Saturday, 21 November 2015 Short Position
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Saturday, 21 November 2015 Short Position
Saturday, 21 November 2015
Instantly transformed?
Instacom Group Bhd got a pretty big dose of endorsement last week. CIMB Research wrote a comprehensive 20-page report on the company detailing how the “sleepy telecommunications tower builder” will transform into a ”giant contractor” with the injection of the Neata group, which is involved in aluminium production and construction, into the company.
The market had taken a dim view when Instacom acquired a 35% stake in the Neata group in the beginning of the year, which together with related companies became subsidiaries of the company earlier this month. To reflect the change in focus, the company has proposed to change its name to Vivocom International Holdings Bhd, which is touted as the key to Instacom’s transformation because of its relationship with CRCC Malaysia Bhd.
Last week, the company bagged three construction jobs worth RM260mil from CRCC Malaysia Bhd. The research house says the oustanding order book of RM2bil could rise to RM5bil over the next one to two years because of Vivocom.
CRCC Malaysia is part of China Railway Construction Corp Ltd, Hong Kong-listed and China’s largest construction company.
There are several interesting points to note in Instacom’s transformation. Why does Neata need to be injected into Instacom? Considering the string of projects and the potential of Vivocom, why not opt for an initial public offering (IPO) where it can extract maximum value a few years down the road when it has the track record?
The report forecast that net profit and revenue for Instacom will jump substantially in the next two years. From a net profit of RM7.8mil expected this year (after accounting for two months worth of earnings from Neata) to almost RM240mil for the financial year ending Dec 31, 2017 (FY17).
Revenue will rise from RM195mil this year to RM3.23bil in FY17. With that kind of profit projections, Neata can easily lure pre-IPO investors if it needs capital in the short term. Even banks may be interested in financing.
The compounded annual growth rate two-year earnings per share is forecast at an “explosive” 456%. Gross profit margins are at 12% to 13% because of Instacom’s strategy of going for negotiated tenders versus open tenders that usually earn contractors 8% to 9%.
CIMB Research has initiated coverage on the stock with a 72 sen per share target price and an “add” recommendation.
Instacom shares were most active but the price remained unchanged at 31.5 sen yesterday. Whether Instacom lives up to its billing is left to be seen.
Ire-tex’s delayed response
A listed company should not wait until the regulator enquires to update the stock exchange on what the next step is going to be after receiving and reviewing an investigative report on its financial statements.
But that’s exactly what happened with Ire-Tex Corp Bhd. The company hired Ferrier Hodgson MH Sdn Bhd, a forensic accounting firm, in June to conduct a thorough review of the transactions it had made with several parties last year.
The plastic-sheet manufacturer’s external auditor UHY had expressed a qualified opinion on the company’s financial statements for the year ended Dec 31, 2014. The investigative report was handed over by Ferrier Hodgson on Nov 12 and this past Tuesday, Ire-Tex made a stock-exchange announcement saying it had “received” and “reviewed” the report by Ferrier Hodgson. It was just a terse filing shorn of any details.
On Thursday, the company gave out more details on what it will do next. This happened only after the stock exchange regulator enquired about what further steps the company will be taking in relation to the findings of the report.
The company said the board, which convened yesterday, will deliberate on the report’s key findings before announcing the necessary information next Monday.
The investigation into the company had run into obstacles, with the forensic accountants unable to finalise the review by mid-September due to the high turnover of key personnel connected with the investigated transactions.
Another oddity was the concern raised by key stakeholders, namely, bankers, customers and suppliers, on the unexpected early retirement of Datuk Donald Yap, Ire-Tex’s major shareholder as the group managing director. On the day he was supposed to retire, Yap was reappointed back to the post due to pressure exerted by these stakeholders.
Under the circumstances, the board should in future perhaps be faster in coming out with information.
Ringgit and oil prices
Many observers still reckon that the ringgit remains undervalued. And some believe that it is “extremely” undervalued.
Standard Chartered group chief investment strategist/wealth management, Steve Brice, said on Friday that the ringgit is undervalued by between 15% and 20% and expects it to make a turnaround in the second half of next year.
He said that when the ringgit rebounces, it will be better than its regional peers and that this is not the time to get excessively concerned over the weakness of the ringgit, as it will probably get stronger towards year-end.
Brice said the Malaysian market was badly affected by sentiments due to commodity prices such as crude oil and palm oil, plus the US Federal Reserve interest rate move.
Once these factors stabilise, Malaysia will start seeing money coming back and it will give a strong impact and support for the ringgit, he reckons. He may be right, but Brice must also be betting that the price of oil makes a similar recovery within that period of time. That’s because the value of the ringgit and the price of the black gold are inextricably entwined.
Malaysia is a net exporter of oil and gas and depends on other commodities such as the export of crude palm oil to sustain its economy. Income from oil-related revenue such as taxes and dividends from national oil company Petroliam Nasional Bhd or Petronas made up 30% of Federal Government revenue last year.
Next year, it is expected to be down to 19.7%. During the years of high oil prices, that commodity was able to finance the country’s deficit. But not now. Still, it is quite opportune that the Government established the goods and services tax (GST) this year, resulting in revenue of about RM39bil this year. But that’s more or less the amount of GST collection that the Government can collect in a year. For the Government’s and thereby country’s fortunes to change drastically from here, only a spike in oil prices can help. But as many commentators have predicted, the world is in for a long-haul oil price decline. That should be taken into account when trying to determine the value of the ringgit.
