Wednesday, September 5, 2012

ECM: Something interesting for traders?

For many many years, I have not looked at any stand-alone investment banking (or stockbroking houses) stocks. It is because the performances of these companies are almost like "short term speculation" in the market itself. I have no ability to foresee what is beyond the subsequent week in terms of how it will perform. You will have noticed that most of these stocks are trading below the book value which spells the sentiment over these companies for many years now.

Now, the merger between Kenanga and ECM Libra ("ECM") has changed my sentiment a little bit, not for the fundamentals but for the short to medium term trade opportunity. One of the directors of ECM has been snapping up the stocks of ECM over the last few weeks. Of course, he is the Managing Director and yes, he has control over the company himself but that also calls for the "siren" for me to do a checkup on the deal.

Funnily, if you search around, I could not find much analysis about this deal. However, let me provide my version. Basically, ECM is getting out of the investment banking business by selling to Kenanga for an amount said to be RM875 million. ECM's directors have the same sentiment as mine i.e. stockbroking (or IB) is a tough business. Remember the franchise thing I was talking about in an earlier article. When comes to this area of business, the dominant franchise is CIMB (of course). If you study properly, it most probably dictates the deals surrounding the government controlled companies - be it already owned or not. IHH is one company created out of nowhere - remember? What other deals are left beyond government nowadays?

How is the deal from Kenanga to ECM? Kenanga is paying ECM 1.27x book value. There are better deals (example OSK-RHB) around but most probably ECM's majority shareholders are trying to get rid of the business as fast as possible, anything premium to book value is a premium!

Kenanga is offering 3 things (to ECM) for the deal:
  1. cash of RM660 million;
  2. Shares of Kenanga at RM120 million par value. It is actually worth RM79.2 million as Kenanga's shares are traded at discount to par value;
  3. RCULS of two tranches at around RM95.5 million in value. The RCULS is tagged with a 5% coupon to it.

Offer from Kenanga and what ECM gives back to its shareholders. See some of the calculation.
From the sale, ECM will be entirely out of the banking business. Unlike the OSK-RHB deal, ECM did not even bother to keep the shares of Kenanga, which it in fact offered (all) to the shareholders. Now what keeps me excited from the deal?

ECM is proposing to distribute the following to its shareholders:
  1. cash of RM442.6 million;
  2. all shares of Kenanga worth RM79.2 million at the moment;
  3. Series A of the RCULS assuming certain condition is met - it needs some approval from the SC on taxation matters apparently.
After the distributions, ECM will be keeping around RM300 million in cash as well as a small asset management company which contributes around RM2 - 3 million in profit. It intends to keep the listing status with a view of using the cash for investments. (I hope that it does what it says.)

I have done my calculation (as above). It seems that shareholders will be getting about RM0.69 return per share assuming the Series A is given up as well as Kenanga's shares stays traded at RM0.665. The cash that ECM is holding after the distribution, is worth around RM0.36 per share. Would ECM's shares be traded at a huge discount to its cash holdings? I do not think so. It perhaps would be trading at 70% to 80% discount. Anything more would deem the company as being way undervalued.

Now, assuming it will be trading at 75% of its net asset value after the exercise. That comes to total value of RM0.96 for ECM's shares currently, whereas ECM is now trading at RM0.86. That's easily a RM0.10 discount and with RM0.53 to be distributed in cash, it's attractive for any short term traders. Another RM0.06 i.e. RCULS is to be given a year later, assuming the Series A are distributed to shareholders as approved.

What about Kenanga's shares? It is worth another RM0.10 (to shareholders of ECM) from its trading price of RM0.67. I do not think Kenanga will drop too much as it is already trading at much discount from its Net Asset Value.

Do you think that ECM is worth it rather than keeping your money in the bank for the next 6 months? For me, it is worth a try as probably the reward far outstrip the risk - and we are supposed to learn how to manage risk here, not avoiding them!

Note: If you read the announcement, do not be bothered about the new issuance from the ESOS as ECM's shares are now traded at below par value, hence nobody will exercise their rights.

And of course there are political twists to this stock which makes ECM sells the banking unit. ECM is not a simple stock (politically - look at some of the director's name), but the cash and other liquid assets distribution may be worth it as its cash holdings (post distribution) to possible trading value may make the stock worth it for half year to a year trade.


yatteng said...

Btw, there is still E&O and Uemland shares worth RM140m in ECM's investment portfolio.

felicity said...

Thanks, something which I am not able to detect -:)

cykoay said...

Not quite understand over the calculation, even u buy now at 0.86, it distribute back to you 0.69 ,isn't it also part of your investment money? Unless it also traded at 0.86 sen after distribute u 0.69 sen, please rectify.

felicity said...

Hi cykoay

it will not trade at RM0.86 as it will distribute some of its assets to shareholders. And the assets happens to be mostly cash.

Post distribution, the share will trade minus the amount distributed. The seemingly attractive part is a substantial will be distributed back to shareholders.

Although the stock is a political stock (most probably a KJ and Badawi stock), Azman Hashim (I hope) would be trustworthy and he is the largest shareholder although he is not in the management.

cykoay said...

Hi felicity, I understand post distribution, the share will trade minus amount distributed but as it distribute substantially, the distribution also just part of your money

felicity said...

HI cykoay

Basically, if you pay RM0.86 today, hopefully after the distribution of RM0.69 per share, you hope that ECM's shares will trade above RM0.17. From there, there is no loss. If the share trade at RM0.27 for example (because the company holds about RM0.36 in cash), then the gain is about RM0.10 (before trading costs of about 1%).

cykoay said...

Hi Felicity,
May I know is it still ok to buy now to be entitled for capital repayment?

felicity said...

I think so, but fundamentally I am not yet sure on where they are heading as a company, but based purely on the asset value and offer from Kenanga, it is undervalued.

FreeMan_自由人 said...
This comment has been removed by a blog administrator.
FreeMan_自由人 said...

Bro Felicity,
I've used pasted your post onto a forum,

I hope you don't mind.

Thks & rgds

felicity said...

no prob

FreeMan_自由人 said...

something promising on the ECM & K&K price+volume surged recently.

Good news is near?

felicity said...

Hi WHo we are

There is no additional good news. Maybe this is due to each party trying to accumulate. The Sarawak party has always wanted to have a larger banking or financial unit. This is the chance. I think as the completion of the deal draws nearer, the pricing gap will be reduced.

Unknown said...

hello, felicity... i can feel that ECM will entitle capital repayment within this few days... however Kenanga only trade at RM0.57, so still merit to go for it??

felicity said...

HI Chin

May not be that worth it anymore as the amount of cash and ICULs it holds from Kenanga would cause ECM to have around RM0.32 cash per share.

Shareholders will be getting around RM0.675 per share of value from the disposal. Hence, the premium is just around 10%.

Unknown said...

Thanks felicity
but i dont understand why it involved ICULs? anyway, i still waiting for the long waiting entitlement date of capital repayment... hopefully PN17 status will not causes panic selling again and someone will speculate it when they announced the entitlement date of capital repayment... haha...

felicity said...

No, this PN17 is not a cause for concern. It just tells that it no longer has significant business.

Unknown said...

yup,i know that. but i think someone with will shock when see 'red color'

felicity said...

Then time to buy, the lower the better

felicity said...

Hi Chin

This is pure value investing, not exactly fundamental investing. Want a one time gain (not much) but more than your FD, this should be good enough.

Unknown said...

yup, agreed. but may not hold it until payment. just waiting the speculation like Pacmas... haha