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Thursday, September 28, 2006

Equation @ 21.5 cts ( Investments / Singapore ) 3 comments

Final Poll Results: 8:3

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Possible investment gains in Citiraya do not justify valuation

2. Speculative play

This is the first day of Equation's trading on the SGX and I am already covering it. But of course, this is not a new stock. It is the hotstock formerly known as Heshe, and readers will probably be keenly aware of the reason for its surge these few days. One word: Citiraya.

Since it's called Equation, let's do some mathematics here. In fact, my writeup is going to be mainly equations.

Current position of Equation
NTA (Net tangible assets) as in FY06 statement = $12M
Additional money from subsequent rights issue = $13M
Total number of shares (incl. exercised rights) = 913M
NTA per share = $25M/913M = $0.027
Current price per share = $0.215
The discrepancy is nearly entirely due to the upcoming investment in Citiraya, hence let's look at what is the possible return on its investment.

The Citiraya equation
Inital number of shares = 630M
New Tranche 1 shares (to Equation and Oei Hong Leong) = 1900M (Equation takes half)
Total outstanding shares = 630M + 1900M = 2530M

(Now comes the hard part)
Let's take a lot of assumptions here, most of them (extremely) favourable to Citiraya.
Last FY results (FY03): Net profit = $17M (this is of course, partly fraudulent, but anyway....)
Let's assume Citiraya loses 50% of its business on resumption of normal operations, while maintaining margins of ~17% pre-tax (though if you look at Enviro-Hub, it looks more like the low 10s):
Then expected net profit for Citiraya = $8.5M

Expected EPS (earnings per share) = $8.5M / 2530M = $0.0034
Attach 20X PE: Market valuation = 20 X 0.0034 = $0.07

Returning to Equation (the company):
The benefit for Equation
Subscription price per Tranche 1 share = $0.0085
Hence total gain for Equation (based on above market value for Citiraya)
= 950M Citiraya shares X (0.07-0.0085) = $58M
Gain in asset value per Equation share = $58M / 913M shares = $0.064 (gain in Citiraya investment value)

Of course, the company has an option to subscribe to another similar-sized tranche after one year, but given that this is going to double outstanding Citiraya shares, the gain will be halved. Let's put it at another $0.03 gain/share down the road (might as well factor it in)

Hence total possible asset value gain = $0.095
Total NTA per share would then = $0.027 + $0.095 = $0.122 (given the track record of Equation's legacy businesses, I wouldn't expect any significant contribution to asset value from them in the medium-term)

Most of the market value of Equation would be tied to the prospects of Citiraya, and taking it as an investment play on Citiraya, the NTA of Equation becomes the most pertinent in estimating its market value. It is reasonable to take a 10% discount on the market value of its Citiraya holding when we calculate Equation's market value (typical conglomerate discount), which means
Fair market value of Equation = 90% X $0.122 = $0.11
To be generous and considering the rest of Equation's business (garments, F&B, property) at ~$0.06 (that was the market price before announcement of the Citiraya deal)
Adjusted total fair market value of Equation = $0.11 + $0.06 = $0.17 (at best)

Much of the sudden optimism about Equation's Citiraya investment has been due to Oei Hong Leong's recent pronouncement that he will give full support to reviving Citiraya due to his interest in electronic recycling (save the world). Oei Hong Leong is at heart a businessman, and an extremely astute one at that. It is difficult to see that he would be willing to commit more resources if Citiraya should find the going tough, without expecting something in return. He could inject funds, but of course it would be exchanged for further dilutory placements. It is difficult to see how Equation can benefit from this as it gets diluted further.

If one plays this game, he has to be aware of what game he is playing. It is no longer about value. It is about the desire, even need, for major stakeholders to keep prices and liquidity up so that they can tap the market for funds should the need arise.

Ok, so did I miss out anything in my Equation? (pardon the pun)

Poll(please vote)
I agree that Equation is a hot-stock-not: Yes/No




Anonymous Anonymous said...

Thxs for showing the breakdown in your calculation when deriving the fair value of the company. Investors should avoid this company for the time being. Too speculative. Looks like a casino game everyday. Dont understand why people are so interested in this stock. There are many better ones out there.

9/29/2006 10:12 AM  
Blogger DanielXX said...

The strange thing is that those who're in this stock seem to implicitly agree the stock is overvalued, from feedback that I got from the Shareinvestor forum. They're basically in it for the pips and the excitement, and probably won't stay in the stock longer than 2-3 days.

Let's see how Citiraya opens. Equation's price will depend on that henceforth.

9/29/2006 8:18 PM  
Anonymous Anonymous said...

Who knows where to download XRumer 5.0 Palladium?
Help, please. All recommend this program to effectively advertise on the Internet, this is the best program!

11/15/2009 4:14 AM  

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