Short Position
Instantly transformed?
Instacom Group Bhd got a pretty big dose of endorsement last week. CIMB Research wrote a comprehensive 20-page report on the company detailing how the “sleepy telecommunications tower builder” will transform into a ”giant contractor” with the injection of the Neata group, which is involved in aluminium production and construction, into the company.
The market had taken a dim view when Instacom acquired a 35% stake in the Neata group in the beginning of the year, which together with related companies became subsidiaries of the company earlier this month. To reflect the change in focus, the company has proposed to change its name to Vivocom International Holdings Bhd, which is touted as the key to Instacom’s transformation because of its relationship with CRCC Malaysia Bhd.
Last week, the company bagged three construction jobs worth RM260mil from CRCC Malaysia Bhd. The research house says the oustanding order book of RM2bil could rise to RM5bil over the next one to two years because of Vivocom.
CRCC Malaysia is part of China Railway Construction Corp Ltd, Hong Kong-listed and China’s largest construction company.
There are several interesting points to note in Instacom’s transformation. Why does Neata need to be injected into Instacom? Considering the string of projects and the potential of Vivocom, why not opt for an initial public offering (IPO) where it can extract maximum value a few years down the road when it has the track record?
The report forecast that net profit and revenue for Instacom will jump substantially in the next two years. From a net profit of RM7.8mil expected this year (after accounting for two months worth of earnings from Neata) to almost RM240mil for the financial year ending Dec 31, 2017 (FY17).
Revenue will rise from RM195mil this year to RM3.23bil in FY17. With that kind of profit projections, Neata can easily lure pre-IPO investors if it needs capital in the short term. Even banks may be interested in financing.
The compounded annual growth rate two-year earnings per share is forecast at an “explosive” 456%. Gross profit margins are at 12% to 13% because of Instacom’s strategy of going for negotiated tenders versus open tenders that usually earn contractors 8% to 9%.
CIMB Research has initiated coverage on the stock with a 72 sen per share target price and an “add” recommendation.
Instacom shares were most active but the price remained unchanged at 31.5 sen yesterday. Whether Instacom lives up to its billing is left to be seen.
Ire-tex’s delayed response
A listed company should not wait until the regulator enquires to update the stock exchange on what the next step is going to be after receiving and reviewing an investigative report on its financial statements.
But that’s exactly what happened with Ire-Tex Corp Bhd. The company hired Ferrier Hodgson MH Sdn Bhd, a forensic accounting firm, in June to conduct a thorough review of the transactions it had made with several parties last year.
The plastic-sheet manufacturer’s external auditor UHY had expressed a qualified opinion on the company’s financial statements for the year ended Dec 31, 2014. The investigative report was handed over by Ferrier Hodgson on Nov 12 and this past Tuesday, Ire-Tex made a stock-exchange announcement saying it had “received” and “reviewed” the report by Ferrier Hodgson. It was just a terse filing shorn of any details.
On Thursday, the company gave out more details on what it will do next. This happened only after the stock exchange regulator enquired about what further steps the company will be taking in relation to the findings of the report.
The company said the board, which convened yesterday, will deliberate on the report’s key findings before announcing the necessary information next Monday.
The investigation into the company had run into obstacles, with the forensic accountants unable to finalise the review by mid-September due to the high turnover of key personnel connected with the investigated transactions.
Another oddity was the concern raised by key stakeholders, namely, bankers, customers and suppliers, on the unexpected early retirement of Datuk Donald Yap, Ire-Tex’s major shareholder as the group managing director. On the day he was supposed to retire, Yap was reappointed back to the post due to pressure exerted by these stakeholders.
Under the circumstances, the board should in future perhaps be faster in coming out with information.
Ringgit and oil prices
Many observers still reckon that the ringgit remains undervalued. And some believe that it is “extremely” undervalued.
Standard Chartered group chief investment strategist/wealth management, Steve Brice, said on Friday that the ringgit is undervalued by between 15% and 20% and expects it to make a turnaround in the second half of next year.
He said that when the ringgit rebounces, it will be better than its regional peers and that this is not the time to get excessively concerned over the weakness of the ringgit, as it will probably get stronger towards year-end.
Brice said the Malaysian market was badly affected by sentiments due to commodity prices such as crude oil and palm oil, plus the US Federal Reserve interest rate move.
Once these factors stabilise, Malaysia will start seeing money coming back and it will give a strong impact and support for the ringgit, he reckons. He may be right, but Brice must also be betting that the price of oil makes a similar recovery within that period of time. That’s because the value of the ringgit and the price of the black gold are inextricably entwined.
Malaysia is a net exporter of oil and gas and depends on other commodities such as the export of crude palm oil to sustain its economy. Income from oil-related revenue such as taxes and dividends from national oil company Petroliam Nasional Bhd or Petronas made up 30% of Federal Government revenue last year.
Next year, it is expected to be down to 19.7%. During the years of high oil prices, that commodity was able to finance the country’s deficit. But not now. Still, it is quite opportune that the Government established the goods and services tax (GST) this year, resulting in revenue of about RM39bil this year. But that’s more or less the amount of GST collection that the Government can collect in a year. For the Government’s and thereby country’s fortunes to change drastically from here, only a spike in oil prices can help. But as many commentators have predicted, the world is in for a long-haul oil price decline. That should be taken into account when trying to determine the value of the ringgit.
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