Buy Insas and Sell Parkson

It is a huge mistake by me as I am behind the curve in terms of retailing. The next wave of retailing seems to be is for companies like Alibaba and Amazon. I am currently reading the book on Amazon (The Everything Store) and I came out quite impressed on the level of technology investments as well as how much changes have been made by Jeff Bezos. Similarly, I have seen interviews made to Jack Ma and I must say that these two guys will be changing the face (or already are) of retailing or how people will be buying things in the future.

This of course does not mean companies like Parkson or Aeon or even Tesco will be dead but they definitely are affected. I must say I am behind like 5 years in this as sitting in Malaysia, we are definitely not seeing the full force of the changing face of retailing. This year alone, Walmart, Tesco are affected and they are not seeing growth. Their competition are not just Sainzbury, Target but the new wave of online commerce. Obviously, Parkson which have significant businesses in China is affected and they seem to change the way they do business as rental rates seems to be tougher for these companies.

Parkson has gone towards the AEON Malaysia model, where they have started to look at owning real estates, however it seems to me they are 10 years late. I hope for Parkson, it is a case of better late than never.

Anyway, I think this is time for me to reposition my holdings and I have decided to sell Parkson taking a huge loss (percentage wise) - do not want to calculate as it is a case of me taking too much time to realise my mistake. I am just glad I did not put too much money into this.

Buy Insas

I have written a piece on this company before - in fact two as the second one is more about its holdings on Inari. The thing I wrote is still very relevant but just that fundamentally Insas has improved over the 1+ years. Inari seems to me is getting more solid by the years and I have done a careful look at Insas past and it seems to me their concentration is more on the technology sector (largely Inari's contribution) nowadays. I had the opportunity to meet one of the directors before and I must say that these are very careful and thinking people - so much so that they are really strategizing every steps they make. While they do seem to plan a lot, you hardly can go wrong with this kind of management.

In the past Insas seems to me were more dependent on its other businesses such as M&A Securities which to me is not too interesting although they do manage the business well I must say. It also had made good money in several investments such as a London property, Gleneagles KL etc. These goes to show that they are very solid investors who know what they are doing. The most recent success as mentioned was definitely Inari.

Insas is trading well below its registered book value (RM1.80/share) and for me this kind of companies they should be trading close to their book value. An investment company especially with large holdings in a securities firm will see huge swings in their profits but to me it is allright as long as they are good assets. Its current price of around RM0.80 is significantly below its book or revised book value which I can easily see at beyond RM2.00 per share. This is because it does not recognize the full market value of Inari which in terms of the holding value for Insas should be more than RM500 million. Note that Insas is now trading at around RM560 million market value - i.e. almost similar to its holding in Inari alone. Only thing is why they do not do share repurchases really beats me...

I am buying this also due to I can see there is a level of confident on Inari's future with the company calling for Redeemable Preference Shares to subscribe for the rights call by Inari. I personally feel that it must be due to there is a good mid term prospect for Inari for it to continue to expand.

As such I am buying a good 10,000 units of Insas.

Note that Insas is issuing a Redeemable Preference Shares at 1 for 5 shares held and they are also providing free warrants at 2 for 5 shares.

Looking at Inari to understand Insas (Revised)

This is an update after a highlight from one of the readers. Thanks

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Anyone who puts in money in Insas over the last 4 - 5 months would have made decent sum - increase from RM0.50 to now RM0.94, which coincidentally was about the period which I wrote about the company. In this particular article, I wanted to know what makes the sudden rise in the stock price whereas it has been in trading in the RM0.40 to RM0.60 for a long time.

I wanted to know what type of character are behind the owners. As in my previous article, again not much can be known except that it is led by a careful investor, Datuk Thong. To do this, I would like to take a look again at Inari. Inari is a hugely successful invested company made by Insas and I would deem it to be successfully managed by the group of management. Insas has about 36.6% of Inari and on top of that it has about 16% of its warrants. Those holdings in Inari alone is worth about RM292 million according to Inari's price todate.

