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.