_type=&company=&mkt=&alph=&sec=&subsec=&dt_ht=&dt_lt=&per_page=50&page=1

Guess which year was the last company that got delisted for not meeting the spread?

May I know your interest in this matter?

If you’re Daibochi minority shareholder like me, my sincere advice is to take profit now by selling in the open market or taking up Scientex offer.

Holding on to your Daibochi shares is not without risk. Why not move to safer investment for the peace of mind instead of worrying about all the possible scenarios and second guessing other players’ motives?

Or are you just a disinterested observer? Again?

@EVEBITDA, to be fair, although Scientex has tried to snap up Daibochi on the cheap while the business is depressed by the pandemic, and before the major capex has started bearing fruits, I don’t see any major governance issue here.

Scientex just behaves opportunistically, especially with its implicit threat of delisting which has failed miserably. Ultimately Scientex is bound by the listing rules. Other major minority shareholders consisting of professional fund managers will provide the necessary check and balance.

We don’t need to hope Scientex to play fair on future RPTs. Now everyone will scrutinize future RPTs and closely monitor the gross margin. As you’ve suggested, any abuse in RPT could lead to these fund managers blocking future resolutions.

From self interest stand point, Scientex owns 2/3 interest in Daibochi. Any unfair gain by Scientex will be offset by a 2/3 loss at the other end of the transaction. A successful RM7 billion enterprise like Scientex will be smart enough not to risk reputation damage by abusing the remaining 1/3 of a small RM900 million subsidiary.

Even if current privatization fails, a successful Daibochi is still in the interest of everyone particularly Scientex, especially if it needs to integrate Daibochi eventually for any strategic reason.

Scientex doesn’t purchase warrants now probably because any volume it can get doesn't make much difference. Even mother share acquisition appears to go nowhere and is stuck at 67%. Whatever small volume sold in the open market recently has been mopped up by someone else at RM2.71.

Looking back past filings, Scientex did buy warrants aggressively at the beginning. It acquired 1.20m, 0.76m and 0.04m on 9/14, 9/15 and 9/20. It stopped after Apollo acquired the necessary 10% blocking shares through warrant purchase.

@EVEBITDA, welcome to i3.

PJ Lim and the fund managers are veterans. If they can’t strike a deal now, they will move on and focus on their common interest which is to make Daibochi successful. Scientex can revisit the privatization in future if it sees a strategic need to consolidate Daibochi before listing its plastic division.

Unless one side tries to take unfair advantage, I don’t see why the fund managers should vote against RPTs. Not to mention it takes at least two of out of three (Apollo, Samarang and Public Mutual) to block the resolution. The current shareholding structure will provide the necessary safeguard.

@Papayashot, check the number of shares EPF received on Oct 8

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3200484

Today filing with Bursa shows that Scientex Chief Operating Officer for Packaging Business, Mr. Choo Seng Hong, has accepted his company offer totaling 186,800 shares.

Past filings under the category “General Announcement”, sub category “Dealings in Listed Securities” show that Mr. Choo has accumulated his Daibochi shares in April 2020, the time of market panic, at slightly under RM2 per share. Mr. Choo didn’t sell a single share even in July 2020 when share price touched RM3.

Mr. Choo is another example of Scientex insider bullish on Daibochi prospect (although he accepts the offer now, which is understandable)

Congratulate Mr. Choo for his handsome profit even after netting off a small loss in warrants.

Now I want to take a look from the interests of Scientex.

It’s probably clear by now that, in its current form, the privatization will not happen. However, it's unclear whether Scientex will revise its offer within the 45 days period; and if not, will it return 6 months later.

But from a more strategic perspective, I note there is little synergy between Scientex's affordable housing business and its packaging businesses (other than some capital reallocation). If one part of the business starts to slow down, the whole group could suffer a conglomerate discount. Separate listings could fetch higher valuation and offer greater flexibility.

In fact several weeks ago The Edge has asked Scientex that after privatizing Daibochi would it consider listing the packaging business.

If Scientex wants to pursue this option, then it will have strong desire to privatize Daiboch first; consolidate it; and finally spin off the whole packaging division for a much better price in the future.

If my assumed rationale is right, Scientex will be likely to offer a fair price eventually. The remaining 1/3 shares in Daibochi is a mere fraction of the entire plastic division. Bargaining and squeezing minorities over that 1/3 shares risks missing a bigger goal.