Inari Amertron is involved in EMS business. Just for knowledge, the largest EMS company in the world is Foxconn or Honhai which many people know manufactures for Apple and many other companies. To provide a simple analogy, EMS is something which some technology companies do not want to deal with as many of these companies largely concentrate on the technology aspects, hence phasing out some of the work to specialised companies like Hon Hai (for Apple). Inari is such for a company called Avago.

Avago, a spin offs from the old HP company and is hugely successful in having a large penetration supplying power amplifier chips and other technologies to most of the smartphones and tablets companies. As smart phones' penetration continues to grow, Avago as expected flies. Similarly, Inari riding on that wave as a contract manufacturer for Avago is enjoying that as well to the extent that its share price becomes one of the most successful IPO of recent times.

Inari's price chart since IPO

I know that Inari is doing well. But I wanted to probe further as I also wanted to know is there any action taken to take advantage of the over-exuberance towards the company. While Avago and Inari are performing, it is a business which I am not able to gather my thoughts or foresee over the next 5 years for example. It is a business which is largely dependent on orders and contracts. Apple's iphone and ipad, and Samsung's Galaxy or HTC's line of products may be using Avago's technology now. This things, as we know can change, which is why over the longer term it is important for Inari to not be overly dependent on Avago although it has been a very good partner.

A look at its financials can be done to sometimes ascertain that.

Based on the above numbers, it is pretty solid with good revenue and PAT growth. Against its free cash flow however, Inari does not seem to be doing that strong. I can partly understand however as one will need to invest quite substantially for it to grow as a EMS player. This I believe is warranted.

PAT and GP margin for last 9 quarters

I would be a little bit careful of this numbers although it is a registered audited number. Looking further into its 2Q2013 quarterly announcement, I felt that its statement was too bullish. It mentioned that its margin improved substantially due to economies of scale as provided below.

Would Inari be a good buy for the future and how about Insas? As mentioned before, Insas has some intrinsic value where as a investment company, it is doing decently well. To how much would the shareholder be providing value to its investor, that very much remains to be seen.

Inari, on the other hand would still be very dependent on Avago while Avago would be dependent on its technology for the smart phones and tablet industries. That is a lot of "IFs" I would say and looking at its share price todate, if one is to still jump in - I just have too many questions still. It is now priced at close to Globetronics market capitalisation and how it achieved this is just too strong for a EMS player.

Nevertheless, if it is able to achieve that momentum, the current traded price is still attractive.

Is this not the most undervalued stock? (Updated)

Wrote this in July 2013. Now is already 1 year 9 months later. The price has rose to RM0.95 from RM0.52 when I wrote them. The company has also raised additional funds from Preference shares and puts in more money into Ho Hup and others. What more has changed?
Felicity (14 April 2015)
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Investing for me, is about looking for great businesses. This however does not apply to everyone. Some may just want to search for companies that are undervalued to its book value. I do not specifically seek for those stocks. What I usually look for is a business which I can understand, comfortable with. Those that I can see and understand the potential - but those stocks may not be the most undervalued. In fact, it may not be undervalued at all, but as in business, you do not seek for just undervalue but good valuable companies is what you seek.

Most good businesses are usually not undervalued. Good businesses are usually trading at fair value. Seldom are we able to get them at prices which is way undervalued unless, we found those companies at its early stage.

To judge a company's undervaluation based on book value though, it is much easier. A company that is trading at below its book value (with some margin of safety) is presumed to be undervalued. This applies to one particular stock which I am going to introduce as below - Insas Berhad. This company should not be difficult to value as the type of holdings that it has are in the form of investments - largely stockbroking business, Inari Amertron, Ho Hup, Omesti and several other smaller investments.

Is it not one of the most undervalued company by Price / Book Value - trading at 54.76% of its total book value?

If it is so undervalued, why is it then trading at such a valuation? No dividends, perhaps. The company in fact declared its first ever dividend of 1.3 sen last year (2013) and 1 sen each for subsequent 2 years.

