Update on LKT

Here's an update to a previous blog posting: LKT Industrial

Here are some key points mentioned by Kenanga in its research article posted today. My comments in green:

Key Points

l M1 (92,500 sf) is fully operational. The visit confirms that M1 ( the first of the two new plants) is fully operational with the buzz of activities both in the sheet metal machine shop as well as assembly plant for the OEM machines. The sheet metal machine shop being the largest in the northern region has freed up bottlenecks in its production process for its own brand name and OEM machines.

l M2 (134,000 sf) is on schedule for completion in March 07. All of the OEM equipment will be built in M1 and M2. We had earlier underestimated the strictness of its OEM customers as we did not anticipate that they will be undertaking a plant qualification process before the load LKT with large orders. This has in turn delay ed the sharp pick up in earnings which we had anticipated in FY07 to FY08.

l The thoroughness of OEM customers reinforces high barrier of entry. On the flip side of the extenuating qualifications of the new plants, we are positive that the barriers to entry for being an OEM supplier to tier one semiconductor equipment manufacturers remain an exclusive club which is highly coveted and difficult to attain.

l We expect RM6m net loss in 4Q06 due to one-off forex losses and write down in inventory. The sharp appreciation in the Ringgit has resulted in some of its earlier contracts priced at lower exchange rate to result in a loss compared with the sharp appreciation at end of 2006. Some write down in value of inventory which could have been obsolete was also undertaken, we estimate the total one of net loss to be RM6m for 4Q06. This would result in FY06 net profit to be within RM33m to RM35m ie at around FY05 levels. (rm6m in losses... ahh... finally some light on what's happening. Kinda disgusting cos the market action recently which saw the saw tumble from rm4.00 indicated that them insiders knew something the minority investors did not know. And rm6m in losses is huge!!)

l Not too concern about one-off losses, business as usual. As we have indicated earlier in our strategy report 2007 that small–mid cap stock are likely to have volatile QOQ net earnings while the whole business model and direction remains intact and in fact poised for strong growth in FY08.

l Industry remains bullish. Largely front -end capital expenditure investment in 2007 in wafer fabrication would result in higher demand in back end equipment with a time large of 12 to 18 months. SEMI has forecasted global semiconductor equipment sale of USD42.1b for 2007 up 3.7% yoy. The growth for 2008 and 2009 is even more bullish with 13.3% and 5.4% yoy growth. ( err... industry remains bullish? Some had voiced concerns, no?)

l OEM business diversifies and grow LKT’s offering from back end to front end of the semiconductor equipment segment. With the OEM business, LKT’s equipment revenue mix is now 60% back-end and 40% front-end which is encouraging seeing that about 70% of the total global semiconductor equipment sales is in the front end.

l The departure of the previous president, Mr Lim Wei Yee will not affect the business. Dato’ Vincent Loh, the executive chairman has stepped up his involvement in the daily operations of the company and remains very hand-on, essentially taking over the duties of Mr Lim. (WOW!!! Departue of previous president... hmmm... did the investing public know about this? (i for one did not know cos i had not followed the stock closely)

l The customers remain confident of the continuation of business as usual. The institutionalisation of the management team with professionals rather than family members of controlling shareholders ensure that there is leadership succession and that no one person is indispensable. LKT has in place a board of management committee which oversees the strategic as well as day to day decision making of the company.

l OEM business has already obtained pioneer status. Meerkat Technologies and Meerkat Integrator have obtained poineer status with 100% tax exemption for 10 years and 5 years respectively. LKT has applied to MITI to activate the status retrospectively to 1 Jan 06 which could result in higher contribution from the OEM division. This could result in lower overall taxes for FY06 and boost its net profit when the approval to activated the status on 1 January 2006 is obtained.

l EPS revised downwards. Given the delay in OEM customer loading LKT with we are lowering FY06, FY07 and FY08 EPS to 39 sen, 51 sen and 65 sen from my earlier forecast of 70 sen, 87 sen and 89 sen respectively assuming lower growth in revenue and also higher overall operating costs. (huge downwards revision in eps!!!! )

l Reiterate BUY recommendation with revised price target of RM4.20 from RM5.60 previously. The target price is derived using a 6.5x PER multiple on FY08 EPS of 65 sen. The selldown in the stock represents good opportunity to purchase LKT at extremely attractive PER multiples 5x and 4x respectively (remember this cheap PE multiples is based on fy 2008 earnings. as it is. fy 2006 estimates is at 26.991 million. fy 2008 estimates is at 44.736 mil. And because the estimates is so much higher than fy 2006 earnings... LKT is surely looking mighty attractive and cheap)

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Update on EON Capital Merger

This morning I wrote about this : EonCap Merger?

