Sapura Resources Bhd: Unlocking of shareholder value or value trap?

On 16 March 2016, Sapura Resources Bhd (Stock Code: 4596) listed on Bursa Malaysia had announced the signing of conditional share sale agreement to dispose several of its associate companies namely APIIT, APU, APIIT Lanka and APS to ILMU Education Group (linked to Malaysian Government private equity arm Ekuinas) for a total combined cash consideration of RM315million.

Post disposal of the above associate companies, Sapura Resources will be left with huge cash pile to focus on its remaining business segment ie property development and aviation services (charter of jets for air travel).

A simple computation as below would have shown a discount of share price to its net cash per share value as of writing (15 April 2016) upon completion of the share sale agreement and receipt of full cash balance:

Before any investor start drooling over the potential 28% discount to cash per share, as at to-date, management has not present any indication of a large one off distribution as the only distribution would be a one off special dividend amounting to RM0.05 per share.

The cash buffer may serve as a margin of safety for those who are interested in riding along the expansion of its property development business and aviation business.

Based on the estimation from its quarterly results, the property segment would make up the bulk of its income going forward as it is currently enjoying a healthy rental income from its stable of 3 properties as per disclosed in its annual report with >90% occupancy. Latest quarterly results had also showed a contribution of PBT amounting to RM10million. Future development may eat into its cash pile going forward as well.

The dark horse would be its aviation sector as it is currently showing a loss of RM3.5million per latest FY ended 31 Jan 2016.

Assuming an estimated cash burn rate of RM6million per annum (as implied by its latest operating loss), discount of cash balance would be completely narrowed to nil within 5 short (or long?) years.

Since the announcement of the deal, prices have started to drift lower from an intraday high of RM1.60 (one day after the announcement on the 17^th March 2016) to a current low of RM1.16.

Investor may use the current discount opportunity for entry should it be confident of its top management linked to Tan Sri Shahril bin Shamsuddin of SapuraKencana Petroleum fame.

Pros: Margin of safety for discount to net cash per share, healthy net rental income as cash flow buffer for future expansion

Cons: Adverse downturn affecting its current aviation business segment, unforeseen large losses on its aviation business segment.

Note: This is not an investment advice. Buy and sell any securities at your own risk.

Disclosure as at time of publication: None.

Golden Land Bhd: Special dividend and capital repayment as catalyst for share price uptrend movement?

Golden Land Bhd (Stock Code:7382) listed on Bursa Malaysia announced on 8 June 2015 that it has signed a conditional sale and purchase agreement to sell 4 of its subsidiaries and a piece of plantation land to a ubsidiary of Felda Global Ventures (Stock Code:5222). Fast forward to March 2016, the sale and purchase is almost nearing its completion stage with the latest announcement in its quarterly report ending 31 Dec 2015 indicating completion of disposal in early March 2016 and receipt of the balance of cash receipt amounting to a total of RM655million.

Yours truly had been collecting Golden Land shares in several trades after the announcement of the deal, with the view that the announcement of the cash distribution will provide a short term catalyst for narrowing of discount of its share price to its intrinsic pure cash value, hence providing a short term risk arbitrage gains.

Based on the latest quarterly financials as at 31 December 2015, intrinsic cash value (A) is determined to be as follows (RM1.87 per share):

 

Note: (B) represents expected cash outlay for purchase of palm oil plantation in Indonesia as announced in its quarterly report.

Based on the current share price of RM1.61 as at 4 March 2016, there is still a 15% discount to its intrinsic cash value, excluding all other fixed assets. The actual NTA is deemed to be higher but had been excluded in the computation.

For those holding on to the Golden Land shares, it may be ripe for harvesting and to take the opportunity to dispose your shares for any gains obtained, since bulk of its income generating palm oil assets will have been fully disposed.

For those that are willing to ride on Golden Land’s shift of focus into growing its Indonesian palm oil plantation operations and smallish property development ventures, the net cash value post distribution may serve as a cash buffer for future operations and should you choose to hold on to the shares.

Note: This is not an investment advice. Buy and sell any securities at your own risk.

 
Disclosure as at time of publication: Long Golden Land Berhad.

KAF Seagroatt-Campbell: Risk Arbitrage or Reverse Risk Arbitrage?

KAF Seagroatt & Campbell Bhd (KAF) (Stock Code 5096) listed on Bursa Malaysia has an impending corporate action where 76.74% of the listed entity shares will be acquired by KAF Investment Bank Berhad (KAF IB). Upon completion of the share sale agreement with KAF IB fully owning 76.74% of KAF shares, a mandatory general offer (MGO) will be triggered which gives other KAF shareholders an option to sell back your shares to KAF IB at a price of RM2.70 per share.