Or more so the controlling parties, are contented (with what already have). To address the low price / NA, the management do some shares buyback - and in fact for certain period, they were aggressively buying back their shares. But those shares bought back were redistributed back to the shareholders in the form of share dividends - which makes me wonder on why do they do that. (I however feel that their buying back is the right thing to do rather than dividends.) Insas, should in fact do more buybacks and even at price of RM0.95 these are seriously attractive for buyback.

In terms of performance, as it mainly is an investment holding company in the areas of business which is very cyclical - stocks investment (marked to the fair value of investment), stock broking, some property investments, several IT related businesses, no one seems to be able to foresee what are the prospects or future profitability of these businesses. However, the management did manage to create value (albeit not fantastic) as shown in the growth of its total assets and equity below.

Frankly, I would not judge the company to be poorly run, but it is one of those companies which are just inaggressive where the controlling parties are just too contented with what they have. Once a while, they would have made some good investments as shown below, but these returns are kept at the group level and not shared with shareholders (usually in the form of dividends). Note: since these were written, the management has been much much more aggressive - issuing more funds to buy more businesses. They have been more aggressive in their moves i.e. investing into new companies. 

One of the scenario which shows that the management have done some great work is as per below where the company has gained 80% over 3 years. These investments however are the ones which only comes once a while, and will not be contributing consistently to the company.

Part of the statement in Annual Report 2010
Last year, we reported that we made a sizeable investment in London in Chantrey House, a residential cum commercial property in the Belgravia area, a prime property location in central London. In conjunction with our UK partner, we took an equal interest in the investment amounting to 22.5 million British Pounds. Since we purchased that property, central London property prices have recovered strongly. Current prices for apartments in comparable locations are transacting at between 1,200 to 1,400 Pounds per square feet compared to our purchase price of 670 Pounds per square feet. We intend to hold on to this investment as we believe property prices should continue to rise in view of the low interest rate environment.

Part of the statement in Annual Report 2012

I am also pleased to report that subsequent to year end, our 50% joint-controlled entity has accepted offer to sell the London’s Chantrey House property for £37.6 million, and the sale price represents a 80% capital appreciation over our original acquisition price 3 years ago. The sale, when completed, will generate free cashflow in excess of RM50 million to Insas.

What is Insas core businesses then and where is its revenue and profit contribution from? Its main involvement is in the investment holding, trading and financial services and credit (money lending), and leasing (as shown below):

Investment holding as highlighted below is what they do with their cashflow, which means they trade stocks as well as buying bonds and other financial instruments:

Besides stockbroking, money lending and investments into several businesses, one noticeable investment is its associate stake in Inari, a semiconductor company which is doing extremely well. On paper, Insas' holding of 30% + warrants in Inari is already worth RM800 million as at 14 April 2015 (as compared to accounts where it is recorded at book value). Hence, the holdings in Inari is already higher than the market capitalisation of Insas and if one is to account the investments at market, the Net Asset / Share of Insas is more than RM2.50. (Is it not undervalued?)

It has also gone on to purchase the revived Ho Hup Construction, a counter which has a very interesting landbank in Sri Petaling. The property is being managed by the same party who manages Pavilion. Having said that, if it can do achieve a quarter of Pavilion is achieving, it should do well already. (It is different location though - very different)

For most part of its businesses, Insas are involved in mostly cash related trades (or businesses) which means they are liquid traded assets, hence the company should not be trading at that much below its NTA. It is not really a property company in which case the landbank may take a longer time to be disposed.

As many would have thought though (including me), Insas has been trading that way for ages, and the management is not going to change its way of handling the company. Insas has about 33,000 shareholders which means there are quite a number of holders whom are caught holding the stock for a very long time.

As for its future, as long as it is into businesses of investing and stockbroking, it will continue to be the same i.e. pretty volatile. I feel that for it to move  upwards i.e. closer to its Net Asset Value, the minority investors have to do something and voice out more so that the management take heed over the voices of the masses. Only then will it trade at its real value.

I do not think the management has taken the shareholders for a ride but they are surely not doing enough to take care of minorities interests.