Well, here is the first denial.

Article Entitled " EPF eyeing DRB-HICOM's stake in EON Capital"

• Subject : Article Entitled " EPF eyeing DRB-HICOM's stake in EON Capital"
  
  Contents :
  
  We refer to the query from Bursa Malaysia Securities Berhad dated 5 February 2007 on the above article published in the New Straits Times, Business Times section on 3 February 2007.
  
  We wish to inform that DRB-HICOM Berhad has announced on 6 February 2007 that the company is not in negotiation with EPF as stated in the above article.

Again?

Are you shocked that the article has been denied?

Let me ask you the productivity issue. Them folks at EON Capital nothing else to do than to reply to all these queries based on sources.

Btw Singapore Business Times carried the following article: source to article

• EON Capital poised to join race for RHB
  Two proposals from foreign suitors already under consideration
  
  By S JAYASANKARAN
  IN KUALA LUMPUR
  
  THE race to grab control of RHB Capital, Malaysia's fourth largest lender, may get even more crowded with the entry of yet another suitor.
  
  Mr Daim: He's advising international investment agency Primus Pacific Partners, one of the bidders
  Bankers familiar with the matter said EON Capital, the country's seventh largest bank, is poised to enter the fray.
  
  It isn't clear if EON has received permission from the central bank to commence negotiations with any of RHB Capital's shareholders - a requirement of Malaysian law - but that may not be difficult.
  
  Late last year, the central bank relaxed rules on bank takeovers allowing owners to negotiate simultaneously with multiple would-be partners.
  
  The multiplicity of suitors for RHB's banking services underscores the new, market driven approach preferred by the central bank to consolidate Malaysia's banking sector. And it means that RHB's shareholders could exit with the best possible price.
  
  The RHB group is now considering two separate proposals from foreign suitors.
  
  The two: Kuwait Finance House's proposal to buy Utama Banking Group's 32 per cent in RHB and a slightly more complicated offer by international investment agency Primus Pacific Partners to buy into RHB.
  
  Primus shareholders Qatar Investment Agency and the Tsai family of Taiwan are being advised in Malaysia by former finance minister Daim Zainuddin.
  
  All this is complicated by the indebtedness of the group. RHB, a financial services company, holds 65 per cent in listed RHB Capital which, in turn, holds 70 per cent of RHB Bank. But RHB itself is indebted to the tune of RM3.5 billion (S$1.6 billion), with close to RM1 billion of that due this June.
  
  The debt has to be resolved, which was why RHB's board announced a plan last week to sell its stake in RHB Capital back to shareholders in proportion to their holdings in RHB. If implemented, the plan would have raised RM3.6 billion, which could have ended the firm's debt while allowing RHB's shareholders direct exposure to the actual cash-generating unit in the group.
  
  RHB's shareholders include the Sarawak-based Utama Banking Group (32 per cent), the EPF or the Employees Provident Fund (30 per cent) and a government pension fund (10 per cent). Of the three shareholders, only Utama is talking to the foreign bidders, while the state agencies want to go ahead with the sale of RHB's stake in RHB Capital.
  
  Enter EON Capital. The bank has a clean balance sheet but is itself a takeover target because of its relatively small size. That is why EON has tried taking over other mid-size banks; its previous attempt to takeover AMMB Holdings in 2004 failed over price.
  
  The bankers said that in September last year, EON Capital proposed to take over RHB Capital through a voluntary general offer. According to them, the finance ministry was keen on the idea but the EPF balked and the proposal went nowhere. But with two foreign parties bidding for RHB, the bankers said that the EPF may have now warmed up to EON Capital's proposal. One reason is the state-owned nexus running between both the banks.
  
  RHB Bank, the group's unlisted bank, is 30 per cent owned by state investment agency Khazanah Nasional, which also has a near 20 per cent interest in EON Capital. The commonality of state interests in both banks could prompt the government to lean towards EON Capital.
  
  Meanwhile, although EON Capital is smaller than RHB Capital, its clean, almost debt free balance sheet allows it to gear up to make a takeover possible, the bankers said.
  
  They added that the EON Capital bid could also be preferred because it avoids the complications of the Kuwait Finance House offer, which is said to be more generous than the bid by Primus.
  
  The Kuwaiti bid is only for the Islamic banking portions of RHB, which means its conventional banking parts would have to be hived off. This, the bankers said, could be potentially embarrassing for the Muslim-dominated Malaysian government as it could see the EPF, say, buying back RHB's conventional banking processes while selling its Islamic banking business.
  

