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.

WCE 2Q19: Commentaries on progress and accounting

WCE has just announced its financial report for 2Q19 which we would have expected as the company has yet to start toll operation. It has just reported a loss for the quarter and that is because it has to account for interest expense for the sections that is completed because it cannot capitalised the interest anymore. (These are accounting treatment but I do not see it starting to pay interest yet)

The higher finance costs can be seen as above. Its explanation is as per below.

Another point of note which we do not see in the previous announcements. This is more important as it foresees it will not be able to register profits for several years in its account as mentioned below due to interest expense which of course would be higher as it is bearing the full loan's interest in the early years as well as usual amortisation costs while waiting for the toll revenue to improve over time. However, we could see that the project to be cashflow positive as mentioned below. (I have mentioned before of losses in the early years while cashflow would be different) Of course these are all projections and forward looking statement.

It also mentioned that it expects to commence toll collection by December 2019. Let's see.

Where are our stocks heading? Is Malaysia Inc. happening and strategies for our Bursa market. Part 1

At the time of writing, we already know of the landslide victory that BN had with its MCA's candidate winning more than 15,000 votes turning around a lost to a win. This by-election win by BN will bring a more challenging situation for the market at least for the next 1 year - if not beyond the GE 15.

This first part of the writing, I am focusing on Malaysia Inc. - a strategy that was close to Tun Mahathir during his 22 years tenure between 1980 till 2003. During then, we know that many government corporations were turned into corporate companies - from LLN to Tenaga Nasional, STMB to Telekom Malaysia Bhd and beyond which includes Axiata today. Bank Bumiputera through several exercises is a corporate that is now called CIMB.

We also have know of Tun Daim - the mastermind of Mahathir's Malaysia Inc. strategy with several associates which includes Halim Saad (UEM, Renong), Wan Azmi of Land and General, Tajuddin Ramli (the original Celcom owner and later MAS), Samsuddin from Granite Industries and several more. There were of course many businessmen whom have made it through that tenure of Tun Mahathir, as he is a person who is keen to allow capitalism to succeed. Those businessmen are Ananda Krishnan, Tan Sri Gnanalingam, YTL (of course), and to a lesser extent Genting's Lim Goh Tong and his son, Hong Leong's Quek Leng Chan and Tan Sri Mokhtar al-Bukhari.

After 9 May 2018, we would have expected the similar strategy to be revived. Khazanah Nasional among its first move was to sell off a stake in IHH - almost controlling stake - to Mitsui. There were talks of MAS being divested or investors invited, PLUS's stake being reduced or fully sold. Tun M himself had mentioned before he is more keen of government encouraging businesses to excel while the role of the government is to get a share of the profits through taxation.

Well, that strategy has yet to see any movement - at all - except for the IHH's stake sale. Even then, it was a change of shareholdings rather than management. As mentioned above, the Tanjung Piai's results may probably see the strategy which already as it is difficult - to be even more challenging. Mahathir will have groups whom will be objecting to several of his strategies, and he is running out of time. At the moment, nothing concrete is coming and we know that for any corporate moves to make them happen, will take a few years. Tun M does not have that time - more so there are 3 main parties involved (Bersatu, DAP and PKR - the other 2 Amanah and Warisan seems to have lesser say and would probably be more obliging). For any private companies, there is this worry as well  additionally, will the next administration be open to private businesses.

After the 1998 Asian crisis, Khazanah if one can remember was growing and active. Several of its moves were to rescue companies like Time, UEM, Renong and Bank Bumiputera. If Tun M had his way, I believe that rescue were not meant to be for long. However, since then, administration changed twice and government linked companies were getting stronger. There are arguments that with government in business, it is curtailing the growth of private businesses. At the moment, about 15 companies under the KLCI are government controlled. Malaysia especially the GLCs head are already comfortable with GLCs controlled companies.

