Ekovest's acquisition of land from IWH: My take

What the deal is about.

Ekovest buying 2 blocks of land from IWH which IWH does not own until this deal is done, ironically. Hence, IWH is actually acting as a middleman and in return IWH owns 32% of Ekovest. Lim Kang Hoo will increase his shareholding in Ekovest, backdoor through IWH as he is a larger shareholder of IWH through Credence at 63.13%. Ekovest pays about RM200 million for the land and another RM800 million through issuance of new ICPS (Irredeemable Convertible Preference Shares) to IWH. The ICPS which is convertible to Ekovest’s shares at RM1 will allow IWH to be a 32% shareholder of Ekovest.  This will solidify LKH’s ownership of Ekovest. His shareholding (direct and indirect) will increase from 29.8% to 44.4%.

The land was part of the land in the original exercise which failed, in the proposed IWH-IWCITY merger back in 2017. As below, in that proposed deal, the merged entity is to acquire land from the same companies although not from as many sellers.

The deal has nothing to do with Bandar Malaysia, if any yet. We know that IWH together with CREC was awarded with the contract for Bandar Malaysia but details of the project is yet to be announced. The thing I can see is that IWH is now getting closer to Ekovest. Whether it is good or bad, we do not know. I can see that neither IWCITY or IWH are construction companies. Ekovest is. Bandar Malaysia needs lot of these kind of work as the entire development is RM140 billion in GDV. One will need a master developer and master contractor. LKH is not going to let CREC take all.

For Ekovest’s shareholders, the situation is hard to read as we do not know several things:

1. We do not know much about the deal between IWH and Straits Bay Sdn Bhd and Empomas Holdings Sdn Bhd. Who are the owners? How are the payment made?
2. Does IWH has to pay cash to these guys? Or will IWH pay them in shares or any other ways?
3. Why is IWH acquiring these 2 pieces of land? This looks questionable. Land in Johor will not see much development unless they are strategic to any government's projects in the near future. This I am not able to decipher.

One thing that is happening is that the owners of Ekovest are thinking big. It is growing Ekovest in terms of market value at the expense of dilution to minority shareholders. However, for the shareholders which include me, we know that the group is not staying put at 2 highways and a few plots of good land. The elephant in the room as all have been talking about is the old military airport land and its development.

I believe this is not the last of the deals.

Interestingly Ekovest's venture into Musang King may have its leads

It started when Ekovest bought into PLS Plantation, acquiring a 23.42% from its Chairman, Lim Kang Hoo. This was a related party transaction and it looked particularly bad when it was the company one controls buying the shares from himself.

Secondly, it looked like a rescue of PLS Plantation. Immediately, after the purchase from LKH, Ekovest continuously bought more PLS shares from the market. Now, Ekovest owns 30.44% of PLS Plantation. First of all, PLS did not seem to be an interesting stock. One would wonder, why would a company that has good business concessions in Setiawangsa Pantai Expressway, DUKE and traditionally a decent construction outfit be keen in diluting itself into plantation. It is neither a strong palm oil stock nor any other plantation business for that matter. At around the same time, PLS announced that it was moving into durian plantation. It acquired a company called Dulai Fruits.

Wow! How is one to value a durian plantation business? Palm oil is difficult enough for a small to medium sized company. PLS was not profitable for last few years. Then durian? Worse, durian is seasonal. The only thing I can think of is the company's strong affiliation with China given it has business dealings with large companies there through Bandar Malaysia and Lim Kang Hoo's partnership with large developers from China through IWCity. China's Chinese adore durians - at the moment. The thing I learned about when I was in China recently - the typical supermart in China would sell durians - Thai's durian. We do not even see durians so commonly available in Malaysia. Also, Malaysia was only allowed to export whole durian fruit only recently. How then Chinese were able to taste Malaysian Musang King previously. I learned about this from a Singaporean in China. We used to export our Musang King via Thailand. That was how bad the situation.

Just recently, Navis Capital invested RM400 million into a Malaysian durian exporter, Hernan Corp. Navis being a long established private equity firm must have done research about durians. They must have seen a trend and China's appreciation of Malaysian durians. And this trend is not a passing trend - as like the bird's nest and arowana. China to me has changing habits. It seems that their reverence over durian may last longer, hopefully forever.

BFM's had an interview with the CEO of Hernan Corp. It is good knowledge for me, not just on perspective of durian business but also perhaps why Ekovest is into the business of Musang King. Perhaps, Lim Kang Hoo by going himself, he is not able to leverage on the durian trend on the large scale basis, and it needs to be done quick, as well.

For durian planters, it takes 5 years for any to start yielding results. That is the bad part. Bursa's investors do not like to wait for 5 or more years - I learned that from WCE. The good part is durian plantation is not an open competition situation. I believe that only a few countries can have that position given the costs of land, position, climate and costs. It can be a moat if done right as competition can be curtailed.

Now, it may not look that bad. Especially given that Bandar Malaysia is alive and back - the construction division will have continuous deal way past SPE while the plantation and toll concessions will bring the long term consistent revenue - ideally.

How should we see Ekovest?

The change in government is going to see changes in Ekovest from a company perspective which is from largely construction based (from government related contracts) to more of its dependence on its long term assets - toll and land. I know many would be concerned on the toll assets as the new government is looking at ways to eliminate toll but lets face it, this is going to be difficult as the country juggles with our finances and continuous development. Toll over the period like it or not it is still an asset which is generating very good cashflow.

For the next 3 years the consistent revenue that is to be generated is going to come are mainly from construction (SPE highway) and toll (DUKE 1 and 2).

Property business as one know is going to be sporadic until it manages to obtain consistent revenue from its property investment - which potentially will come from EkoCheras mall.

The below is a pick from its latest 4Q18 quarter results, and as we see there is new revenue from DUKE 2 (which increases the contribution from toll) since December 2017. However, in accounting for concession assets, this is also the start where it is starting to recognise the interest expense from the toll assets (see Figure 2).

Figure 1

Hence, profitability from toll concession will not be good, but that is a different story when concerning cashflow. Its cashflow will be good and when the third highway is completed - i.e. the SPE it is all full throttle for the company. Again, I am not worried when it comes to abolition of tolls, it is very hard for the government to do that. Otherwise, they would have contacted the concessionaires and discuss. So far, the only concession that they have contacted is their own - PLUS which is owned Khazanah and EPF. The way I see it is that the current government is trying to avoid the topic until when they are ready to discuss about this.

Figure 2

The concern over the losses for 4Q18. As mentioned in Figure 3 below, part of the losses is due to costs of the failed acquisition of IWCITY - turns out to be a blessing in disguise and its provisioning for LAD - Ekocheras and highwe interest expense as mentioned earlier.

Figure 3

How I see Ekovest

As in many of my investments, I see Ekovest as a good long term investment with solid assets. It is moving into a territory where it will be less dependent on new projects while focusing on what they have built in the last one decade.

Seems to me, after this few years, it hopefully can become a good dividend stock if the controlling shareholder is fair.

The Edge: Dr Mahathir on toll concessionaires

The most recent Edge Weekly is quite a meaningful edition as it had the opportunity to interview Tun Dr Mahathir i.e. the first to do so in a private setting after GE14 where Pakatan Harapan had won the election.

