SOURCE:http://www.nextinsight.net/index2.php?option=com_content&task=view&id=2226&pop=1&page=0&Itemid=60
Written by Value Investor
Friday, 26 March 2010
The writer is a shareholder of Keck Seng Berhad and a professional in the investment community in Singapore. His article is not a solicitation to buy or sell shares in Keck Seng. The stock has soared about 50% in the past 2 months. The early buyers probably understood the idea of adjusting book values, reading footnotes, etc - which is the key takeaway that the writer would like to share.
KECK SENG Berhad (Bloomberg: KS MK) is a Bursa Malaysia listed company. It is involved in four core business - plantations, palm oil milling, hotel management and property development.
The book value of the company (RM4.98) does not reflect the true economic value of its assets. This is because the company has not reflected the true market value of its securities portfolio on its books.
The actual composition is unknown but Keck Seng, from what we gather, owns 4.9 million shares in PPB Group Berhad and 2.8 million shares in Chin Teck Plantations Berhad.
The footnotes to its financials indicate that the market value is RM672 million, sharply above the carrying value of RM254 million.
Under accounting rule FRS 139 which took effect from Jan 2010, Keck Seng (www.keckseng.com) has to fair value its equity investments and reflect unrealised gains or losses in its statements.
Depending on the eventual accounting classification for the portfolio, the unrealised gains or losses would flow either into the balance sheet or the income statement. The impact is likely to be on the former as the portfolio is held for the long term.
Hence, when the company next reports in May 2010, the Net Asset Value could surge to about RM6.70 per share because there is a surplus of about RM1.78 per share from marking to market the securities portfolio.
It is also noteworthy that Keck Seng has a huge land bank in South Johor which is still valued based at 1980s prices. As you would imagine, land value in this part of Malaysia has appreciated following the impetus attributed to the Iskandar Development Region (IDR).
Plans for the IDR include having a Legoland, medical facilities, international universities as well as Chelsea factory outlet.
As a result, Keck Seng's land in Pasir Gudang, Tanjong Langsat, Bangdar Baru Kangkar Pulai and Ulu Tiram is much more valuable than what is reflected on its books. In fact, Keck Seng had to sell 180 acres of such land in Ulu Tiram to the government at RM251,000 per acre.
Using this 2005 benchmark, its entire Southern Johor land bank could be worth as much as RM2.5 billion. If so, this would in turn add approximately another RM9 per share to its NAV!
We also believe that the company's commercial assets are carried at sharp discounts to current market prices. For example, Menara Keck Seng which is located at Jalan Bukit Bintang, the Orchard Road equivalent in KL, was last valued in 1996 at about RM240 psf. Current transaction values for KL office property is about double that.
It also owns Regency Tower, an apartment block which it bought in 2006 for RM62.5 million and Keck Seng Tower in the heart of Singapore's business district.
Besides office properties, it owns several hospitality assets. Singapore readers would be familiar with Riverview Hotel in Havelock Road.
It also owns hotels in Canada (Sheraton Ottawa, Four Points by Sheraton Hotel & Conference Centre Gatineau-Ottawa, and the Doubletree at Toronto Airport), China, Vietnam and Hawaii. Several of these hotels have not been revalued for several years.
Besides its grossly undervalued assets, Keck Seng is cash rich. As at Dec 31, it had a cash horde of RM332 million and no gearing. Investors in Keck Seng are probably expecting higher dividend payouts in the foreseeable future.
It reportedly also has plenty of un-utilised tax credits (RM427 million) which can be franked as dividends before end 2013.