Based on the current ask price of RM2.51 per share (where shares can be bought immediately from a willing seller/sellers), there is a potential risk arbitrage gains of 7.5% in less than a year. However, this is subject to share sale conditions being fulfilled which will result in KAF IB gaining ownership of 76.74% equity interest in KAF.

As at 22 February 2016, the share sale conditions have not been fulfilled, after several announcement to extend the period of fulfillment of the conditions, hence delaying the trigger of MGO. On 22 Feb 2016 itself, a 3^rd announcement was made to Bursa that the period for fulfillment will be extended for another 3 months (90 days). The discount between the share price and MGO offer price has also widened since the announcement of the offer, hence giving market onlookers looking for risk arbitrage a chance of profit should they be confident in their assessment of the conditions successfully fulfilled and paving way for an MGO.

The final hurdles (share sale conditions) going against the deal may be the regulator’s stamp of approval, namely Bank Negara approval for KAFIB to purchase a securities broker KAF and Securities Commission approval on any change in shareholdings in the listed entity KAF. Should these 2 conditions fail to pass, there may be temporary roadblock to the MGO.

Final thoughts:

Pros: Potential attractive risk arbitrage returns of 7.5% in less than a year.

Cons: Continued delay in fulfillment of share sale conditions, lockup of excess cash in this risk arbitrage deal, total cancellation of share sale agreement and MGO, resulting in share price plunge below current levels.

Note: This is not an investment advice. Buy and sell any securities at your own risk.

Disclosure: None.

Side note: The continued delay highlights one of the key risks for those looking to profit through risk arbitrages deals involving listed securities. Excess cash may be lock up for longer than expected periods, or you may be forced to cut loss for a better investment opportunity. For those looking to spice up their returns using share margin financing, your interest cost on borrowed funds will be ticking up as the days and months goes by, hence reducing the profit margins.

Reach Energy: Potential Risk Arbitrage?

Reach Energy (Stock Code 5256) listed on Bursa Malaysia is a Special Purpose Acquisition Company (SPAC). In short, SPAC is a shell company, where funds are being raised from public shareholders via IPO and they are required to identify eligible companies (oil and gas sector companies for the case of Reach) for acquisition within 3 years from date of listing. The funds raised are placed in an interest bearing Trust account.

Reach Energy was listed on 15 August 2014, and it has about 1 year and 6 months left for identifying a target for acquisition. Should it fail to acquire any business as defined in the Prospectus, the funds raised will be returned to shareholders. In the event cash is to be returned in full to shareholders at the end of the 3 year timeframe, shareholders stand to receive a minimum amount of RM0.71 cash per share or up to a maximum (more or less depending on the interest rate and related expenses) of RM0.775 cash per share, assuming cash placed in the Trust account deposit has a interest of 3% p.a. Moreover, shareholders can choose to vote against any acquisition and full cash will be refunded to the shareholder, irregardless of the acquisition deal going through if the majority supports the acquisition.

There are 2 scenarios as explained below in which Reach could be a potential risk arbitrage play with decent annualised return (after brokerage expenses):

Scenario 1: Reach fails to acquire any qualified business. Cash is duly returned at the end of the 3 year timeframe (expected to be August 2017). Should you enter Reach now (19 Feb 2016) at RM0.655 per share, you stand to receive RM0.71 to RM0.775 per share, which gives you an effective return of 8.4% to 18.4% in 1.5 years.

Scenario 2: Reach tables a qualifying acquisition and you vote against the Resolution. Assuming EGM is called at exactly the end of the 3 year timeframe, should you enter Reach now (19 Feb 2016) at RM0.655 per share, you stand to receive RM0.71 to RM0.775 per share, which gives you an effective return of 8.4% to 18.4% in 1.5 years. The returns would vary depending on the final cash balance in the Trust Account. A minimum return of 8.4%is conservatively estimated.

Should you choose to vote in favour for the acquisition, Reach Energy shares in your hands will no longer be a valid risk arbitrage play.

Final thoughts:

Pros: Decent minimum high single digit annual returns on excess cash in hand.

Cons: Lockup of excess cash, delay of qualifying acquisition to beyond the 3 year timeframe, Lower than expected returns of 8.4% in 1.5 years.

Further information regarding Reach and SPAC in general could be found at: http://reachenergy.listedcompany.com/spac.html

Note: This is not an investment advice. Buy and sell any securities at your own risk.

Disclosure: None.