Timing wise, a revised offer may not be immediate. However it probably have to act before Daibochi expansion starts bearing fruits and share price moving up.

Of course, different shareholders have different objectives, risk profile and investment horizons. Just take the action best suited to own interest. Personally I will continue to hold, with or without a revised offer, and plan to top up again should price weakens in the future.

In fact Daibochi is just a small part of my diversified portfolio. Any revised offer won’t make me rich, and any decline in price won’t make me poor either. Somehow the asymmetry in information and power that I see just fires up my interest to learn more about this privatization game and share my view here. The knowledge gained in the process will be my biggest reward.

Daibochi board (minus the Scientex representative who abstained) seems to deny their own good efforts when they endorsed a report that downplays the contribution of the RM100m investment which expands company capacity by 60%.

However this is not entirely unexpected. Valuation involves judgement. There is no strictly right or wrong answer. Probably some unspoken norms are involved. Besides, few in the corporate world would like to be the heroes insisting they will deliver even better results than needed, especially when the boss is not asking for that answer!

Below is how I imagine it could possibly happen. Not saying that it did. Just a probable scenario based on my own observation in the corporate world.

First when the outside adviser won the job they already got the picture. As part of their methodology, the adviser then asked the board and management for their inputs involving forecasts and targets. Typical management will rather err on the side of being conservative, especially if the boss is not demanding! The advisers then fed those conservative input into their own DCF black box and out came the result. After some beautification next they presented to the board and sought endorsement. How could the board dispute the validity of experts' output that are produced by following the best-in-class methodology? Little by little, this is probably how the adviser report get produced with the good and genuine effort of everybody.

Of course, as shareholder then it becomes my job to examine their output and comment on it, criticizing it where it deserves. Not that it will make a difference as probably everyone of us have also made up our mind, with or without this report. This is just for the fun of it!

And to be fair, I also want to recognize Daibochi board for not engaging in any kitchen sinking with last quarterly results. A big impairment could have put fears to some minority shareholders.

While they may have given the appearance of siding with the majority shareholder in the IA report, moving forward I believe the interests of Scientex and other shareholders are aligned. The board and management have to deliver the fruits of the RM100 million investment regardless of the forecast given to the adviser. Scientex which owns 2/3 interests will be more anxious than any other shareholders that Daibochi delivers!

Besides the value of Daibochi, as discuss before, lies in its strong portfolio of MNC clientele which cannot be easily replaced or replicated. For that I will overlook any perceived lack of impartiality which hopefully is just one-off.

@dragon328,
I have similar experience with i3 forum before where long comments don’t get posted. The problem usually resolves by itself after some short comments are posted or after a day. This crankiness reminds me of the early incident here where a new forumer with opposing view claimed a conspiracy to censor him!

Understand your frustration. More about it in my next comment. But first congratulatie again for realizing profit!

I’m not going to stop yet. I want to work out the free cash flow assumed in each and every year from FY22 up to FY26.

It’s incredible that this report, which is paid by Daibochi shareholders, doesn’t reveal how they arrive at their numbers. Wonder why? Blame it on commercial secrecy, perhaps?

Nonetheless I’ve managed to reconstruct based on some trial and error on spreadsheet.

There are two pieces of information which we have worked out earlier:
(1) The undiscounted FCFE in FY2026 is RM57.883 million
(2) The total FCFE from FY22 to FY26, discounted to present value, is RM128.57 million.

I observe that the FCFE in the last year FY2026 is quite large, yet the total over 5 years (in PV term) is rather small. This could only mean the adviser starts with a very small number, and then inflate the number with high growth rate towards the end of the 5 year period.
(Note: It cannot start with a large FCFE like RM40 million in the first year, because the 5th year FCFE has to be RM58m and the 5 year total is constrained at RM129m)

This is another crazy assumption. Recall on Year 6 onwards they assume Daibochi growth rate will collapse to 2% to 2.5% forever, which is practically stagnant after adjusted for inflation!

I put forward two scenarios on how they could have grown the numbers. In the first scenario, the FCFE is assumed to grow from RM17.45 million at a constant rate of 35% annually (I know this is crazy)!

