Friday, December 21, 2012

ECM: Efficiently Constructed Market?

Today's trading in ECM can actually tell that market is ignorant. I believe the market should read more and trade less which to me is not happening now. Lots of information are readily available. A reader highlighted to me that ECM's stock symbol is to be traded in "red" from today onwards as it is now a PN17 company and he is worried. I never suspected a company that is to be admitted into the PN17 category will immediately trigger selling no matter what reason as it's symbol will be highlighted with red color font. Its the fundamental, not the color that determines the stock.

PN17 triggering the stock marked red
In fact, I mentioned that its buying opportunity if the share price drops as the fundamental remains the same while the stock now becomes cheaper. One should already know this as ECM has already pre-empted shareholders way before during the announcement on the merger.

What is the PN17 for? Note: Not all PN17s are all that bad

From the exercise, as below, shareholders will be getting a total RM0.676 worth of cash, ICULs of Kenanga and some small shares of Kenanga. The main attraction is the cash of RM0.534 per share. ECM is traded at RM0.85 now. The distribution of RM0.676 will be completed by next month - 31 Jan 2013, which is what is mentioned by ECM, and I trust that it will happen as the Kenanga deal is already completed.

Upon the distribution, ECM will be having a RM0.38 of Net Tangible Asset (NTA) per share with RM0.32 in liquid assets (cash and ICULS).

Hence, if we are doing the math - with the RM0.676 distribution, at RM0.85, the stock will be quite in the money (RM0.85 - RM0.676 = RM0.174). Assuming it is trading at a discount of 30%, it is still in the money. I am not holding this stock for long though as I think the company is going the Private Equity route judging from the purchase of Pelikan's shares. Its directors were formerly investment bankers and PE people anyway - that's what they do best.

Hey, within a few months we should be getting back almost all our money with some small profits possibly. This is almost a "cigar butt theory" as what Graham says - the cigar butt that's thrown on the ground can still last few more good puffs - if only you are willing to pick it up.

What is left at ECM
It is easy to find out what's left of ECM as after the distribution of RM0.676 per share, the company will still keep RM265 million worth of cash and ICULs from Kenanga. From the below balance sheet, ECM has already highlighted what they are to dispose off from the sale. Just take out the one in red box and intangibles as well (not sure what it is). What's left in the cash and ICULs add back to the assets - liabilities, that's what you get from ECM. But beware, it is a company with no real business.


Unknown said...

thanks for sharing, felicity

LochNESS said...

what is your take on adventa? i reckon that the situation is almost similar and probbaly worth a buy call too, no?!

felicity said...

Originally I thought it was not a good deal, but after looking through again - sounds good. Thanks.

felicity said...

After looking through again, the NA left after dividend and capital distribution is RM0.40. Hence at RM1.93, the premium is only RM0.17 per share, May not be that attractive.

Can't really depend on online news. they say the NA post distribution is at RM0.82.

LochNESS said...

At the cost of RM0.23/share post distribution based on current price of RM1.93 (RM0.17/share for yours truly, having bought some at RM1.87), the novice share-trader-investor-wannabe in me would like to think that the potential upside still outweighs the down.

Appreciate very much your unbiased and insightful thoughts in your very many posts all these while.

Merry Christmas & Happy New Year to your good self :)

felicity said...

I would think so. But in this deal it feels weird that the largest shareholder sells to himself and he ends up owning almost the same amount of shares.

Having said that, I think the downside is limited.

reyes430 said...

Hence, if we are doing the math - with the RM0.676 distribution, at RM0.85, the stock will be quite in the money (RM0.85 - RM0.676 = RM0.174).

Hi, for the above calculation, could you please further explain? I understand that there is capital repayment of up to rm0.676. However, let's say you bought at rm0.85 now, but the price will adjust accordingly after the capital repayment isn't it?How to you justify that its in the money. Sorry i am newbie, please help on this. thanks =)

felicity said...

Hi Reyes, My term when I mentioned in the money as in comparison to the cash holding or NTA per share.

You are right that they will adjust themselves accordingly after the distribution. The adjustment will be at around RM0.676 to be deducted from the traded price the night before if I am not mistaken.