ECM: A Post Mortem

In stocks, sometimes I would like to have a large 5 feet diameter target just 10 feet in front of me. I can use either a spear, bow and arrow or even throwing a knife - it will 90% hit the target. The reward for the target may not be a brand new car or even make me rich but it will nevertheless be higher than 3% to 5% annual return which we are getting from putting our monies with financial institutions.

Last September, I wrote a piece on ECM. Not that I like the business or company, but I felt that there were opportunities with this stocks. Neither was I interested in putting the call into my Felicity Fund as I am concentrating longer term on that one - it was not meant for ECM kind of trade. I however was not going to let that opportunity go (having found it) and for sure put in some of my money into the stocks.

Trading in ECM, one would know that he is to expect getting 4 things - cash, Kenanga's shares, Kenanga's RCULS and some part of ECM's shares back. If one is to invest say during the time I made my piece, the return would have been at least 10% annually. This is what I achieved...

I in fact need not put in all of those money during September but some of it was made in December when I wrote another piece. There was an average down. The return is around 4% over a period of 3 to 6 months. Annualising it, one would have made more than 12% - but not every day is a Sunday...you do not get this kind of offer every time. It is not great but it was a good opportunity.

Why such things happens? Because market is inefficient. Investors or people who get involve in the stock market are not fully knowledgeable. So am I, but probably I am better informed - that's it. Reading, learning and practice makes perfect! Many investors are more into highly tradeable stocks - those with lots of news especially hearing them from remisiers, punters etc. They are exciting but chances are one would get his pants on fire. Why take that chance? From ECM, I will not be rich from these kind of trades - but hey, Rome was not built in one day.

With the cash already in my bank account, today, I have yet to sell Kenanga, ECM and RULS will be cashed in less than a year's time. This is because as much as Kenanga and ECM are not exciting, it is still undervalued. ECM at RM0.67 is trading at below 60% of its NAV. So is Kenanga - and most probably due to the involvement of the Taib Mahmud's family in Kenanga, it is trading as such with election getting so near.

Back to trades like this, do write to me whenever there are more opportunities as such and maybe we can study this together when I have the time.

Cheers...

ECM: Efficiently Constructed Market?

Today's trading in ECM can actually tell that market is ignorant. I believe the market should read more and trade less which to me is not happening now. Lots of information are readily available. A reader highlighted to me that ECM's stock symbol is to be traded in "red" from today onwards as it is now a PN17 company and he is worried. I never suspected a company that is to be admitted into the PN17 category will immediately trigger selling no matter what reason as it's symbol will be highlighted with red color font. Its the fundamental, not the color that determines the stock.

PN17 triggering the stock marked red

In fact, I mentioned that its buying opportunity if the share price drops as the fundamental remains the same while the stock now becomes cheaper. One should already know this as ECM has already pre-empted shareholders way before during the announcement on the merger.

What is the PN17 for? Note: Not all PN17s are all that bad

From the exercise, as below, shareholders will be getting a total RM0.676 worth of cash, ICULs of Kenanga and some small shares of Kenanga. The main attraction is the cash of RM0.534 per share. ECM is traded at RM0.85 now. The distribution of RM0.676 will be completed by next month - 31 Jan 2013, which is what is mentioned by ECM, and I trust that it will happen as the Kenanga deal is already completed.

Upon the distribution, ECM will be having a RM0.38 of Net Tangible Asset (NTA) per share with RM0.32 in liquid assets (cash and ICULS).

Hence, if we are doing the math - with the RM0.676 distribution, at RM0.85, the stock will be quite in the money (RM0.85 - RM0.676 = RM0.174). Assuming it is trading at a discount of 30%, it is still in the money. I am not holding this stock for long though as I think the company is going the Private Equity route judging from the purchase of Pelikan's shares. Its directors were formerly investment bankers and PE people anyway - that's what they do best.

Hey, within a few months we should be getting back almost all our money with some small profits possibly. This is almost a "cigar butt theory" as what Graham says - the cigar butt that's thrown on the ground can still last few more good puffs - if only you are willing to pick it up.

What is left at ECM
Note:
It is easy to find out what's left of ECM as after the distribution of RM0.676 per share, the company will still keep RM265 million worth of cash and ICULs from Kenanga. From the below balance sheet, ECM has already highlighted what they are to dispose off from the sale. Just take out the one in red box and intangibles as well (not sure what it is). What's left in the cash and ICULs add back to the assets - liabilities, that's what you get from ECM. But beware, it is a company with no real business.