(In million RM)
Year FCFE FCFE @PV
FY22 17.450 16.130
FY23 23.558 19.954
FY24 31.803 24.685
FY25 42.934 30.536
FY26 57.960 37.775
Total N/A 129.080


~~~~~~~~~~~~~~~~~~~~~~~~~


Of course, free cashflow does not grow linearly. It depends on the different growth rates in earning, net capex, working capital and how long the capacity expansion still has to run. But all these assumptions are kept away from us.

So for illustration purpose, I massage the numbers to assume major capex spending for three more years (!), and after that, with magic, there is a 180% jump in FCF in Year 4. This is what I get:

(In million RM)
Year FCFE FCFE @PV
FY22 20.000 18.488
FY23 20.000 16.941
FY24 20.000 15.524
FY25 56.000 39.830
FY26 57.883 37.725
Total N/A 128.506


~~~~~~~~~~~~~~~~~~~~~~~~~


In both scenarios, the numbers and assumptions look suspect. It doesn’t match my understanding based on Daibochi past financial info.

But I’ll leave this cracked open black box here for time being. I’ll come back with more comments later.

The IA report withholds the cashflow details from us. But luckily a few numbers are there to help working it backward to crack open this black box.

The first equation is shown in page 16, where terminal value (in present term)
= [ FCFE_2026 * (1+g) / (Ke-g) ] * ( 1 / (1 + Ke)^4.9 )

where
FCFE_2026 is the free cash flow (FCF) for FY2026 before discount
Ke = cost of equity = 9.13% or 0.0913
g = perpetual growth rate, where two scenarios are provided, which are 2% (0.02) or 2.5% (0.025)

As mentioned in Page 16, when g = 0.02 and 0.025, terminal value (in present term) is RM539.68 million and RM583.23 million respectively.

Substituting the number into first equation, it’s found that FCFE_2026 = RM57.883 million. (Note: this value has not been discounted to present value).


~~~~~~~~~~~~~~~~~~~~~~~~~


There is also a second equation in Page 17, where

Value of the Daibochi Group’s business
= Present value of projected FCFE based on the Future Financials
+ terminal value (in present term)

A simple explanation of this second equation is Daibochi value = first 5 years value + value from Year 6 to infinity.

Page 17 also informs that when terminal value (in present term) = RM539.68m and RM583.23m respectively, the corresponding values for Daibochi business is RM668.25 million and RM711.80 million respectively.

Again, assigning those values to the second equation, we find that present value for the first five years is RM128.57 million.


~~~~~~~~~~~~~~~~~~~~~~~~~



Now take a moment to think about this figure. A total free cash flow of just RM128.57 million (at PV) from FY22 to FY26. On average, the FCF per year is less than RM26 million!

Basically, the report expects little to come from the more than RM100 million capex spent over the past two years.

That presents two possibilities. First, the report is right. It also means the board has destroyed shareholder value with >RM100m capex since the adviser projects to yield miserable future return. It's ironic that the board accepts the findings.

The other possibility is, as I firmly believe, the report has made fundamental mistakes in its cash flow projection. But the board endorsed it as one may say. Of course the board endorsed it. I just don't want to dwell into that. Just wish this privatization saga is over soon and the board and management get back to their business of delivering value for shareholders!

The IA report is out. Instead of just swallowing the report output without thinking, it's worthwhile to examine its method and assumptions behind.

The first thing I note is the IA report uses discounted cashflow (DCF) method based on free cashflow to equity (FCFE).

Anyone with a basic understanding of DCF will know that, given this method projects cashflow into the infinity, any result can be produced with slight tweaks of the input values. A good example is RHB reports for glove stocks that are DCF based. Last year using the DCF method their reports chased the glove stock price up. This year using the same DCF method the reports are chasing the price down (albeit with a new analyst now).

DCF is highly sensitive to three variables -- the cost of equity; the terminal or perpetual growth rate; and the starting cashflow assumption.

The first variable, the cost of equity is found on page 14 of the IA report. The COE of 9.13% derived from CAPM method come across as reasonable to me. So no issue there.

Next the terminal or perpetual growth rate. At page 16 it’s set as 2% to 2.5%. This values are not unusual. But note it’s applied for the period FYE 31 July 2026 onwards. In other words, the “high” growth phase of Daibochi will end in 5 years. Daibochi annual growth will settle to 2% to 2.5% from Year 6 onwards, perpetually.