That situation is going to be hard to change. In the past, we parachuted business owners to own the business - think Tajuddin Ramli with MAS. I believe that will be very hard to happen given the challenge that Mahathir has - case in point PLUS. Khazanah is against it, the Finance Ministry is against it as well. One cannot fault these two entities to be against the purchases though, as PLUS is among the more lucrative assets that the government owns.

This is the reason why KLCI will be a bad performer

With about half of the companies under the KLCI government controlled and the strategies of the government in limbo, many investors rightfully would be staying on the sideline. It does not help when these counters are not cheap in their valuations. The ones that seem to do the supporting are again the government controlled funds. How much can they support as ultimately the one that is important is the financial results? That is also why GLCs cannot afford to slack. If any one of the company is slacking, it may impact KLCI. Example: Telekom Malaysia when a year ago the Minister in charge opened up the fiber broadband to other players. It was the right thing to do, but it affects Telekom and ultimately KLCI.

What do we do then?

We have to basically avoid the large counters especially the ones which are not founder or privately driven. When there are situations whether things will be changing or not is causing the GLC companies to be less attractive. When government is not coming up with a certain and solid direction, employees would be waiting at the side - doing the waiting game. That is not efficient.

If we want to still invest into Bursa, the way forward for now is to look for companies that are less impacted by government policies. And that is the one which I am going to discuss in my future article as Malaysia Inc. policies is not clear and it is not going to help either party.

Positive trend from trade war should be coming through PIE Industrial and VS Industry

The early impact of trade war can be seen now. While companies are scrambling to reorganize their supply chain, within the short run we see deterioration of international trade. Yesterday, Malaysia announced a 4.4% GDP growth - not bad given the circumstances. Export sector has seen a drop expectedly. As discussed in my previous article, we will see some companies benefiting from the trade war while others may suffer. I foresee those that are benefiting in the long run would be

• PIE Industrial
• VS Industry
• Globetronics
• Pentamaster has shown a surprisingly positive results

While those whom will be immediately impacted are:

• Inari Amertron
• KESM
• Unisem
• Carsem (MPI)
• Aemulus

The announcement provided by Statistics Department which is not a surprise,

Malaysia’s exports of goods in the third quarter of 2019 recorded a decrease of 1.9 per cent to RM247.0 billion as compared to RM251.8 billion registered in the same period last year. The main products which attributed to the decrease were electrical & electronic products and crude petroleum that shrank by 4.9 per cent and 43.9 per cent respectively.

For PIE, it announced a better 3rd quarter results yesterday against previous quarter of 2Q19 as well as last year's quarter of 3Q18. While its profitability improved (due to foreign exchange gain, lower administrative costs, reversal of impaired collection), its revenue dropped a little.

It is a decent result given the circumstances. It is expected as US imposed additional tariff starting on 1 September 2019 causing companies to scramble to readjust. We seen the results impacting some companies but still VS and PIE are not affected as much. In the long run they will gain.

What is more important as has been provided by PIE is a guidance on what it expects for 2019 and beyond as below. From what we read, PIE may not increase its revenue substantially, but potentially the profit margin will increase. It is more selective in its business orders - something which one can do when times are better. It is better times potentially for Malaysian EMS companies. We see the same through VS Industry.

Current Year Prospect - PIE Industrial (3Q19)

The major source of revenue and profit of the Group is from its manufacturing segment (99%). For EMS activities (80%), orders are expected to increase in the long run from existing customers and potential new customers through its fully built-up vertical integrated manufacturing facilities which have been improved in operation for the past 5 years. Due to the beneficial effect of USA-China trade war, this division is expected to receive more orders from new overseas customers in 2019. This division will cancel certain new low-margin, high-volume products since beginning of 2019 and focus on profitable projects from potential new customers. The serious shortage of certain electronics component in 2018 is expected to be smoothen in coming quarters. However, any drastic fluctuation of Ringgit Malaysia against USD will be the main factor affecting its performance in the near future. 

I see better performances for these companies in the EMS sector throughout next few years as the global trend is changing and for the better.

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.