ECM: Something interesting for traders?

For many many years, I have not looked at any stand-alone investment banking (or stockbroking houses) stocks. It is because the performances of these companies are almost like "short term speculation" in the market itself. I have no ability to foresee what is beyond the subsequent week in terms of how it will perform. You will have noticed that most of these stocks are trading below the book value which spells the sentiment over these companies for many years now.

Now, the merger between Kenanga and ECM Libra ("ECM") has changed my sentiment a little bit, not for the fundamentals but for the short to medium term trade opportunity. One of the directors of ECM has been snapping up the stocks of ECM over the last few weeks. Of course, he is the Managing Director and yes, he has control over the company himself but that also calls for the "siren" for me to do a checkup on the deal.

Funnily, if you search around, I could not find much analysis about this deal. However, let me provide my version. Basically, ECM is getting out of the investment banking business by selling to Kenanga for an amount said to be RM875 million. ECM's directors have the same sentiment as mine i.e. stockbroking (or IB) is a tough business. Remember the franchise thing I was talking about in an earlier article. When comes to this area of business, the dominant franchise is CIMB (of course). If you study properly, it most probably dictates the deals surrounding the government controlled companies - be it already owned or not. IHH is one company created out of nowhere - remember? What other deals are left beyond government nowadays?

How is the deal from Kenanga to ECM? Kenanga is paying ECM 1.27x book value. There are better deals (example OSK-RHB) around but most probably ECM's majority shareholders are trying to get rid of the business as fast as possible, anything premium to book value is a premium!

Kenanga is offering 3 things (to ECM) for the deal:

1. cash of RM660 million;
2. Shares of Kenanga at RM120 million par value. It is actually worth RM79.2 million as Kenanga's shares are traded at discount to par value;
3. RCULS of two tranches at around RM95.5 million in value. The RCULS is tagged with a 5% coupon to it.

Offer from Kenanga and what ECM gives back to its shareholders. See some of the calculation.

From the sale, ECM will be entirely out of the banking business. Unlike the OSK-RHB deal, ECM did not even bother to keep the shares of Kenanga, which it in fact offered (all) to the shareholders. Now what keeps me excited from the deal?

ECM is proposing to distribute the following to its shareholders:

1. cash of RM442.6 million;
2. all shares of Kenanga worth RM79.2 million at the moment;
3. Series A of the RCULS assuming certain condition is met - it needs some approval from the SC on taxation matters apparently.

After the distributions, ECM will be keeping around RM300 million in cash as well as a small asset management company which contributes around RM2 - 3 million in profit. It intends to keep the listing status with a view of using the cash for investments. (I hope that it does what it says.)

I have done my calculation (as above). It seems that shareholders will be getting about RM0.69 return per share assuming the Series A is given up as well as Kenanga's shares stays traded at RM0.665. The cash that ECM is holding after the distribution, is worth around RM0.36 per share. Would ECM's shares be traded at a huge discount to its cash holdings? I do not think so. It perhaps would be trading at 70% to 80% discount. Anything more would deem the company as being way undervalued.

Now, assuming it will be trading at 75% of its net asset value after the exercise. That comes to total value of RM0.96 for ECM's shares currently, whereas ECM is now trading at RM0.86. That's easily a RM0.10 discount and with RM0.53 to be distributed in cash, it's attractive for any short term traders. Another RM0.06 i.e. RCULS is to be given a year later, assuming the Series A are distributed to shareholders as approved.

What about Kenanga's shares? It is worth another RM0.10 (to shareholders of ECM) from its trading price of RM0.67. I do not think Kenanga will drop too much as it is already trading at much discount from its Net Asset Value.

Do you think that ECM is worth it rather than keeping your money in the bank for the next 6 months? For me, it is worth a try as probably the reward far outstrip the risk - and we are supposed to learn how to manage risk here, not avoiding them!

Note: If you read the announcement, do not be bothered about the new issuance from the ESOS as ECM's shares are now traded at below par value, hence nobody will exercise their rights.

And of course there are political twists to this stock which makes ECM sells the banking unit. ECM is not a simple stock (politically - look at some of the director's name), but the cash and other liquid assets distribution may be worth it as its cash holdings (post distribution) to possible trading value may make the stock worth it for half year to a year trade.