Given valuation is performed in nominal term, and given the average inflation rate is about 2%, the assumption is Diadochi perpetual growth rate in real term is only 0% to 0.5%. In other words, this report assumes Daibochi become stagnant after 5 years!

This is in the context of Daibochi business selling to F&B MNCs which correlates with growth of population and prosperity. Malaysia is an emerging market with young population. Despite declining GDP growth rate over the decades, I believe Malaysia could still achieve GDP growth rate of around 3% for many years. And that 3% GDP growth rate is in real term. Translating to nominal term it’s about 5%. Furthermore Daibochi is now tapping into the even faster growing neighboring ASEAN countries.

While I won’t say the assumption of near stagnant growth just after 5 years in a fast-growing region is wrong, but is the assumption overly pessimistic?

The final factor is the initial conditions of free cash flow. By assigning too low/ high a starting point, the subsequent year FCFs, which is projected into infinity, could be grossly under/ over-estimated. So I want to see how the report treat Daibochi's >RM100m investment in the last two years. Rightfully these investments should translate into high FCF in subsequent years, where operating cashflow grows but investment is back to the low maintenance capex level.

To my disappointment I don’t find any details! I have expected the report to provide a table to lay down the 5-year calculation, outlying the annual projected earning, net capex and working capital. But none is given! Quite surprise indeed for a long report like this. (To RHB credit it always provide its DCF working for readers)

I notice @dragon328 has done a reverse engineering of the annual FCF assumptions.

Given I've done a FCFE for Daibochi quite some time back, later I'll bring up my old spreadsheet and do a smilar exercise too.

In short, I find the IA report does not provide sufficient transparency in its calculation. Until I can convinced myself otherwise with my reverse calculation, I will still stick to my PE calculation method shared earlier which assumes a fair value of 18.6 times (past 10 year mean PE) * post pandemic forward EPS of close to 20sen.

@bang_miskin, forgot to add that Harta has a net cash of ~90sen per share. A fraction of the cash may be added to the final value too.

@bang_miskin, I just made up the assumption. Logically there should be three phases - above norm, below norm and eventually return to normal margin. For simplicity I assign them to FY22, FY23 and FY24.

Making the normalized year earlier or later than FY24 doesn't make much of a difference to the final valuation. For example, if normalized year is in FY25, the value of normal year (FY25) EPS * normal PE multiplier will be discounted at 1.1 * 1.1 * 1.1 = 1.33 (instead of 1.1 * 1.1 = 1.21). However, given the global demand may continue to grow at around 10% per annum, capacity and therefore revenue & EPS may grow at about the same rate, offsetting the discounting effect.

The most important factors that determine the fair value will be the normalized profit margin and PE multiplier. Get that roughly right and the valuation result will be about right.

This is my valuation approach.

First estimate the net profit to shareholders (PATAMI) in future years until it reaches normalization. For example, assume FY22 is still above normal earning; FY23 is below normal earning due to price war; and FY24 is return to normal earning.

The earning for each year = average annual capacity x utilization x ASP (convert to RM) x net profit margin.

Annual capacity for FY22 to FY24 can be estimated from the announced capacity expansion plan from 44b (to be achieved soon) to 63b in the next 2 to 3 years. Can assume utilization of 80% or 85%.

During the AGM it was mentioned that ASP below USD30 didn’t make sense from profit margin point of view. So I assume that ASP for FY22 is around USD30. However as raw material prices continue to drop and competition heats up, ASP could drop below USD30 further down the road. Looking back at history, ASP was USD53 per 1,000 in FY08, USD 38-40 during FY10-12, USD 23-26 in FY16-19, and USD21 in FY20. With technological improvement and competition there is no reason why ASP will not resume its historical downtrend.

Past data also provides guidance on net margin. It was >20% up to FY14. After that there was a gradual decline from 18% in FY15 to 15% in FY20. (For comparison, just before the pandemic Top Glove net margin was 8%). As competition heats up, it’s possible that future net margin could eventually settle at a lower end.

By making different assumptions on the capacity, utilization, ASP and net margin, we can estimate the net profit for FY22, FY23 and FY24. Divide by 3,428 million shares outstanding will yield the EPS.

Borrowing from the method by Pankaj C. Kumar, we can work out the dividend per share for FY22 and FY23 by multiply EPS with 60%, which is the payout ratio of Harta. To make the estimate more complete, FY23 dividend can be discounted based on cost of equity. Lets say COE is 10%, then FY23 DPS is divided by 1.1 (=1 + 10%).

