PUNCAK (6807) - [Shaun Loong] - PUNCAK, Still a Hidden Gem?

All information, including recommendation provided in this article reflects my personal view and opinion only. 
This stock was brought to my attention from The Edge Malaysia weekly (21 - 27 March 2016).

Recently back in 15 October 2015, PUNCAK has disposed off its main profit generating subsidiary Puncak Niaga (M) Sdn Bhd and Syarikat Bekalan Air Sdn Bhd (SYABAS) for a net cash inflow of RM 1.443 billion. Subsequently, PUNCAK rewarded its shareholders with RM 1 dividend per share, totalling RM 447.2 million. At present, PUNCAK holds a net cash and cash equivalent of RM 1.230 billion, 2.01 times its current market cap.

Puncak Niaga Holdings Bhd (PUNCAK) is a leading regional integrated water, waste-water and environmental solutions provider and  an involvement in the oil and gas sector. The Group been in operations since 7 January 1997. PUNCAK operates in 3 different segment; (i) water and waste-water (ii) oil and gas (iii) construction.

Google Finance: KLSE:PUNCAK
Substantial shareholders as at 30 Sep 2015:

1. Central Plus (M) Sdn Bhd (24.98%) - indirect interest of director
2. Corporate Line (M) Sdn Bhd (15.18%) - indirect interest of director
3. Lembaga Tabung Haji (9.64%)

Valuation	FULLY VALUED
Current price	RM 1.35
Shares outstanding* (approx.)	452,516,704
Market cap	RM 610.9 million
Fair value	RM 1.74
Margin of safety	22.6%

* inclusive of 3,232,920 warrants outstanding

HIGHLIGHTS

• Buying RM 2.01 for RM 1
• New venture into plantation and property development
• Lower bound of share price of RM 1.18

ANALYSIS

Financial Ratios @ Reuters: PNHB.KL

Please note that I have computed all ratios reported below from original sources unless stated otherwise. For other various ratios, please refer to Reuters.

Buying RM 2.01 for RM 1

PUNCAK's cash pile amounts to 83.7 cents per share and short term investment securities worth RM 2.039 per share. Post disposal of its subsidiaries, PUNCAK has successfully degeared its debts into an insignificant 15.7 cents per share of borrowings, hence a positive net cash and cash equivalents of RM 2.01 per share.

80.2% of loans and borrowings are USD denominated. The strengthening of MYR against the greenback is a beneficiary for PUNCAK.

Discontinued profitable business, continuing loss-making operations

The chart above shows the segmental analysis with the results of continuing and discontinued operations. Excluding impairment charges, the Group suffered a total of RM 21.653 million loss on its continuing business. 

Water and waste-water division remains loss-making since FY2014, with LBIT magnified due to large impairment charges.

The oil and gas sector sunk into the red due to the collapse in crude oil prices. Revenue fell drastically from RM 476.5 million in FY2014 to a mere RM 62.1 million in FY2015. The management succeeded in minimizing losses by cutting down its operational costs aggressively.

Construction segment also reported loss due to higher operating expenses. Construction segment will be the key segment for company to achieve profitability from its continuing activities.

Ongoing construction projects expected completion in FY2018

Operations and maintenance of Kg. Lawa Gadong WTP, Beaufort, Sabah project was awarded on 19 November 2015 with an expected completion period after 36 months. The project involves operating and maintaining water treatment plants.

Package D44 - Design and construction of sewerage pipes in Bunus, Kuala Lumpur. For additional details, refer here.  The project was awarded on 25 February 2014 with an expected completion date on 24 February 2018. The contract was worth RM 393.98 million.

The Group is actively tendering for more projects related to water and environment sector within Malaysia.

Material litigation

In the first arbitration proceeding (mutually agreed independent body to settle a proceeding), Kris Heavy Engineering & Construction Sdn Bhd (KHEC) has filed a dispute for claims amounting INR 84,426,981 (approximately RM 5.06 million now) back in year 2005. Subsequently, PUNCAK has filed a counter-claim of INR 136,161,931 (approximately RM 8.16 million now). Until now, no decision has been made by the arbitrator.

There is a second arbitration proceeding with KHEC, with KHEC claiming that they only received 4.31% of profit when KHEC is a 10% shareholder. The claim amounts to  INR 54,432,916 (RM 3.26 million now). Meanwhile, PUNCAK filed a complaint to dismiss the "frivolous and unreasonable" allegations and a compensation for loss of opportunity of INR 500,000,000 (RM 30.0 million now) . This was dated back in year 2013. This case had previously been settled with PUNCAK having to pay approximately RM 83.6 thousand to KHEC. KHEC challenged the final award, with no hearings till now.

In conclusion, PUNCAK should be on the safe side given that; (i) PUNCAK did not lose the second arbitration proceeding results (ii) the claims are minor amounts relative to PUNCAK's market cap (iii) positive expected claims since PUNCAK claims exceed KHEC claims.

Prospective plans in plantation and property development?

Looking ahead, the Group is planning to use the funds available to expand its core businesses and venture into new sectors such as plantation and property development.

Sources from The Edge has highlighted that the executive chairman Tan Sri Rozali Ismail is involved in the plantation business via its private company Corporate Line (M) Sdn Bhd. Corporate Line's principal activity is the harvesting and trading or oil palm and tropical fruits.

If this is the intended plan for PUNCAK, then it is likely that PUNCAK will have M&A deals in the very near future to catch the plantation bull run.

VALUATION

Fair value of RM 1.74 based on a sum-of-parts model below.

In an attempt to establish a bottom, at worst case scenario, PUNCAK should not be valued below RM 1.18 based on the SOP model below. This scenario assumes; (i) all assets are nullified except for cash and cash equivalents and working capital and investment properties which are steeply discounted at 50%.

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Thank you.

Shaun Loong

Disclosure: At time of publication, I own stocks in PUNCAK.

All content are obtained from sources which are deemed to be reliable. I do not guarantee the accuracy, completeness or timeliness of the information nor can I be held liable for any losses arising from the use of information provided in this article. Valuation, if any, is decided based on:
OVERVALUED - margin of safety less than -25% at current price
FULLY VALUED - margin of safety between -25% to 25% at current price
UNDERVALUED - margin of safety greater than 25% at current price

 PUNCAK (6807) - [Shaun Loong] - PUNCAK, Still a Hidden Gem?
https://megamicrocaps.wordpress.com/2016/03/24/puncak-still-a-hidden-gem/