I managed to get a copy during the weekend, and Dr Mahathir was enquired about his views on toll abolishment in stages as in the Pakatan Harapan's manifesto.  Here are some of it (but please go and buy a copy as there are much more to read especially on ECRL, HSR etc).

TheEdge: The national debt is already so high. The government has zero-rates GST, reintroduced petrol subsidy and is reviewing toll charges. These will cost the government money. How is it going to handle the situation?

Tun Dr Mahathir: Much of the work being done now is to downsize the financing of the government. By doing away with all these expensive projects, we are already reducing (debt) servicing costs.

.....

I must admit that when we were campaigning, we proposed things so that the people would want us to be the government. But, of course, we have to manage these promises. For example, the toll review is not going to be immediate, it will be in a gradual manner.

Is the government going to acquire all the toll concessionaires?

Some we have already acquired. But we have to work with the private sector. I have read some of the proposals; they sound quite reasonable. You see, the main point is we don't want to punish the people (toll operators). At the same time, we have to ensure the government has some money to build roads.

Based on the above, it is unknown what he meant by "Some of the toll we have already acquired." Could he have meant that PLUS was for example is already 51% owned by Khazanah, the only government owned that I know which is owned by the government. Many other toll businesses are either owned through PNB (a government managed fund), EPF or some of them the shares are passively owned by Malaysian funds.

Toll business which traditionally have been the safer bet assets, have been hammered especially when several individuals have appeared to justify that they will follow the Pakatan Harapan's manifesto of abolishing toll in stages. From there, the toll concession shares have suffered drastic drop and some of them have been owned by my investment fund. These are WCE, Ekovest, LITRAK, MRCB.

What was initially feared is that the government will be using a clause which is available in the toll contract i.e. in the "expropriation clause" where the government can acquire them for national, public interest or public security.

Of course, the argument from many (including me) is that in doing so, it will collapse the capital and bonds market where toll concessionaire's bonds are among the highest in total.

What I think may happen?

As mentioned by EPF's CEO, the toll business acquisition has to be looked at holistically. In my mind, holistically means it has to be looked at in its entirety and it may involve Khazanah, PNB and EPF in acquiring these assets. The bonds may also be repackaged and new shares may also be offered in the capital market.

One may ask: But, it does not eliminate toll charges. Yes, but in reducing the toll charges, it is already a win. When the government together with the funds are able to negotiate a package with the toll owners, they can relook at an optimum charge towards the users as well as a decent return for the investors i.e. the funds.

It has to be understood, rightly so, some of these toll businesses have made quite a lot throughout the concession period. Among them are LITRAK and PLUS and these have been the topic of contention among the politicians like Tony Pua.

Hence, by acquiring the concessions outright at a fair price and repackage the toll rates, they may seem to be the best option.

My thoughts on WCE after the GE14

I am sure many people would be concerned and confused on what to do with WCE which is a toll concession business after the Pakatan Harapan (PH) has won the election. Among the manifesto, PH has proposed for a staged elimination of toll concessions in Malaysia. They are also proposing for renegotiation of the highway concession contracts.

I have seen several press articles as well as a video put up by Tony Pua.

Well, while some of the toll concession businesses has made tonnes of profits (such as LDP, Maju, PLUS), the way it is presented (by Tony) is somewhat misleading. One cannot just say that because of the concessionaire has invested a "y" amount of money and they have profited several times more from the y investment, then the concession should be bought back at cost +.

In finance, where especially projects are concerned, one of most important theory is "Time Value of Money". I do not want to explain so much on that concept, but here is a good explanation. From that explanation, usually for a project to kickstart especially concession business such as the toll, the concession owner will invest upfront for a number of years (in the case of WCE - more than 5 years), and upon the completion, they will start collecting from the tolling proceeds.

Note that finance is different from accounting. Finance has element of time while accounting does not take into account time. In this case, finance is more relevant.

As in any business, the biggest question is who will be coming up with that big sum of money (including cash and borrowings) and ultimately allowing the government to buyback the projects at cost or even cost plus? Nobody.

It is illogical. Nobody wants to take up that risk that way. It defeats entrepreneuralism.

This is because there are completion risk, borrowing risk and return risk that the business concession has to stomach. As an example again for WCE, there are not many construction companies that can complete these kind of projects. Why it has been delayed is that companies like Talam were not capable of doing it and ultimately not getting the financing and support needed. Hence, me being convinced to invest into this project is because it is a IJM led project. Even then, as one can see, there are additional risks now.

One of the biggest message that has been given by the current PH government is the application of the "rule of law". Mahathir also put huge importance onto the economy (which is why the council of elders comprising of 5 very experience people i.e. Daim, Zeti, Robert Kuok, Hassan Merican and Jomo) are all financial and economic experts. Many other countries, their advisors are mix of security, financial, legal etc. But the first team formed in Malaysia are all finance and economy.

To eliminate tolls, the older projects are those such as PLUS, LDP, and PNB owned Prolintas.

All our large funds such as EPF, PNB (ASM and ASB), KWAP, Khazanah etc. owns large proportions of these projects. Prolintas which owns 6 highways i,e, AKLEH, SUKE, LKSA, SILK, DASH, GCE is wholly owned by PNB.

EPF owns 49% of the biggest highway chain in Malaysia i.e. PLUS while the remaining 51% is owned by Khazanah. PLUS has a RM23.35 billion sukuk bond  which is largely unpaid, probably not even paid principal yet. If the government wants to eliminate toll, it has to find ways to repay this i.e. more than RM23.25 billion bonds. By taking out PLUS, it will impact EPF contributors as well. And Khazanah also, which is under MOF.

As it is, there are a lot of financial issues that the government has to tackle and the main part of them are eliminating GST, continuing with BRIM, bringing back some of the subsidies. Obviously, to look at doing away with tolls, it is a very hard task and not as easy as explained by Tony Pua.

The merits of WCE itself

WCE is an important project. It not only connects the west coast where if one is to take the old Federal roads which is inconvenient, but it also connects ports such as Klang, Penang and Lumut. The road is much flatter and more friendlier to heavy vehicles. These are all the important economic development which has been promoted by many of the PH leaders, chief among them Mahathir, Daim and perhaps even Anwar.

Moreover, which part of Malaysia gave the biggest endorsement to the new government? West coast of Malaysia. I.e. connecting Taiping, Lumut, Tanjong Malim, most parts of Selangor - all which have brought the wins to PH.

In fact, I may not be surprise, the new government is better for WCE as some alignment as it is now is still not finalised, especially Tanjong Karang. 

IJM is one of the most respected construction company and without them, the costs of the highway could have been even higher as they are not only capable of building the highway but they are also able to manage the costs.

One should take note that the large part of its management today is from Road Builder Bhd - which was merged into IJM back in 2005. Road Builder as in its name is particularly strong in building roads and West Coast Expressway is not one easy feat. Portions of WCE is on soft soil, which is not easy.

What may happen with the new mandate with the Manifesto

To entirely take away tolls, that is not easy. But to payoff especially the older tolls, that will show that current PH government meant what they promised. The older tolled highways are LDP, Lebuhraya Sungai Besi, first Penang Bridge etc. But even to do that it can be costly as it is not about buying back but also the costs of maintenance.