The main part of the value lies in FY24 (assumed to be the normalized year). The value = FY24 EPS * normal year PE multiplier.

Before the pandemic, the mean PE multiplier is at the high 20s given the double-digit growth rate and leading industry practice. However, if Chinese competition has successfully changed the competitive landscape (actually it remains to be seen), a lower PE multiplier will be warranted.

How low could it be? For that I will look for a benchmark outside of the rubber glove industry. For example, lets take Wellcall which shares many of Harta's characteristics – an OEM rubber hose manufacturer which sells to 100+ countries; above 60% dividend payout and respectable growth. But it doesn’t command industry leading position. Its past 5 year average PE is 17X.

Even with stiffer competition Harta is likely to command a better position than Wellcall, so should be worth more than 17X PE. With further consideration of liquidity and ESG factor, the normalized PE multiplier should comfortably stay above 20. The multiplier should probably range from low 20s to high 20s (assuming Chinese competition fizzles out).

After working out the value of of FY24 EPS * normal year PE multiplier, it should be discounted back to present value. It can be divided by 1.1 * 1.1 = 1.21. Adding the values with the DPS in FY22 and FY23 will yield the fair value of the stock.

By repeating this exercise on a spreadsheet with various combinations of assumed parameters, one can get a range of possible values for Harta.

I have more confidence in this range of values approach than the X standard deviation from mean approach as used by some analysts.

I often wonder what does it mean when analysts use standard deviation to determine glove stock TPs.

We learn in statistics that the concept of standard deviation applies to normal distribution curve. When applying to historical forward PE graph, we can imagine a horizontal histogram is superimposed on this graph. The histogram represents the occurrence of each PE value. The assumption is the histogram resembles a normal distribution, which may not hold true.

The 5 year historical forward PE of Harta has two peaks – a smaller peak in early 2016 where PE is almost 40X, and a larger peak in 2018 where PE > 50X.

If an analyst is bullish about the stock. I would rather the analyst say something like “Look. In early 2016 the stock price was almost 40X PE. My TP will be based on the 2016 peak of 40X. While high it’s still below the all time high of 50+ times.” Such explanation is more intuitive.

However analysts prefer to sound sophisticated. They will say the TP is based on +1SD which translates into 40X PE, implying 84 percentile highest in a normal distribution (Note: +1SD is 66%/2 = 34% above mean. So +1SD is 50% + 34% = 84% of the normal distribution).

But there is a bigger conceptual problem, for me at least.

If we look at Harta or any glove stock historical forward PE graph we find that the low PE happens in recent time. Consider the period of late 2020. The forecast EPS for next year then was sky high as analysts expected the sky high ASP to sustain. When the high stock price in late 2020 was divided by an even higher forecasted EPS, the resulting forward PE turned out to be lower than historical mean, and in fact near single digit. The lesson here is during the peak of share price the PE is low (in fact a common feature for cyclical stocks)

Today the analysts have turned pessimistic. They start to apply -1SD forward PE. But – 1SD is near late last year valuation level! In other words, to express a bearish TP the analysts have applied the valuation level during a bullish time!

It's really mind boggling to think about that!

@rl68,

I don’t know Intco nitrile production cost. I read some Intco investors quoting very low figure but I can’t verify.

A short cut is to compare the quarterly operating margin which will indicate relative competitiveness. You can find that from Yahoo Finance. However, take note that Intco has sizeable PVC glove business whereas Harta is almost pure nitrile.

@rl68,
Check out Note B3 (page 10) of the latest quarterly report ending 30 Jun (1QFY22). It provides more info. The four plants under NGC 1.5 will add 19b piece per annum capacity. When fully completed, total capacity will reach 63b per annum. Based on prior communication, NGC 1.5 is expected to be fully completed in 2 to 3 year time, meaning 63b is only reached in 2023 or 2024 assuming no change in plan.

As of 30 Jun 2021, the total capacity = 63b – 19b – (2.7b * 8/10) = about 42b. The last part represents the last 2 lines under installation at Plant 7 of NGC 1.0.

Based on 1QFY22 data, given the shipment data (some analysts provided the estimate) one may work out the ASP (= revenue divided by shipment) and unit cost (calculate from margin). My estimate of the unit cost then was about USD25 per 1,000.

