Investing based on NTA

As an investor, I find it extremely dangerous to ass-u-me it is 'safe' to invest in a stock if the stock is trading at a hefty discount to its Net Tangible Assets (NTA).

Why? Face the reality. As an investor, we are always going to be the minority shareholder in a company and we are not the elite corporate raiders of the financial world. Hence to ass-u-me that we will be rewarded handsomely when a corporate takeover happens is nothing but pure speculation in which the investor is faced with two main issue.

1. What's the probability of it happening?
2. How rewarding will it be?

Probability of it happening. How does one rate our chances? And most important when will it happen? For it takes too long, will our bet ever be justifiable?

How rewarding it is?
Ah.. saw this newsclip on the Edge Daily: Samling extends takeover offer for 59% of Lingui

Now Lingui is one stock featured by Dynaquest in their Sunday write-up on 30th june 2003.

• Nevertheless with timber product prices having recovered (plywood prices have surged from US$240 per cu m in February to US$330 per cu m), we expect Lingui to perform well in FY03. Although the US economic recovery appears to be faltering currently, we are confident that the good demand from China and the export ban on logs and plywood by Indonesia will see higher average prices for timber products in FY03 as compared to FY02. Besides benefiting from the rise in timber prices, Lingui will also benefit, albeit to a lesser extent, from the current surge in palm oil prices through Glenealy. We are hence forecasting Lingui to achieve an EPS of 15 sen for FY03. Based on this forecast, Lingui is thus selling at a very undemanding PER of only 7.2 times at the current price of RM1.08. Its valuation is also very low when compared to its past 5 years' average PER of 18.7 times. Furthermore, its current price is 39% below its Net Tangible Asset per share of RM1.77.
  
  As we bought our first tranche of 3,000 shares only a few weeks ago on 7.11.02, we shall only give a brief highlight of the group and update on its developments here. One of the top five timber groupings in Sarawak, Lingui is currently backed by 650,216 hectares of licensed forests in Malaysia, which will further increase to about 800,000 hectares on completion of the proposed acquisition of 60% of Samling Plywood (Miri). The group presently has an annual manufacturing capacity of over 360,000 cu m of plywood, 100,000 cu m of medium-density fibreboard and 8 million pieces of doorskins. Besides this, it also owns 27,348 ha of radiata pine plantation in New Zealand. Through its 36.0% ownership of Glenealy, Lingui is also indirectly involved in the oil palm business.
  
  We bought Lingui earlier because it is a recovery stock. The group performed to our expectations in its 1Q03 ended 30/9/02 with a PBT of RM30.1m, a significant turnaround when compared to the RM4.6m loss of 1Q02, and was 71% higher than the RM17.6m PBT made in 4Q02. The improved performance was due to the improvement in timber prices, with increased volumes harvested also contributing to the better showing. The results have produced a 1Q03 EPS of 4.1 sen. Although the upward trend in timber prices appeared to have peaked and prices have softened somewhat, we are confident that the better global economic growth expected for 2003 and the good demand from China will see higher average prices for timber products in FY03 as compared to FY02. Besides this, Lingui will continue to benefit from the current high prices of palm products from its 36.0% stake in Glenealy. We are thus maintaining our full-year FY03 EPS forecast of 15 sen.
  
  Based on our forecast and using Thursday's closing price of RM1.01, Lingui is currently selling at a PER of only 6.7 times. Besides this, the closing price of RM1.01 is 6.5% lower than the price of RM1.08 when we bought our first tranche of 3,000 shares. We are thus buying another 2,000 shares at RM1.01 to average down our holding to RM1.05. (A company related to the Chairman of Dynaquest Sdn Bhd has been buying the shares of Lingui.) ( Ahh... do note the disclaimer...)

See how Dynaquest argued that Lingui's current price is 39% below its Net Tangible Asset per share of RM1.77.

Last July 2005, Samling announced its takeover offer for Lingui and there was an interesting write on the Edge also. No gains for minorities in Samling Global's plan

• The timber-rich Yaw family of Sarawak has laid out a grand scheme to create one of the world's largest wood product companies. But while the plans may seem grand on paper, it is likely that the minority shareholders of Lingui Developments Bhd — where the Yaws are majority shareholders — are nonchalant about the deal. This is because it is difficult to see how the deal will benefit minorities.
  
  Last Wednesday, the Yaws said they planned to combine their listed and unlisted timber and timber-related businesses in Malaysia, China, Guyana, New Zealand and the US under one entity. This plan includes the Yaws selling their 39.87% stake in Lingui to Samling Global Ltd, the new entity. This newco will then be listed on the Hong Kong stock exchange.
  
  Under the proposed share sale agreement, the Yaws will sell their stake in Lingui for RM265.61 million cash or RM1.01 per share to Samling Global. The Yaws will end up as the controlling shareholders of Samling Global, which means that they will not lose control of Lingui. It is, however, unclear what the exact stake the Yaws will have in Samling Global.
  
  ....
  
  The selling price's discount to Lingui's net tangible assets (NTA) is even larger because as at end-2004, its NTA was at RM1.72 per share. And at RM1.01 per share, Lingui is being valued at RM666.23 million, which is 42% less than its shareholders' funds of RM1.13 billion.

Now, if you are an investor and had invested in Lingui at a price of 1.01 in June 2003 based on the huge discount over its NTA of 1.77 hoping for a rewarding takeover offer... look at the end results. An offer did happened but the offer made was never rewarding for the minority investor at all!