I would suggest the current PH government to declassify the contracts so that it is becoming more transparent. Speaking of the fairness of the contract, I believe the WCE contract is one of the most fair tolled highways. This is because it has fixed the IRR (actual IRR is not revealed but I hear that it is a higher single digit percentage - not double digit) and if the highway achieves that IRR, government will get a share of the profits over and above the IRR threshold.

I also believe some part of the contracts may be renegotiated. But as mentioned above, a decent IRR (I think) has already been incorporated for the WCE highway.

What about WCE's valuation?

Assuming that the current government is not illogical (by killing the project, and not paying compensation, where even then the court is the remedy for WCE) and follow the rule of law - the price of WCE where it is currently at 93 sen continues to warrant my interest. With the recent proposed fund raising, at 93 sen it will increase the market capitalisation of WCE to RM1.5 billion. This is still a good valuation for investors.

Mahathir has already said the abolishment of tolls will be done according to the contracts. And the contract mechanism for WCE I believe will have elements of protection for the shareholders.  After the contract has been finalised, there were 2 major new shareholders that has gone into the business - MWE and Mamee. They would not have bought into the company if their rights are not protected in the contract.

In summary, the bigger risk after the new government is formed is whether they will follow the "rule of law" as promised and being rational in terms of financial management. Now, let's see!

I have been one of the guys whom have been rooting for a change. That was why I was not concerned with the manifesto of PH especially on tolled highways, but after their big surprise win, it made me think of the consequence of the promise.

Why acquisition of IWCITY is a good move for Ekovest

As always in my investment philosophy, I have put importance onto what certain decision can bring towards the value addition of a company or whether it demerits the company as a whole.

We know that Ekovest has just decided to offer to purchase IWCITY for RM1.50 per share. One can read the detailed proposal from here and we can also digest the reason for the purchase in this well written announcement. The proposed purchase translates to valuing the assets of IWCITY at RM1.256 billion. We also know that the proposed purchase values IWCITY's assets at less than 50% of its market value, based on the announcement and valuations made by respected valuers. For that itself is a good beginning point to purchase a certain assets.

However, many investors are concerned over Ekovest's exposure to properties over the long run as unlike concession from toll business, property is cyclical especially is this down cycle. However, let me put into perspective what I see.

We know that Ekovest has 3 main line of business i.e. concession from highway tolls, construction and properties. Toll concession is its crown jewel as I see it, due to the sustainable growth as well as the location of its highway - right in the middle of the city. Last year alone, EPF has valued the DUKE 1 and 2 at RM2.825 billion through its 40% purchase of the highway. Besides the 2 highways, Ekovest has also another longer highway which is in its early completion stage called Setiawangsa-Pantai Expressway. If one looks at highways, technology cannot really replace the need to travel and move around. One real threat for these 3 highways is MRTs and I think we as a country does not build fast enough to cause real threat to Ekovest's assets.

Another business is its construction business. Unlike more established contractors like IJM and Gamuda, Ekovest usually complete its own projects but do not focus (as much) on getting external projects for obvious reasons. They are not in the mould of IJM and Gamuda in terms of construction, civil engineering but its own projects is enough for them to be kept busy. Hence, you do not see a Gadang, Advancecon (which focuses more on external projects constructions) as much in Ekovest. On the other hand, construction business has one major weakness, it has to continue to bid for projects and usually these projects are in a 2 - 5 years cycle. After one project, it has to obtain next projects to keep itself busy. Otherwise there could have idling manpower and machineries. This actually happens now to China, as this is the reason why Xi Jinping is helping its own state construction companies by pledging Belt and Road Initiatives in the name of helping neighbors, but in essence it is more to help its idling companies which have been building China at a furious pace years ago.

The third business for Ekovest naturally is the property business. As compared to toll and construction, this third business is the weakest among the three for Ekovest and in my opinion, it does not mean that Ekovest is in the mould of building like what Ecoworld is building. This is because Ekovest does not have the DNA of Ecoworld or SP Setia or even Sunway. In this respect, Ekovest is rather beginners. It has managed to secure prime land of 60 acres through acquisitions and exchanges from the Blue River project. Further to several other pieces such as the one in Cheras which is just opposite to Leisure Mall, Ekovest does not have much landbanks. To be a strong or prominent developer, first one must have land and these land must be in a place where one can sell properties. The ones in Cheras and Titiwangsa are good starts but they are not substantial.

Hence, they move to Johor. Happens to be, IWCITY another company controlled by Lim Kang Hoo has good landbank (1000 acres) in Johor and they are the most prime of landbanks. In this period of property slow growth, to be a successful property company - either one have to be Ecoworld which can still outsell others despite not in prime location or one must have the financial wherewithals to withstand slow growths. As an example, TA Global (a boutique developer) has that. It has I do not know postponed its projects in TA3 and 4 for I do not know how many times as it has the financial muscle to do that and wait for the right timing to launch. Ekovest, in times like this and with it being kept busy by so many projects at this moment has that as well. This, I think is the main reason the acquisition of IWCITY is an opportunist time as it can wait. And to top that of, it has signed a contract with Greenland group from Shanghai (one of the Top 5 largest developer in China - and when it comes to China it is really big) where that contract will bring strong cashflow for the next 3 years towards the Ekovest-IWCITY group. How is this deal not positive towards the acquisition for Ekovest?

I however fully agree that among the 3 more developed states - KL/Selangor, Penang and Johor, it does look like Johor is the worse off in this bad times for property. Why? Johor has large landbanks and it does not help that so many of the developers such as UEM, Sunway, SP Setia, Ecoworld, Forest City - all of them have massive landbanks in that area. The foreigners are not buying as what they would have wanted - and more so a country cannot be dependent on foreigners to purchase our properties for growth. In this respect, sustainability is the name of the game.

Come 2024, there is however one game changer. What I do not foresee will really happen is happening. What is that?

There is an MRT link between Johor and Singapore, and it is to be ready by then. Why is this important? It means Singapore is willing to open up more (slightly). For so long, the causeway is the clog point for Johor to develop fast. It is a joke if an affluent or white collar worker to say that they are ok with staying in Johor and work in Singapore as the commuting is so bad that it deters them from doing that. With the new MRT connecting Johor at the checkpoint towards Singapore, that unbearable commuting is made more bearable. With that, the real property buyers (to stay) will consider buying, as compared to those who are only investing and not stay as at now.

The game changer is especially important to the landbanks surrounding that area. Who in your guess has the most landbanks and one that overlooks Singapore as well? IWCITY.

As one can see, the landbank for IWCITY or reclaimation rights for land are very close to the causeway - the main connecting point for anybody between Johor and Singapore.

Hence, I am guessing the acquisition of IWCITY by early 2018 pace the planning made by Ekovest very well. Between 2017 to 2020, there are enough highway construction projects to sustain its growth and operating cashflow. Post 2020, they will be more busy with property projects down south. And with the collection from tolls continuing to grow, the planning made by Ekovest could be very sweet for investors.

As it is, now Ekovest is trading at RM2 billion valuation. The toll business alone is worth more that. It is buying landbanks at good value. How is that not good?

Happy New Year to all readers.

Ekovest: seen many times funds vs owners & retailers

First of all, I am not a trader. Hence, this post does not mean I mainly look at trades, however as an investor I have to be smart on short term movements, psychology in among traders especially funds.