Cost is declining now. Raw materials like Acrylonitrile and Butadiene make up about half of the product cost. Some reports say the prices are trending down.

As a minority shareholder of Daibochi, the only activism I care about is for fund managers like Claire to stop Scientex from buying up the company for a song at the moment when the economy is picking up and the RM100 million capex is about to bear fruit.

Over the last four weeks Scientex managed to acquire not more than 5% shares. At current rate it either has to pay up, or perhaps even better for long term shareholders, to abandon the privatization altogether so that minorities can share in Daibochi’s growth.

Intco Medical nitrile glove production capacity has reached 45 billion per annum, matching/ exceeding Harta's 43-44 billion per annum.

http://irm.cninfo.com.cn/ircs/question/questionDetail?questionId=1000185012022304768

While I believe Harta still leads in cost efficiency and quality, the continuous addition of capacity puts pressure on profit margin.

From yesterday Star

https://www.thestar.com.my/business/business-news/2021/10/09/petgas-to-gain-from-power-sector-transformation

Key takeaways:
1. Revenue and earnings are stable despite spike in global gas price. This is because gas tariffs are regulated and the long term gas processing agreement with Petronas.
2. Despite decarbonization and phasing out of coal, surge in gas demand is only likely after 2030
3. Limited growth as most gas processing and regassification facilities have already been taken up by Petronas.
4. While more demand may come from third-party access agreement as part of Malaysian gas market liberalization, the pace may be slowed down by hike in global spot price.
5. Annual CapEx of ~ RM1 billion in the next 3 years
6. Look into future opportunity like hydrogen and setting up CoGen power plants in industrial parks.

I track the daily changes on Daiboshi share and warrant ownership. The status as of 8-Oct:

Total shares: 327.372m
Scientex: 218.871m or 66.86% (before 61:88%)
Apollo: 32.233m or 9.54% (before 9.38%)
Samarang: 17.206m or 5.26% (before 5.06%)
Open market purchased by others since 14-Sep: 4.816m or 1.47%


Total warrant: 27.297m
Scientex: 3.163m or 11.59% (before 4.25%)
Apollo: 4.894m or 17.93% (before 9.37%)
Samarang: 1.608m or 5.89% (before 5.89%)
Open market purchased by others since 14-Sep: 15.643m or 4.78%


Total share + warrant: 354.669m
Scientex: 222.034m or 62.60% (before 57.45%)
Apollo: 36.127m or 10.19% (before 9.38%)
Samarang: 18.814m or 5.30% (before 5.12%)

Welcome to i3 @BeatySwalls.

I don’t know anything about the Apollo’s Claire Barnes beyond her blog so will refrain from making comment on her personality.

Unfortunately the manager at Samarang doesn't seem to blog as there is limited info on their website. Otherwise I'll share their view too.

I can imagine Claire's words could have irritated Scientex. I also wonder if Scientex is negotiating with those funds now. Perhaps not going well? As a small little minority shareholder of Daibochi, my interest is aligned with Apollo, Samarang and other funds. If they drive a good bargain, I can take a free ride on them. So have to pardon me for any perceived bias.

(P/S: Datuk David Goh is on the news again on last Sat)

@dragon328, I’ve read your comment history earlier. You pay good attention on cashflow analysis, which I should do more.

We share a few interests. Also briefly looked at DKSH and Samchem before but I missed out as I was deterred by the low margin of their distributorship business. Your point that DKSH crossing RM800m market cap is a good one as I’ve noticed in the past how funds start piling into previously illiquid stocks when their values are discovered and MC approaching RM1 billion mark. Latest example in SAM. May be more exchange with you on other stocks in their respective forums in the future.

Thank you for the explanation. It's a good education for me!

@dragon328, I forgot to congratulate you on your WB profit. You mentioned that you picked up a lot at 0.1X just a few months ago and now sold at 0.3X. That is huge in percentage term, and even larger if annualized. Your overall holding cost will be super low now!

@wsb_investor,
Thank you for the important info. Does this NB multiplier correlate mainly with NBV growth rate? If so, do Allianz Ayudhya and Allianz Malaysia have comparable growth rate so that the 10-12 times range is a reasonable choice?


