Let us quickly revisit the case analysis of the Sime Darby demerger. In our first posting

(link here: https://klse.i3investor.com/blogs/wiz_of_finance/140175.jsp), we mentioned that the plunge in share prices in the first day of trading was the result of:

1) The misallocation of value based on the reference price, especially given the dividend

2) Panic selling among shareholders of Sime Darby Property and Sime Darby Plantation

We maintained that the fundamentals of Sime Darby remained unchanged before the re-listings and hence the total share prices should not drop. After a period of irrationality, the price of all three Sime Darby related counters finally retraced to approximately the same price before the re-listings as below. This is as per what we expected.





So..what’s next?

Again, we stand by our opinion that SDPlant would be the counter with the most short term potential as per our posting here https://klse.i3investor.com/blogs/wiz_of_finance/140696.jsp.

With more visibility over the earnings of the individual companies, we opine that SIMEPLT is the most stable blue chip counter among the 3 counters and still have some upside to go when a relative valuation comparison is done among its peers. We also opine that SIMEPROP also has upside potential but given the weak property sentiment at this time, in the short term, there should be some volatility.

Disclaimer: This is not a buy call. Please do your own research before investing.

Cheers,

Wiz_of_Finance

SIMEPLT - What's next?

If you have followed our postings on the Sime Darby demerger, you would know that we are quite bullish about the prospects of Sime Darby Plantation. If u missed our postings please refer to the link below:

Part 1 - Sime Darby demerger - https://klse.i3investor.com/blogs/wiz_of_finance/140175.jsp

Part 2 - SIme Darby demerger - https://klse.i3investor.com/blogs/wiz_of_finance/140393.jsp



SDPLT shares finally rebounded today after a steep decline in the previous few trading days. It even started the day negative before rebounding strongly. We believe that there is still much upside to this. We premised this on our estimation of full year financial result, the estimated dividends for this counter and also the relative valuation to other big plantation players.

1) Estimated Dividends

In SDPLT's prior announcement, management has indicated that SDPLT will declare dividends of at least 50% of its earnings. Based on our estimation of the full year earnings, the dividends could potentially be RM0.16 per share which leads to a dividend yield of 3% at the current share price. This is a reasonable dividend yield for a blue chip counter.




2) Relative valuation

Based on our estimated full year earnings above and relative to the Trailing PE (Based on historical) and Forward PE (based on estimated earnings), we can see that SDPLT has some upside. Please note that even excluding the one-off in our estimation (which is a very prudent assumption seeing as this one-off has been realised and is already reflected in the books), the average relative valuation indicates that SDPLT is currently trailing its peers in its valuation. We have also received some comments about how high the PE ratio that we are using is. We understand the concerns but one has to compare the PE ratios based on specific industries. As evident below, blue chip plantation counters tend to be valued at a relatively high range of PE (i.e. above 20x). Tech companies would definitely be valued at even higher PE ratios.





Stay tuned to this page as we will be doing an in-depth analysis on SDPROP as well in our upcoming post. We shall dig deeper into the numbers and see if the price now is really undervaluing the company.



Disclaimer: This is not a buy call. Please do your own research before investing.

Cheers,

Wiz_of_Finance

If you are interested in contacting me for more analysis, please contact me at wiz.of.finance@gmail.com

Engtex – an overlooked gem?

We at Wizard of Finance believe more in fundamentally good counters over high risk high return counters that could make you a fortune or result in bankruptcy. We believe there are many good fundamental counters listed in Bursa Malaysia that are often overlooked.

Here is our analysis on one such counter, being Engtex.



A little background on Engtex

Engtex is best known as a pipe manufacturer. It is one of the largest pipe manufacturer in Malaysia and is the largest distributor of non-oil & gas pipes. Its four main business segments are manufacturing, wholesale & distribution, property development and hospitality. The biggest contributors to its bottom line are its manufacturing and wholesale & distribution segments



Why we think Engtex has good prospects

1)Good competitive positioning in two of its main bottom line contributors:

a. Manufacturing – only one of a handful of local manufacturers that can manufacture large diameter pipes (e.g. Mild Steel pipes up to 3-metre diameter). Also embarked on capacity expansion recently which will likely lead to better margins from economies of scale

b. Wholesale & distribution – has one of the largest distribution network in Malaysia

2)Improving Gross Margins

From 2014 to 2017 (we took the cumulative results for 3 quarters as the latest financial report is the 3rd quarter results ending September 2017), its gross margins have increased, owing to the economies of scale. This is despite the increase in steel prices, which mean that Engtex is able to pass on the additional costs to its customers.




We note the slight dip in margins from 2016 to 2017 as the margins from 2016 has been exceptionally good. We however believe the margins to maintain at the 17% to 18% level as we believe that Engtex will be able to benefit more cost wise when all of its newly expanded capacity starts contributing.



3)Promise to “reward shareholders”

After the exercise of the warrants upon its expiry, Engtex has a cash pile to reduce borrowings and reward its shareholders. Given that most of its capex has been completed, the management of Engtex has the ability to declare more dividends and buyback shares (both of which seem to be occurring). On 29 Nov 2017, it was the first time that Engtex has declated an Interim Dividend, as Engtex has habitually only declared dividends once a year. Engtex has also been regularly buying back its shares, evident of its commitment to reward its shareholders and its opinion of the undervaluation of the shares.



Quote management of Engtex below:

“We have been habitually paying dividends, but around one sen per share. While we will always invest in our business to remain competitive, we are looking to reward loyal shareholders,” says its founder and managing director Datuk Ng Hook
(Read more at https://www.thestar.com.my/business/busines...CO6CIEcjwy1.99)



4)A star amongst its peers

So you may be wondering how Engtex is performing in comparison to its peers. When it comes to this, we were actually extremely surprised on how well it is doing compared to all its peers. We note that some of its peers are not solely in the pipe business, however, how well it is doing compared to its peers is also something to take note of. Notice that none of its peers have recorded a positive cumulative result (Trailing 4 quarters). Even better, Engtex currently trades at an undemanding valuation of less than 9x earnings.





5)Potential additional upside – Nationwide pipping projects

Lastly, Engtex stands as one of the largest beneficiary to the nationwide pipping project:

Under 11th Malaysia Plan, there are plans to reduce Non-revenue water (NRW) (resulting in replacement of pipes)
Under Budget 2018, RM1.4 bil allocated to implement the NRW programme
Potential resolution of Langat 2 in 2018 – the deadline has been pushed back to July 2018. We see that a resolution could be forthcoming post-election.


In conclusion, we think 2018 will be a good year for Engtex. Given its recent lows from the bad market sentiments, we think it is opportunistic to consider Engtex as a potential investment.



Disclaimer: This is not a buy call. Please do your own research before investing.

Cheers,

Wiz_of_Finance

If you are interested in contacting me for more analysis, please contact me at wiz.of.finance@gmail.com

This post has been edited by wizard_of_finance: Dec 10 2017, 03:52 PM