Ekovest, if one notice its latest Annual Report has added on institutional investors. While many have opinions that institutional are good, to me IT DEPENDS. Ekovest's shares have been bought by institutionals especially when Datuk Haris sold his block. During then, Ekovest's shares have huge volatility and of course when there are huge swings, many retailers like to take part. Some are caught at around RM1.45 to RM1.50 (one has to note that Ekovest's shares have split from 1 to 2.5 early this year and has given 25 sen dividend after its sale of 40% of DUKE).

This time around, it seems (while I am positive or rather see very little impact), I think funds are negative on Ekovest's proposal to acquire as they deem it as a rescue of IWCITY. I obviously differ in my opinion.

To me, it is quite obvious - the owners and sponsors see this deal as positive for Ekovest. They have hence in the short period of time decided to buy more shares of the company they control. I see this as quite common actually. While funds are funds and they can impact the short term trade of the stocks they own, they however move in herds.

I have actually seen this in many strong fundamental stocks - Airasia, NTPM, Padini are among some of them. All of them have funds relinquishing and frankly Airasia was the classic. One guy from Hong Kong gave a negative comment and some of the large funds (in US) started to sell (strongly advice to read this link and reflect again) - at a period when the fundamentals actually turned to the positive. It is most of the time started with the same concern - gearing and gearing.

As long as the fundamental of the company is sound - the idealogy is when funds sell, we slowly pick. Again, as long as the fundamental is strong - this is important.

In Ekovest, I see that same. Ekovest is not used to funds investing in their stocks. One can run through their annual reports of yesteryears. This year is the difference where funds are started to pick up the stock.

As a small retail investor, I see these as opportunities - which is why I say, one can be small but we can actually perform better. Some people simply call this as "contrarian" strategy.

Sold off Tropicana-WA and bought 6500 Ekovest

Through the sudden reaction on Ekovest's shares, I have decided to buy more Ekovest and sold off Tropicana-WA.

The reason I sold off Tropicana-WA is because it is a warrant and I wanted to reduce my short to medium term exposure risks. Also, as I am going to put my money into a construction, property related stock, it is better to keep the exposure at a certain percentage. Tropicana, on my other investments in fact I still keep to my investment as the emergence of Tan Sri Lim Wee Chai is good for the company business-wise and investment wise. It is just that my fund over here which I started with RM50,000 is limited and I have to make the best use of it.

Ekovest is a stock which I have liked. I have in fact invested into this company - for this fund - prior to it being split from its bonus issue early this year.

I also find it ironic that UOB KayHian is downgrading Ekovest from RM1.45 to RM1.04 i.e. a drop of 41 sen with the announcement of the proposed acquisition of IWCITY. That is a downgrade of RM877 million and this amount is more than what Ekovest is going to pay for the 62% of the minority stake of IWCITY which is RM800 million cash or RM1.50 / share towards the IWCITY minority shareholders if it is using cash.

I usually like to target these funds as funds are supposed to be principled when they write their calls as they are so-called professionals. Investors are supposed to trust them. I however find some of them to be not-principled as they put a price without good justifications.

I have written quite a bit on this company and here are some of them.

Is Ekovest Investible?
A look into Ekovest
Do not sell Airasia, WCE and Ekovest
What is IRR 10% - where I first invested into Ekovest for this fund at RM1.30 for its warrant

One can also find the funds here.

Lim Kang Hoo's reverse psychology

Lim Kang Hoo is either a brilliant strategist or a desperate man. However, come to think of it - how is the deal between Ekovest and IWCITY  a desperate deal? Ekovest, which is a family controlled (>60%) company of Lim Kang Hoo, family and friends is offering to buy MINORITIES IWCITY's stake at RM1.50 per share.

He is not buying his shares of 37% in IWCITY which is held through IWH. He is buying the shares held by the other parties 62% - 63%. There is no injection of cash into IWCITY. He is not desperate to rescue IWCITY. In fact, he is taking OPPORTUNITY. This deal is done at its best so that it does not touch KPRJ which is related to the Sultan of Johor - it seems.

I am of course perplexed when the shares of Ekovest dropped massively - so stupidly I buy some more.

As can be seen IWH which is owned by Lim Kang Hoo and KPRJ will still directly own IWCITY which will be delisted. Ekovest is not buying Lim Kang Hoo's stake in IWCITY

Having said the above, I can understand the investment communities concerns. IWCITY holds land in Bandar Iskandar which to them cannot be transacted as there is a doldrum in properties especially down south. Moreover, Ekovest will need to fork out RM800 million which it does not have to buy over the minority stake - hence delisting IWCITY.

However, that is flawed thinking. IWCITY just did a deal worth around RM2.1 to RM2.3 billion with Greenland group from China and they are paying for 127 acres of land in Bandar Iskandar.

Because even reading yesterday's one pager announcement cannot even be done properly by those who invested into Ekovest, I hence will put down the payment schedule for IWCITY - Greenland deal below. There are obviously a lot of milestones and the sweet side is that IWCITY has collected the first payment of RM46.2 million. I know that's small but it also means the collection will be going to Ekovest in future rather than the listed IWCITY.

As for raising the RM800 million to buy up the IWCITY minorities stake, I have this prophesy. The payment schedule above will help a bit, then the amount paid by EPF of RM147 million just last week AND more importantly, in its announcement yesterday, one can also opt for an Ekovest share equivalent which is valued at RM1.50. Obviously, Ekovest shares is not worth RM1.50 now and the latest as at my writing now - it is priced at RM0.97. No chance to trade in shares?

If the transaction is done now, all IWCITY minorities will be opting for the cash - me too. But obviously again, the deal is not done now. It is many months down the road, if it is ever pulled through.

Now, my question to Tan Sri Lim Kang Hoo (who is many times more brilliant than me) is which option he prefers - cash or shares. If cash, then obviously again Ekovest is worth more than IWCITY at per share price of RM1.50 or more as he does not want to waste the value of Ekovest to be given to minorities. If shares, then IWCITY is more valuable.

Having seen how he does his deals, it is not going to be that smooth and straight forward. There will be challenges and hurdles.

On the strategy with this deal, as mentioned above there will be challenges but strategically it is there. IWCITY is a land owner. Ekovest is a developer, contractor. There are still some 900 acres of land in IWCITY after the sale to Greenland. Moreover, part of the deal will need IWCITY to reclaim (worth RM400 million) the land which Ekovest can obviously do.

To me what was obvious yesterday has now become murky. An analyst said that the deal is bad. He is perhaps not being straight or thinking clearly.

Or could it be I am too slow to have a clear head as I have become too complicated.

To me if the deal can be pulled through, it definitely looks like it is positive for Ekovest. If however, the deal is not able to be pulled through then back to original as it is today - but why the drop of 20 sen?

Moving from DKSH to Tunepro and Ekovest

After reading the article on DKSH, I decided to reduce my position on DKSH. In the long run, DKSH is still a strong company and I believe its business model and positioning is very strong.  It will be the least impacted by the revolution in retailing that is happening now - at a very fast pace i.e. a lot of purchases are moving towards online. Just a note, I have made more than 20 transactions purchasing things online from buying shoes to padlock to fridge this year alone. That was from zero online purchase 2 years before.

That behaviour of mine is going to affect traditional retailing as I can really see the effects that Jack Ma and Jeff Bezos are impacting the traditional business lines.