May I ask another question on EV multiple. While 1X seems to make sense, under what circumstance could the EV estimation be grossly wrong?

I notice Chinese life insurers are sold grossly below their EV. Assuming market is rational what could it imply? Major asset write-off? Could such scenario happen here?

I stay away from warrants.

However, just for the sake of discussion, we can try to understand the rationale or motives behind investors/ speculators who chase after them.

The main objective is to bet that Scientex will revise its offer price sufficiently so that the gamble pays off. That means mother share offer price has to be revised to above RM2.82 for the warrant bet to work, such that the “see-though” price is greater than RM2.82 – RM2.50 = RM0.32.

However, a revised offer of RM2.82 (if happens) is only 4.4% above current offer at RM2.70. If Scientex couldn’t acquire sufficient shares at RM2.70, it’s quite unlikely that an increment by less than 5% could entice enough holdouts to push acceptance above needed threshold.

Therefore, it’s more likely to be a binary outcome. Either revised offer > RM2.82, or no revised offer at all. If we focus on the revised offer scenario, excluding transaction and interest cost, the return for a warrant bought at RM0.32 will start to outperform a mother share bought at RM2.70 when the mother offer price is revised to RM2.84 or above.

At an assumed revised mother share offer of RM2.84, new offer price for warrant = RM2.84 – RM2.50 = RM0.34.
Mother share return = 2.84/2.70 -1 = 5.19%
Warrant return = 0.34/0.32 – 1 = 6.25%

In the scenario (not saying it will happen) the revised share offer price is RM3.00, revised warrant offer price will be RM3.00 – RM2.50 = RM0.50
Mother share return = 3.00/2.70 -1 = 11.11%
Warrant return = 0.50/0.32 – 1 = 56.25%

I believe this is motive behind warrant price being bid up much higher than the mother share price.

Of course there is no free lunch. The downside is capital loss when nothing happens and warrant approaches expiry of Jun 2022 (of course one may still hope share price moving up during the interim period). May be a way to minimize the risk is to accept Scientex offer on the last day. However, warrant price is currently trading above offer price. Some capital loss seems to be unavoidable. Besides, I wouldn’t want to buy high in the market and sell lower back to Scientex in the hope of a revised offer, purely on the reason of principle.

There could be a different objective for Apollo when it accumulated warrants. As mentioned before Apollo’s current shareholding is already close to 10%. Perhaps they are constrained by internal guideline not to hold a position beyond 10%. Buying warrants may help them to get around it (just my guess).

The warrants strengthen their bargaining power as they now have the veto over compulsory acquisition by having the 10% blocking shares (if they convert). It serves like an insurance policy, At the same time they can still participate in any upside should there be a mutually agreed new offer.

Anyway, this is just pure deduction. Feel free to point out if there is any mistake in my reasoning.

Note I’m not here to promote buying or even holding on to warrants. As said before, while I hold tight to my shares, I stay clear from warrants as I am a risk adverse person. Any investor/ speculator should be responsible for own decision.

@iknownuts’s is right to say that "If you accept the offer from scientex via this method, if there are any subsequent increased scientex offer, you will also get the increased price"

However, I want to highlight another point not mentioned.

For shareholders who choose not to sell at RM2.70/RM0.32, but are willing to sell at a higher price if Scientex revises the offer, they have the OPTION TO WAIT.

Refer to Appendix 1 (Terms and Condition of the Offer). Clause 4b (iii) reads

“If the Offer is revised after the Posting Date, the Offeror will …. keep the Offer open for acceptance for a period of at least 14 days from the date of posting …”

So, if price is revised, shareholders will have at least 14 more days to decide.

Shareholders who want flexibility can just wait and see how events develop in the coming weeks.

Yes. Posting Date is considered today. The First Closing Date is 5pm Oct 25, 2021. The formal the three-week offer period has just started.

This info has just been posted on the Bursa Company Announcement.

@iknownuts, salute you for reading faster than I do!

We’re coming to the end of the three week offer period now (if not extended).

