Hwang Capital: Potential bumper dividend round 2?

Since the sale of its investment banking and brokerage arm to Affin, Hwang Capital (Stock Code 6688) quoted on the Bursa Malaysia stock exchange has been a cash rich company since. From the latest quarterly financials announcement for quarter ended 31 October 2015, Hwang held liquid readily convertible into cash available for sale securities amounting to RM436million (~RM1.7 per share) Note that RM250million (approximately RM0.98 per share) has been earmarked for potential acquisition of new business and Hwang has up to 7 April 2016 to announce on its proposed new acquisition should it had identified (if any).

Shareholders may be in for a surprise bumper dividend of at least RM0.98 per share should management decide to return the excess cash for failing to identify any target acquisition.

Based on the current market value of its share price of RM2.38 (last closing as at 18 February 2016), market is implying a valuation of 0.5 based on the P/B (Price to book) ratio of its moneylending consumer financing business and P/E (Price to earnings ratio assuming annualized EPS of RM0.14) ratio of 4.7 which may seem fair for a small scale money lending business with total loan book of RM369million.

The latest gross interest margin on its loan book is approximately 10%. Assuming a 50% impairment to its loan book (which is a pretty bad case but not entirely impossible for the unsecured consumer financing business space), the liquidation value of Hwang Capital still stands at around RM2.40 per share, which is around its current share price. This may indicate a fair margin of safety. Note that Hwang does not have any significant financial liabilities. It had also recently declared a decent dividend amounting to RM0.10 per share which translates into a 4% dividend yield.

Share price has been on an uptrend since mid-2014, gradually increasing in price since. Could the price increase be in anticipation of a pending corporate action involving another round of bumper dividends from its reserves?

Final thoughts:

Pros: Potential unlocking of share value via dividend distribution catalyst, acquisition of earning accretive business, decent margin of safety via annual dividend distribution and liquid asset backing

Cons: Extension of timeline for new acquisition of business thus delay in full realization of share value/narrowing of discount to NTA, Management hoarding cash (low probability), acquisition of value destroying business.

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

Disclosure: None.

MAA: Something brewing?

On 16 June 2015, MAA Group Bhd (Stock Code 1198) announced on Bursa Malaysia that Bank Negara had given the green light for MAA to commence negotiations with Zurich Insurance Company Ltd for the disposal of 75% stake held in MAA Takaful Bhd.

MAA has been classified as a PN17 company since the sale of its insurance arm to Zurich. On its monthly announcement regarding its status as a PN17 company, MAA has sought extension from Bursa Malaysia to draft out a regularisation plan in order to remove itself from the PN17 classification. Since disposing its core conventional insurance arm, there has been some corporate action namely MAA Group disposing its non core subsidiaries which were not financially significant to the Group. MAA Takaful has not been a consistent profit generator for the MAA Group and it could be management's plans to rid itself from the PN17 classification at the same time free itself from the massive capital required to sustain a Takaful operations by putting up the Takaful arm for sale. It has been commented by the Chairman himself of the huge capital base and resources required to compete in the Takaful sector. (http://www.thesundaily.my/news/857707).

On its latest announcement dated 30 November 2015 regarding the sale, an application was submitted to Bank Negara to enter into an agreement by MAA Group and Solidarity (holder of 25% stake in MAA Takaful Bhd) with Zurich. It could be that pricing negotiations has been done or semi completed and an agreement could be announced soon once BNM has given the 2nd green light.

Could there be potential of a risk arbitrage situation where post disposal of the stake in MAA Takaful, MAA Group may be a cash rich company with cash levels above its current market capitalisation?

Note that MAA has been actively buying back its shares in the open market. Based on the company announcement dated 1 December 2015, it has cancelled all its treasury shares previously accumulated (11.6 million shares in total) via share buybacks from the open market. Could this be a sign of full liquidation of and delisting via a payout to shareholders of MAA Group? Nevertheless, share price of MAA has experienced a surge since December 2015 with a current closing of RM0.945.

A sign of undervaluation could be inferred from the continuation of the Company's last 3 buybacks (dated 16, 17 and 18 Feb respectively) of approximately 1 million shares at a price range of RM0.94. Currenct market price as at 18 February 2016 stood at RM0.945.

Final thoughts:

Pros: Management aggressive buybacks. Favourable valuation obtained for sale of MAA Takaful and management unlocking share value via distributions.

Cons. Unfavourable valuation obtained for sale of MAA Takaful, management hoarding cash or deploy in value destroying new core business.

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

Disclosure: Long MAA Group Bhd.