Anyway, the reason why companies like DKSH may probably not be enjoying very good growth for this year is due to the prolonged impact of GST as well as weak Malaysian currencies. In fact, the blame on GST I think is not as correct, but most probably the weak Malaysian currencies as well as reduction of subsidies are really affecting many people on the streets. This as mentioned is going to affect DKSH who is distributing goods such as milk, cheese and pharmaceutical products.

On the other hand, I am putting my money on Tune Protect which has dropped from circa RM1.60 to now RM1.12. I am also putting more money into Ekovest.

The reason I am putting money into Tune Protect is because it is largely tied to how well Airasia's volume performance. IT IS TRUE that Tune Protect is affected by the ruling to bar automatic add-ons by Malaysian Aviation, however I felt that the price dropped is already compensated by that ruling.

The general thought is that with the barring of that automatic add-ons, it has affected Tune's revenue by some 35% - 40%. The below graph by Airasia in its slide presentation says that it has dropped by 39% on a per passenger contribution basis.

With that drop, Tune Protect's travel insurance business should hence start from this piece of situation. I believe that it is now growing in tandem with Airasia's passenger volume growth which is low double digit - from 2017 onward. In the long run, as long as the travel insurance business is tied to Airasia's growth - it should be above average.

Tune Protect is also building its other parts of insurance business i.e. motor, personal accident etc. The deregulation of the motor insurance rates may provide opportunities for Tune Protect to be more aggressive and winning market shares as its business model is less complex against the more traditional insurers whom have been around for a longer period.

Anyway, lets see as I purchase 8000 units of Tune Protect for this portfolio.

I have also added 5000 units of Ekovest as I feel that the impact of IWCITY - whom may not be bidding for the Bandar Malaysia will be minimal towards Ekovest. I felt that the drop in its price is an opportunity for me to add-on to the company - and this also follows my thoughts of having Airasia, WCE and Ekovest as my 3 main holdings.

One should note that the contract that Ekovest has is for the upmost long term - up to 50 to 60 years. As in any country, once a contract has commenced - it will be almost impossible to terminate them - be it there is a government change.

The case of IWCITY and Bandar Malaysia is different as it was not effective yet - although my initial propagation was that it was not going to be terminated.

Anyway, as I can see for Ekovest it is now completing half of DUKE 2 and has already commenced Setiawangsa-Pantai Expressway.

Those will be the main revenue generator for the group in the long term to come. I also do not think the market is putting any value towards its new projects such as River of Life and the proposed highway to Klang.

Changing Ekovest-WB to Ekovest

I am not here to proof a point but purely taking a position that Ekovest-WB's pricing is 20 cents different to Ekovest (the warrant exercise price is RM0.48). Hence, with all these fluctuations, I have decided to sell Ekovest-WB and buy Ekovest. Let's call it I decided to do my exercise this morning at a 28 sen discount.

On whether Ekovest can be purchased as at now fresh from the news of Bandar Malaysia's termination, I actually do not know.

It is true that Ekovest has many ongoing projects and there are higher likelihoods that they may not be terminated. In fact, the SPE has already commenced and DUKE 2 is completing soon.

In this debacle, one will also see the benefits of EPF being a project shareholder for DUKE 1 and 2, as it is harder for government to terminate a contract with EPF as shareholder.

The reason I am also sticking to the share is that I do not see enough details to sell the shares especially fresh from my earlier article last month. This I want to proof a point. Fundamentally, there are not much difference. I am not here to share with you that I am a good trader, which I am not. In fact, in writing this blog, I have some responsibility to share my experience in evaluating situations and businesses. I may be right - I may be wrong in some situations - but hopefully there are much more rights than wrongs.

Physically the group which also include IWCITY, there may be some impact which I cannot deliberate too much. It all depends on the owners and management as some may take a different approach like expanding overseas rather than locally. Some may take it with stride and move on with another project.

Definitely, I do not know what's behind the scene. However, in my opinion a large scale project such as Bandar Malaysia, there sure are many challenges. I do not see money as the largest concern especially for the purchase of the land which costs more than RM7.4 billion. It is a huge sum but with a partner which involves CREC, it is doable. Let's just say, as a government, there are many ways to kill a project.

IT IS MUCH LARGER THAN THIS.

Anyway, I do not have the clout to comment much on this but to continue looking for good investments.

DO NOT SELL WCE, Airasia and Ekovest

This is a reminder that I gave to myself. Everyone will have their own preferences according to what they are comfortable with. I am comfortable with Airasia, Ekovest and WCE. Those are obvious. In investment as what are mentioned by the top notched investors - it is difficult to find gems all the time.

To some people, they may like diamond, some may like ruby. Others may like Emerald. To me, investments is the same.

THIS DOES NOT MEAN I WILL HOLD THEM FOR LIFE.

However, I am very comfortable with what I have found. Some people may be very comfortable with Top Glove for example as they know the business. Some may be very comfortable with Inari as again they know the business and are confident of their views on the semiconductor sector.

For the 3 stocks, I discovered WCE back in 2013/14. Those people who read my blog would know I have done lots of research on the company and its business. This article is not about me saying again what I have said on the business and company as you can find them here.

Then 2015, Airasia went to ridiculous low price. Around RM1.50 was my price point of buying in. You know the fantastic thing is that I knew while oil price was dropping like from USD100 to USD50, many people were focusing on Airasia's debt which it definitely can service - they were ramping up to fight, hence the debt but those assets were already generating cashflow. Not all high debts are bad! So, while the stock price should have gone up, people were selling down - I should have thanked the Hong Kong research house. So who says Malaysians are not smart - we were buying, they were selling (or could it be talking it down to buy?) - Perhaps, they are smarter. I was perhaps the stupid guy who was telling the truth on how cheap and good Airasia was.

(You would also know I was negative on Airasia X, but not Airasia. I am right until now.) So, you may ask - how is it that businesses in almost the same space can be different although run by the same management? I can be wrong in terms of share price in the short term, but in the long run, I hope I am right.

Last year, 2016 was when I realised Ekovest is realising its asset value and having a fantastic business. They are not the best of contractors but good enough. The thing is though, again I shall say this - they have fantastic assets, which many are already realising cashflows.

Yes, of course I can make mistakes. However, you would note that in many cases of businesses that I have put positive comments - they are good businesses run by good people. Some may face the wrath of situations - such as Parkson, Aeon example. Even YFG - look at how they really try hard to revive the business!

Whenever, I write here - I do not write for purchase in the short term - hit and run. Or pump and dump. The above three stocks are testimony of that. The same goes for Padini, Power Root, Insas, Tropicana, TA, Freight Management etc.

My style is very different. You can read this article and if you believe the same as me - one does not need to read another article of mine for next 3 years. Come back when there is a major catastrophe or war in the Middle East. I am very different from many of the "sifus" out there (which I am not on par with them, because they can work wonders by buying a SCADA system company which they do not understand about - as they only look at the financial numbers.) As mentioned here, I look at business first then financials (although I am a financial person). Note, they are definitely not wrong as there are many ways to skin a cat.

BTW, that SCADA system company is a good company, just that I do not feel comfortable enough to put lots of my money into it. 

I am also not the type of feeling remorse when I did not buy Inari (although I know enough of them) when it was trading at 35 sen 6 years back - this company has achieved a 10 bagger - as I was not comfortable enough - again. Why? Because it was a single customer company - Avago (today's Broadcom). Who knows how its "taiko" is going to treat them? Today, it is still largely single customer although it tries to diversify. Again, some people may know enough to be comfortable. That feeling discomfort caused me lots of potential gain, but I would have sold them long time ago anyway.