The latest status with Daibochi mother share:

Total shares: 327.372m
Scientex: 217.546m or 66.45% (before 61:88%)
Apollo: 32.233m or 9.54% (before 9.38%)
Samarang: 17.040m or 5.20% (before 5.06%)

The latest status with WB:

Total warrant: 27.297m
Scientex: 3.163m or 11.59% (before 4.25%)
Apollo: 4.894m or 17.93% (before 9.37%)
Samarang: 1.608m or 5.89% (before 5.89%)

As defense against Scientex’s privatization, the warrants can be converted. Assume all warrants are converted to mother shares, the latest status is:

Total share + warrant: 354.669m
Scientex: 220.709m or 62.23% (before 57.45%)
Apollo: 36.127m or 10.19% (before 9.38%)
Samarang: 18.648m or 5.26% (before 5.12%)

Scientex is far from reaching 75%, let alone the 90% necessary to secure its privatization.


If Scientex is unwilling or unable to come up with a fair offer, and let the offer lapses, share price is likely to go under RM2.70. A small risk where short term investors need to consider.

The price is likely to settle higher than the RM2.3-RM2.4 pre-announcement level given Daibochi’s hidden value gets wider recognition now.

However, any attempt by Scientex and/or other players to buy on bargain, even for a small quantity, will lift the share price again.

As a long term investor, this is actually my preferred scenario rather than cashing out even at a revised but still inadequate offer.

@dragon328,
Thanks for your response on the forward PE.

<Let me share below early message in response to some unnecessary comments which were retracted but reappeared now after edit. >

A few words on the ongoing distractions.

Even though @anti_colonialists doesn’t confirm any strong tie to Scientex, IMO by calling other evil and liar is actually doing a disservice to Scientex which he seems to defend passionately.

Earlier he complained he was censored, presumably by the i3 Forum people, and claimed there was a collusion. But his posts are flowing in now without problem. His earlier problems could well be due to i3 system auto function imposed on newly created user accounts. Jumping to conclusion doesn’t serve his cause, whatever it might be.

I’m also intrigued by his remarks that “I agree more with @iknownuts, it considers risk management, instead of your posts that feel more bias to best scenario projection and application of fairness which is flimsy and subjective. Discuss our reasoning in next posts? Much later.”

Note that “our” is a peculiar choice of word.

I actually feel sorry for Scientex. Even though he may just be a passionate volunteer “observer”, the method used is clearly counterproductive.

Those remarks are mere distractions from the main topic here, which is to analyze the Scientex offer and how minority investors could respond. As I said many times, the best defense for Scientex is to present an alternative valuation case to justify the RM2.70 offer.

A more persuasive argument should start from the viewpoint of Daibochi minority shareholders’ interest, not Scientex!

@auditorandconsultant
Can you share your source of intrinsic value calculation?

I looked up a few broker reports. They value the GI business based on book value. The multiple ranges from 1.2X to 1.6X. The book value estimate varies greatly from FY19A RM2.1b to FY22F RM3b. However I’m skeptical that book value can grow >40% in 3 years. At least one of them must be very wrong.

For the life business, the embedded value (EV) is estimated to be RM2.6b (as of Jun20) to RM3.3b (as of Jun21). Again the difference is rather big. Most apply a multiplier of 1.0X which makes sense. But not sure how they get the actuarial estimation. But none assign any value to the NBV growth which should bring in value too.

Allianz doesn’t disclose its own EV estimation. I also don’t know how to work out its GI book value based on its quarterly or annual report info. Appreciate if anyone can share their estimation approach.

The said BNM report
https://www.bnm.gov.my/documents/20124/4782528/fsr2021h1_en_wb4_medical.pdf

BNM publishes a report on Impact of Medical Re-pricing Deferrals on Life Insurers and Family Takaful Operators.

My takeaways after reading:

• Between 2015-19, the combined ratios of Life and Takaful Operators (ITOs) is broadly within 90%-100%.
• The combined ratio declined in 2020 as policyholders delay non-critical medical treatment. But the average cost per treatment was up 14%-15%, higher than long term trend of 8%-9%. The higher cost mainly due to pandemic-related protocols may persist in the future.
• However, as movement control is lifted, the number of claims is expected to normalize, or may temporarily exceed past level.
• Most ITOs agreed to defer re-pricing to preserve affordability. Their margin could be squeezed.

Insurers are under pressure not to reprice given policyholders are still suffering from the economic fallouts. It may impact different ITOs differently. For example, ITOs that rely more on credit products like STMB face a lesser impact than Allianz, who in turn fare better than pure life insurers?

I don’t have the details and am not capable to judge the magnitude. Just throw up a thought for others to comment.