Sunday, January 13, 2013

MKH: How can this happen?

There is no doubt that MKH is a company in a hurry. It has diversified into plantation at a time when it sees many are getting much stable income from the sector. Although the oil palm project in Kalimantan is just 39,000 acres, it is a start which we are seeing another property company diversifying. As I read further, many analysis says that MKH will benefit from the current MRT project as the rail runs through Kajang where the company has the bulk of its developmental land - no doubt about it.

A simple calculation (I know it can't be used all the time but neither can many other analysts' projections), assuming it achieves net profit of RM1 million per acre from its developmental land, it would have achieved future profits of RM600 million alone from those projects in Kajang. Then there are the plantation and other projects elsewhere.

Along with that, I see that it has been buying land and increasing its inventory of land for future projects in a hurry. At that rate, its debt ballooned to more than RM500 million (although the debt / equity ratio is still below 1x) from about less than RM150 million in 2007. Hence, reducing the debt it still must.

In doing that, it has proposed an exercise which was just completed. The exercise would have raised around RM51 million with RM45 million immediately towards repayment of loan which exceeded RM500 million.

How MKH uses its proceeds from rights

In calling for shareholders to chip in for expansion is acceptable, however the way it was done is to me not acceptable. As I have mentioned, usually a rights issue is tagged together with a warrant to sweeten the rights issuance. In those exercise, shareholders who do not take up the rights would get the value of their shares diluted as rights are usually lower than the mother share while warrants upon trading, it would have additional tradeable value tagged to it. True enough the warrants for MKH-WB is now trading at RM0.435 per share.

However, as much as I have been looking at exercises, this one has bonus share tagged to it with the condition that the rights must be picked up. As per below, see the sentences,

The Bonus Shares shall ONLY be issued to the Entitled Shareholders and / or their renouncee(s) who subscribe to the Rights Shares pursuant.... 
Accordingly, the shareholders of MKH who renounce their entitlements to the Rights Shares provisionally alloted to them under the Proposed Rights Issue with Warrants will simultaneously relinquish their entitlements to the Bonus Shares.

I am actually thinking WHAT THE HACK!!! This means that the shareholders who opted not to or are not aware or are illiterate about this will really get THE VALUE OF ITS HOLDING REALLY DILUTED...Already they have lost the opportunity of the lower share price from rights, it lost warrant as well as 1 full bonus share (for every 10 held) too. This is as if I am not going to take up the rights, the management is putting a gun onto me forcing to take up the rights...otherwise I would have much to lose - 1 lower right, 1 warrant and 1 bonus share for every 10. Seriously, how many minority shareholders really understand these things???

I have seen bonus issued in the exercise together with the rights, but I have not seen the bonus provided is SUBJECT to the rights.

I am actually surprise the authorities who oversee this let this pass. Just to show that who actually did not take up...About 1.84% did not take up ONLY.


But the 1.84% are usually who? The ones who normally hold less than 10,000 shares - the bulk of the no of shareholders...The ones who hold 1-99. 100-1000 and 1,001 to 10,000. A classic scenario of the rich, get richer, if you are poor, you'll get poorer.


Really exercises like this will need much scrutiny and I am not surprise at all few more companies are doing this...I am actually thinking is bonus tagged to rights the correct way of doing exercises?

Sorry for the one reader who has been asking my opinion on this company few weeks ago as I do not really have the time to look through in detail before.

6 comments:

M.A. Wind said...

Agree, I can not recall I have seen anything like this before, rather weired. Authorities should look into this.

CrabGrill said...

Long before I have seen very high gearing in this company. I wondered how she is going to pay her debts. Now I know. When debts are so high, you're better off to be careful of the "assets".

Steve Wong said...

Hi,

My first post since came across this great blog last week. Well, it is kinda weird, but doesn't necessarily trigger the alarm. As the MKH-OR listed on the first day, it was traded at around $2.10, so if you opted not to subscribe, you are diluted by getting the bonus shares as "dividen", and the warrants as well. As as now, the shares are trading at $1.89 and warrant at $0.46, so you are losing out about $0.25 by now. Well, this is the only opportunity u lose out if you choose for a quick profit. There is nothing wrong or against the rules.

In regards of the debt issues, from what im seeing in 2012 annual report is that the debt/equity is only 0.65, which is still manageable, their company policy is to keep below 70%. NAV is higher than the market price at $2.66. Land bank is not revalue to current fair value. Revenue is increasing.

I do foresee future earning to increase significantly, 15,000 acres of cultivable palm oil out of 39,000 acres in kalimantan will generates about 15mil net profit FYE2013, an increase of 20% from FYE2012. Forward P/E looks attractive.

In fact, if you look into the latest financial reports, palm oil division starting to contribute profit into the group, the company has been expanded for the past few years into kalimantan, and for the first time, the fruit started to yield.

Conclusion, hold for at least 2 earning quarters and you will see a surprise 30% gain in price.

felicity said...

Ya, I do think there are some good assets there...

shrobin said...

Hi Feli, is it possible for you to review MKH again? It has gone up by 17% since the beginning of 2013.

shrobin said...
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