In the longer run (10-20 years), things can change. Airasia can be facing new challenges for example or it could have gone overpriced. Similar to Ekovest or even WCE. Sometimes, even in the short term, it can be particularly bad for some companies - example oil price goes through the roof for airlines business. Airasia could be facing regulatory challenges in India and Indonesia or even Vietnam.

I am always (or hope) aware of these. Again, I am not sleeping with my stocks but I am also not careless to sell them when they are growing. This is like you have prepared and provided for your 18 year kid - when is time to realise the benefit - we stop supporting them.

Why I still keep my portfolio

I noticed that there are quite a lot of views on the portfolio that I keep and I thought that I owe some of the people what I do think of it - where after a long while I have not been talking about it.

Right now, the stocks that I hold through the Felice's Fund is as below:

Alternatively, you can also view them here.

One would have noticed, I seldom buy and sell as compared to some other bloggers - some of them I have been critical of. Why? Firstly, if I am to share my portfolio or how I deal with my investment, I always believe that I have to be responsible. If I trade them often, then it is unfair towards the readers. I am not stupid to see that some people do take notice and tend to have a followers mentality (although the decision to invest is ultimately the readers themselves) and just emulate.

You would notice that over the last 2 -3 years some of those stocks that I have bought, would have moved lower than my purchase price during certain times. These happened to stocks like EcoWorld, Ekovest-WB, WCE, Insas. In fact, some of these stocks are still trading below my purchase price - e.g. Tropicana and TA.

(Hence, the moral of the above paragraph is not to follow me as the stock I pick does not tend to have immediate upside. You can in fact wait.)

Those whom have read my articles, would know that in the stocks I picked, I tend to be more careful and have deep thoughts and research over them. In fact, the stocks I picked here in my blog, I am even more careful as opposed to my other personal investment account - where I tend to be more aggressive. In times where stock market is on the uptrend, generally being aggressive would bring more upside. But over the last 50 days where market have been more active, I have not even shown a single trade in my portfolio.

Why?

First of all, I am still very happy with the portfolio that I have. There could be some readjustment...for example, I could have bought more Ekovest and TA - but generally these are just as good.

You would also know that my investment horizon is over many many years to an extent that I have penned down it is a 2027 target. Basically, this means very long term investment. For those whom do not have that kind of horizon, please do not try to emulate.

Why again WCE

As an example again, WCE - one will not see good positive numbers until few years down the road. The only number I tend to follow is how much its development expenditure has gone up to. Through that, it gave me an indication that the project is progressing - although not the best indicator. Besides that, I also see its borrowings level. These numbers will not tell me whether the company is able to keep the construction within budget - but to me as long as it is within certain range, it is good enough for me.

WCE definitely is not a "sure thing" stock, but I have certain confidence that I think it has a good probability to succeed well. My margin of safety is the upside is huge while the downside is lower. Just to give an example (which sometimes I have mentioned before but did not elaborate).

WCE is a holding company. It holds 2 main companies - WCE, the highway which it owns 80% and Rimbayu which it owns 40%. We know that Rimbayu is quite safe as it has land and these projects are now selling albeit slower due to the slowdown in property sector - but it will get there. Whether the project is 15 years or 20 years, there are limited downside in my opinion. But the upside is not that much - perhaps slightly more than RM1 billion in total?

As for WCE, the highway subsidiary, currently the company is raising hundreds of millions to pump into the project. People who invest mostly would know that the holding company is ring-fenced against its subsidiary's bad performance. Assuming (which I do not think so), WCE the highway is so bad that it does not perform at all - something like the Seremban - PD highway. Then WCE Holding's return from WCE highway is zero. It will not be negative as they are different entities and one should note that some of the bonds are guaranteed by Danajamin. Even if WCE Expressway needs more funds injections, there are ways to get around it without affecting WCE Holdings that negatively.

On the other hand, its performance on the upside is tremendous even with say 8% IRR. I will not show you the cashflow but people in finance will be able to figure it out. Or else, just think of it this way after the completion (with an IRR of 8%), the compounding would be just crazy over 50 years. This is why I take note of the progress of the project.

What about others?

Again, most of the stocks I hold are for long term. These applies to Ekovest - which has similar trait to WCE but with more immediate return. The structure is quite different. With WCE, it is more direct, which is why I hold WCE more as well.

I do not have to put much mention on Airasia. The more I say, there are certain groups which would say I try to move the stock - but if you look at its daily volume, you would know that no 1 single individual can do anything to Airasia's stock performance. At this moment, I can say is that I admit the structure is not simple (and that is admitted by Tony Fernandes). The devil is in the detail, and once it gets simpler, many things would be clearer. Another thing is that the group does do things. They talk a lot and they do a lot as well. Some companies do a lot of talking but do not do. Airasia REALLY sells tickets.

As for DKSH, well to me it is one of the cheapest consumer stock which can have large upside. To me, DKSH has yet to perform to its ability - which is why it is my longest holding stock i.e. since I started this portfolio.

What about Ecoworld? Just purely a fantastic property company. Anyone who is in the premium property business would have wished that PNB did not do a big controlling purchase of SP Setia - because it created a bigger monster. And ironically, it competes BIG against SP Setia as well.

Insas? Inari is real and through that alone Insas is certainly cheap, just that one would wish that the controlling shareholders provide a fair deal towards its shareholders. There is a tendency for the controlling guys to do an ICap which is not fair. The only thing I can say is if one gets older - there is a higher chance they get more sensible. Insas controlling shareholders are not getting younger.

TA? Quite similar to Insas but (don't know why) I am more confident towards the attitude of the TA's shareholders. For one thing, in the past (many many years ago), TA was a darling, hot stock. Today TA is no longer that and the controlling shareholders I hope does not have that mentality. It is just that - it is true, TA did not perform well financially in the past few years and many people just does not understand its financials which can be more complex. In this case, I hope time is my friend.

Tropicana? Wow, like I have said before Tropicana has changed in its business strategy and not many people understand that. It no longer holds single individual properties all over the place but holds huge development land in attractive places. It is not Ecoworld for sure, but do go over to have a look at Tropicana's projects and you would realise that it is not a RM1.4 billion property company.

Ekovest's new highway(s)

This is certainly a surprise. Ekovest announced not another highway that it has gotten an approval in principle but 3 highways! These highways are named Kampung Baru Link, Istana Link and Kapar Link Expressway (as below).

Before anyone got excited (me included) these are non binding agreement as mentioned above. Basically, non-binding means that it is NOT CERTAIN. However, in most situations - they do have merits for Ekovest to announce them. Otherwise, no one would go to the process of looking through a detailed project such as a RM6.32 billion highway.

Very little information (or non at all) can be found on these links - which makes this announcement a big surprise. To be honest, I did not put any projections for Ekovest to secure (or bid) for new highways as I thought the Setiawangsa-Pantai Expressway is tough enough.

My little worry is whether Ekovest has taken too much than it can chew?

Anyway, who am I to say don't take on more jobs. If this thing comes fruition, I definitely look at it as positive and it seems Ekovest is going to be the largest highway operator in the country, after UEM. Larger even than IJM, I presume (in terms of value not length).

