Friday, December 26, 2014

Food for thought: A look at MWE

I know this is a hugely uninteresting stock, but there is a reason for me to look at it. It owns about 25% of Keuro where I already have a decent exposure. I would also like to know why it has sold a business where it has been earning between RM20-25 million a year and part of that proceeds have been used to buy Keuro. MWE spent around RM280-RM290 million to have a hold of 25% of Keuro. They purchased the substantial stake from Chan Ah Chye at RM1.34 per share and later picked up the rights at RM1.08 per share. There could be a reason it sold controlling stake of a business to own an associate stake of another business. Usually business people do not do that. And I am very sure they are many times smarter than me.

Accounting Treatment

The company has taken equity accounting method for its investment in Keuro. Basically MWE has taken the following treatment for its investments.

Latest financial report

Now we know that it has borrowed some money to buy the 25% stake including the rights. What does that mean? Its borrowings is in the form of revolving credit and the borrowing costs seems low - around 5%. The dividend income from Magnum alone (see below) can cover for the interest to be paid from the borrowings.

From MWE's 3Q14 financial report. The added on loans is after Keuro's rights

Balance sheet wise it is definitely sound. It has a Net Asset Value of around RM2.88 per share against its share price today of RM1.47. Generally, I do not think that its business is much of a significant although if one is to read its annual report, nothing tells that. (This is the reason why reading Chairman's statement is NOT telling much). The value of the company is in the investments, not subsidiaries. However, in the Annual Report's statement by the chairman, he was dwelling on subsidiaries business which I do not get excited from. Nothing much is mentioned on the investments.

The three largest shareholdings are investments (investments in associates and Other Investments - largely Keuro (around RM270 million in value including Keuro-WE), Magnum and MPHB Capital which can be read through below.

Magnum's substantial shareholding with MWE ownerships worth around RM181.5 million

MPHB Capital's substantial shareholding. MWE's shareholding value is around RM61.5 million
Other than that, it owns textiles business, the remains of the electronics business after selling to General Lighting Co. (Note that Carlyle has sold the business after 2 years holding it to Philips at a profit of course), some properties and a plantation in Kelantan (MWE tried to sell it but was rejected by the state government).

Anyhow, I can see it interesting from this is trading at 50% of its NAV. Would you buy it? There are many things to think through though like dividends, share buyback etc.

Happy holidays to all the fellow bloggers and readers.

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