Now, the subsidiary that received the letter is not KESTURI (which is DUKE 1 and 2 which just sold a 40% stake to EPF) or SPE (under Lebuhraya DUKE Fasa 3 Sdn Bhd). It is another company - a 70% owned Lebuhraya DUKE Fasa 2A Sdn Bhd - not 100% owned.

The name itself, signifies it may have linkage to the current DUKE. However, one point to note - unlike other highways which are all within Kuala Lumpur, this one seems like it would have to pass through Selangor (especially Kapar Link). Kuala Lumpur and Selangor is different and we know the difficulty of getting it approved on another state front as land matters are under the state government. There was one highway which was cancelled and another - DASH which is still under consideration.

Well, these are too much of speculative thinking.

Ekovest: What is IRR 10%

In the deal that EPF has signed with Ekovest, as mentioned, there is 1 most important clause - which is the guarantee of 10% IRR by Ekovest to EPF over the period of 5 + 2 years.

What is this IRR for those non-financial people. Basically, what EPF and Ekovest have agreed is a valuation of RM2.825 billion on the DUKE Expressway (DUKE 1 & 2). That valuation has a condition i.e. it must provide a IRR of at least 10% to EPF - a good deal to EPF as it gets guaranteed 10%.

What both parties do is that they most probably use a Discounted cashflow (DCF) method and work backwards whether the revenue, cashflow and profits achieve the intended minimum 10%.

As mentioned, there is a target to get into an exercise be it IPO or trade sale etc for the asset. If Ekovest does not achieve that, it will have to payback to EPF at a certain guaranteed arrangement.

Based on the below table, this is the assumed valuation of the highway in the event there is no dividend paid. It will on compounded basis grow 10% every year. I have provided a row on what would the value be for EPF and Ekovest as well since it still owns 60% of the highway.

Please click to enlarge

As an example, by 2020 the value of the highway if it achieves the 10% IRR to Ekovest would be RM2.481 billion. (This is the reason why I am so positive on Ekovest as this is one of its few assets)

In the event, it does not achieve the intended 10% IRR, it would be however detrimental to Ekovest - which is also why in several news report they have mentioned of their intention to quickly do an IPO probably by 2018.

I however do not think it is that bad as I trust the management to have that confidence that it will achieve 10%. In fact, if I read between the lines, EPF sees it will achieve more than 10%.

By the way, as I know despite I write so much I have not put in my money under this particular personal fund for Ekovest, I have decided to do what is obvious by buying 5000 units of Ekovest-WB (this is how confident I am) as it still has about 2.5 years to go before expiry. I took the opportunity of yesterday's slump to do that.

Purchase of Ekovest-WB at RM1.30

The purchase is partly helped by my sale of Insas-PA as I think the remaining more than 5% of return could be better now.

Sale of Insas-PA

Ekovest is for the long term

Yesterday, Ekovest came out with a long well crafted filing for its sale of 40% of DUKE Expressway, and when I asked my dealer on whether there are any analysts that provide report based on the filing made - I guess most analysts went home early, more interested into deciphering the US election than looking at the long-winded filing(please read them if you can) made by Ekovest. Ironically, the dealer of mine passed me an article and that article is this. I did not know they follow me too. Hence, I decided to write another one.

In deciphering the entire purpose of the company and what they intend to do, I would say Ekovest's management have been very fair to its shareholders, thus far. This is in considering that it is the type of management that is able to get into Iskandar Waterfront and Bandar Malaysia projects. They have done well in this respect.

What's important in this filing?

(Again: I request you to read yourself, even though can be tough - http://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download?id=75898&name=EA_GA_ATTACHMENTS)

1. Special Dividend of 25 sen per share;
2. Split share of 2 into 5 shares of Ekovest - hence par value will reduce from RM0.50 to RM0.20 per share
3. IRR guarantee - The way the agreement between EPF and Ekovest is drafted, it is with a purpose (I would say) for a listing of the highway business within 5 + 2 years from the completion of this deal

1. Special dividend - 25 sen

I guess I do not have to explain this much but upon completion of the deal with EPF, Ekovest will pay 25 sen per share of dividend to its shareholders that hold the parent share (now RM2.35). This includes those warrant holders that have exercised the shares into parent within certain allowable timeframe.

Few things to note, based on below (if I am not wrong), even if you hold the warrant the warrantholders will not lose out as its exercise price will be adjusted accordingly after the dividend payment. Also the share split which I will discuss in the next point, the warrants will be equally split as well.

Proposed distribution means the special dividend distribution

Do also take note that from the sale valued at RM1.13 billion, RM244 million will be distributed as dividends while RM400 million to repay borrowings. The rest are for working capital and other purposes such as fees.

Details as follows:

2. Share split

As usual, the share split is to make the shares more tradeable - nothing significant but I guess the number of tradeable shares will increase to about 2.44 billion shares (inclusive of the converted warrants). The dividend will be paid first then only the shares will be split from 2 into 5 shares. As mentioned, the warrant holders will not be prejudiced. If I am not wrong, assuming the warrants exercise price is RM1.35 and after the dividend payment of 25 sen - it will be adjusted to RM1.10 before the split. (Do let me know if I am wrong.)

Proof of additional warrants to be issued

3. Exit via IPO, trade sale etc.

This item 3 is the most important and one which we have yet to see prior to this. (I DO expect good dividends, prior to this announcement).

To cut things short, basically there is a guarantee of 10% IRR to EPF for the next 5 + 2 years. (EPF has protected itself well - so everyone thats working should be happy). If Ekovest does not achieve the intended target, it will have to pay EPF the difference through the monies that are allocated under the escrow account (RM149 million). The whole negotiation as I see it is to find another place for the highway asset - most probably IPO (see below).

I would say that itself will allow shareholders of Ekovest to benefit from the dis-entanglement exercise. Most shareholders, I presume would prefer a direct exposure to the highway assets as compared to now park under Ekovest, the holding company.

For me, this is the most important element in the entire filing as it inherently explain the intentions of the organization in discussion with EPF.

I have mentioned of the intrinsic value of Ekovest. It depends on whether the management will want to surface them and allow shareholders to participate. In some events (cases like Tradewinds Plantations, old Maxis, Mamee example), the major shareholders wanted to take most of the value by privatising their controlled companies.

Seriously, I was concerned that it could have done that as the shares was trading at around RM1.00 - RM1.30 for some time.

With this exercise, I am convinced of the company even more, I should say.

What needs to be done by Ekovest

There is no doubt that Ekovest has still a lot of value although to many people the stock has climbed from around RM1.00 to now RM2.25 within less than a year. As much as one can get excited, I should also be afraid that despite good value, stocks can still go back to hibernation and that was what Ekovest was for many many years - since 2000, as I was doing some tracking back on the progress of the company during the weekend.

(Note that I prefer to look at Ekovest as valued at RM1.925 billion at price of RM2.25 rather than just the stock price itself)

For many years, the company has had many construction projects and the company's performance has been fairly volatile as I had mentioned in most construction companies. Its performance has been dependent on projects it has managed to secure as well as signed-off to register the revenue as well as profits, if any. Ekovest had one good break way back in 2004/05 where it secured the DUKE 1 project, however at that time it did not own the concession. The bigger break was back in 2012/13 when Ekovest through issuance of new shares has managed to secure 70% of the concession rights for DUKE 1. Following on, DUKE 2 and later DUKE 3 (now renamed as SPE) have been secured. As mentioned in my article earlier, these are very valuable assets which are able to provide good cashflow over the next 40+ (DUKE1 & 2) - 50+ years (SPE).

There is no other better ways to value these kind of assets besides using DCF and it seems there is already a certain growth trajectory for both parties i.e. EPF and Ekovest to agree on, hence I am quite confident of DUKE 1 & 2 (DUKE Expressway) value as given, or at least close.

Note that in the valuation of DUKE Expressway, a binding agreement was signed with a valuation of RM2.825 billion provided although subject to due diligence by EPF. Ekovest's stock is hence suspended for 2 days to allow finalisation of the contract between EPF and Ekovest although some variation to the earlier agreement may happen after EPF's final due diligence. I would think, for EPF to be committed at a certain valuation before the due diligence, the value of DUKE Expressway is already very close to the valuation of RM2.825 billion. Even if the negotiation is to fail, there are other ways for Ekovest to surface its assets.

I have read of the management of Ekovest intention to list the highways as REITS. That is a possibly good method as it allows direct participation from investors into a certain asset class. If one is to read how EPF's involvement into private equity deals, it has many times put money into a certain cash generating assets and subsequently either allow them time to be have a better and more certain growth path - then monetise them further. That has happened to PLUS and it seems KFC is going through the same path. It is not certain whether EPF may be interested to do the same with DUKE Expressway but that can always happen, and to me is the way to go to provide better returns for its depositors. There are many ways to structure the REITS IPO (if any). It could have directly submit for DUKE Expressway first, then only SPE or could have done for all the 3 highways in one listing. 

With the separate listing of the highway assets, I could safely value the DUKE Expressway and SPE to be not less than RM3.5 billion, even taking out the EPF's 40% portion. One should not forget that by 2018, SPE has still more than 50 years of concession period counting in the construction period.

Although the timeframe for SPE to be monetised (for me) could be too early if it is to be done by 2018, but I guess if it is done the RM1.13 billion cashflow from the sale of 40% of DUKE Expressway may not be used entirely for the equity portion of SPE. This will provide Ekovest with more cash.

I am thinking if the management of Ekovest wants to make it right and not putting the company's stock into hibernation, surfacing the assets individually especially those with good cashflow is the way to go. Let the investors decide which they want to invest into.

Is Ekovest investible?

After the article on Ekovest a month ago, its share price has since rose from circa RM1.95 to now around RM2.18.

(Before I deliberate on this topic, I would like to insist, I have always been very careful when putting my positive comments on a company as it has to be a long term value stock. My definition of a long term value stock is always about one potentially can be putting away his/her money for years as investments and the fundamental of the company has to be of creating value to its investors. Value investment is always a subject of debate as is it just an undervalued stock or is it also a very good company which will consistently provide better value than other companies among its peers. In my perspective, it is always more of the latter where it will continuously provide investment value, than the former i.e just cheap stocks but can also be poor in terms of business performance.)  

Ekovest to me is putting itself to be a company with recurring revenue from its assets although at this moment, it is still more of a construction company. I will put the composition of its construction:property:toll businesses at the moment to be as follows 60:15:25. (I know, I am aware of how I described Gadang)

In 3-4 years down the road though, Ekovest is going to be a very different company. That is very important to me as its composition will be more like 35:15:50 in the order of construction:property:toll. Why?

Its toll business itself may potentially be even bigger than LITRAK. As it is, for DUKE 1, after its 6th to 7th year of operations it has started to register good profits (cashflow wise, would be even better). By the time DUKE 2 and SPE become operational, Ekovest could be a very substantial toll operator than a construction outfit. (I would be even more amazed if its construction arm is to be just as big, which means that it will be getting more jobs)

Yesterday, in a Q&A session, the CEO of EPF put down that for his private equity investments, he is looking at IRR of between 10% to 13%. He further mentioned,

“If you look at the types of assets that we have been investing in, they would typically have an IRR range of between 10% and 13%, depending on the risk profile of the assets, the tenure of the concessions and the security of cashflows

“For instance, a power plant asset which has secured power purchase agreements would be in the lower range, while something that has a bit more revenue volatility would be in the higher range,”

I will take it that for DUKE as it has some volatility, EPF is probably looking at around 11%. In today's low interest rate environment, where US is offering almost zero, 11% is very high. I would not mind putting my money in stable investment which returns 11% IRR.

From that perspective, I will take the positives and negatives - if I am an investor of Ekovest, it is willing to let go 40% for 11% IRR, this is a negative. I am sure that it can get better deals elsewhere. I in fact think that whatever it is, selling to EPF is a defensive strategy. It is the same as one cannot terminate the PLUS concession (in the event there is a loophole) as it involves 49% holding by EPF (hence our money), unless the government decides to pay off all the debt, to me not possible - around RM23 billion.

From a positive standpoint, Ekovest still has 60% of that asset which it stands to gain 11% IRR (at valuation of RM2.825 billion) still with more than 40 years of toll to collect (in fact more in actual value, as a concession investment such as DUKE has a definite concession period, hence when doing a DCF it will take into account that definite period - not indefinite period in which case they use terminal value). So for any investors, even putting money for DUKE already has his money worth with very strong IRR. For me, if the IRR of 11% is right, Ekovest's 60% ownership could translate into at least a good multiple of what the EPF is paying for as concession assets has good value - just look at LITRAK which still enjoys 16x PE despite its concession to remain around 15 years?

And as mentioned in previous article, what about Ekovest's other assets such as SPE, its construction business and property projects? They must have worth some good numbers as well.

Is it investible though?

Now, after the above, is Ekovest an investible stock? There are several benchmarks to a company. Firstly, even if it is to make money, bring in good cashflow (remember, some red chips (China's) companies showed profits, cashflow but without or little dividends) - would the management be ready to share part of it in the form of dividends? Here are the track record of the company's dividend payment since 2000.

Dividend and net profit of Ekovest from FY2000 to 2016

I am quite comfortable as although for certain years, its dividends to net profits dropped (2012 - 2013) - that, I believe was mainly due to the company needed funds for the acquisition of DUKE assets. Ekovest does pay dividends every single year during the period in review.

The management has mentioned of its willingness to pay some of its returns of RM1.13 billion to shareholders. That has yet to be announced. If I am to read its cashflow requirement, the amount should not be too low - i.e. not less than RM100 million.

Another thing which was of concern to me was that the free float for Ekovest was way too low for some time - somewhere in the range of 5% to 10% as it is still a very tightly held stock - through Lim Kang Hoo's family, Haris Hussein (brother of Hishamuddin Hussein) and an old partner of Lim Kang Hoo, Khoo Nang Seng. In the last few months, the two groups except for Lim Kang Hoo had disposed off some of their shares. One may think that they are selling early which is a bad sign, but that has also translated into more liquidity for the market. (Frankly, I do not know how to read this.)

Ekovest has not been a much followed stock because funds do not like low liquidity stocks especially the sell side brokers. They are not able to introduce much to their clients as there are not much stocks to buy. That to me is changing for Ekovest. If I am to read right, some if not all portion of Haris Hussein's sale 6 months ago went to several funds.

As it is still at good value, I see the funds coming in a bigger way - as they are becoming visible for the bigger guys. That's how I see it as Ekovest is surfacing some of its value.