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APB Resources

This stock, APB Resources, is famously named as Baby KNM by RHB Research.

Well, this is one stock whose stock price has appreciated tremendously in recent months due to fact that it was in JV with PSCI. For me, this was the catalyst for its strong share price appreciation in recent months.

RHB today has another report on it today and one of the points worth noting is the fact that this JV has not been concluded YET.

Ah.. a risk? Maybe? For me, I think it would be rather foolish to discount this risk. No?

Anyway, here is what RHB is saying on this stock.

♦ PSCI jv discussions may be shaky. The company is currently still in negotiations with Boustead on the terms and conditions for the 50-50 joint venture to fabricate process equipment on 10 acres of sea-frontage land within PSCI’s 43-acre shipyard in Penang. Although management had previously expected to sign the agreement in 2QFY07 and commence operation towards the end of FY07, we believe discussions have been moving too slowly and may now be shaky. Management has set a deadline for middle of March to conclude the agreement or negotiations will likely be called off.

♦ Alternative plans. The company is currently evaluating two other proposals.

Firstly, management is looking at a piece of land of more than 10 acres with workable access to the sea to allow fabrication of more bulky process equipment.

Sea frontage would also allow loading and unloading of raw materials and products, which would improve the overall efficiency of the operation. Currently neither of APB’s yards (in Subang and Kuantan) have direct access to the sea, and all materials have to be transported by road. The second alternative would be to buy 18 acres of land near its existing Kuantan yard. The land may cost some RM5-6m and equipment and building would require capex of around RM20-25m over two years.

♦ Opportunity cost. Management readily admitted that the delay in the PSCI jv has resulted in lost opportunities. However, the company does not plan to rush into alternatives. Growth in FY07 will likely come from higher-margin product mix and recovery from the FY06 cost overruns.

♦ Normal capex of RM10m p.a. Management guided that the company will spend around RM10m p.a. in normal capex which can be easily funded internally from operating cashflow of RM19-23m p.a. in FY07-09. However, management is prepared to borrow to expand its capacity if the company opts to buy the land in Kuantan. Our sensitivity analysis suggests net debt/equity would still remain manageable at around 25%, vs 2% currently estimated for FY07.

♦ Good visibility. Management believes the earnings visibility is good for the next three years given confirmed major oil & gas, power and oleochemical projects, especially in Indonesia. Currently 90% of its sales are derived from overseas contracts, of which 50% are from the Middle East, 35% from Asia and 15% from Europe, US and Africa.

♦ New risk-management policies. The company has introduced new policies for dealing with contracts that require more exotic steel alloys to mitigate the risk of future cost overruns, including: 1) completion period increased from nine months to 15 months; 2) contract period to start only when the raw material is delivered; and 3) the client supplies the raw material. Management stated that the company is prepared to walk away from contracts where the client is not agreeable to these terms to prevent the recurrence of major cost overruns.

♦ Maintain Outperform. Although the failure to conclude the PSCI jv would be a disappointment and cause a further delay in APB’s capacity expansion plans, we note that our forecasts have not factored in the jv. We highlight that although we only expect 6% growth in turnover in FY07, we have forecast 18% growth in fully-diluted EPS, due to recovery from FY06 cost overruns and slight improvement in gross margins to 19%, from 18% in FY06 (adjusted for costoverruns).

The sector weighted average PER for CY07 has risen from 15x to 17x over the last three months. Maintaining a 25% discount to peers, to factor in APB’s relatively small market cap and tight liquidity, we have used a CY07 PER of 12.8x to derive our fair value of RM1.89/share. This implies a further 17% upside in the share price. Given the sustained momentum in the industry, good visibility ahead, and potential upside from future capacity expansion (via PSCI or otherwise), we thus maintain our Outperform call on the stock.

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AsiaEP

KenangaResearch just posted a nice rosy write-up on AsiaEP.

Really.

And I made a posting on Sahamas on this stock here. Give it a read.

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EonCap Merger?

Them sources will never die will they? Not especially in a hot market.

This was reported on Business Times on 3rd Feb 2007.

• EPF eyeing DRB-HICOM's stake in EON Capital
  By Francis Fernandez
  bt@nstp.com.my
  February 3 2007
  
  THE Employees Provident Fund (EPF) is considering making a formal proposal to acquire DRB-HICOM Bhd's stake in EON Capital Bhd for about RM9.50 a share, executives familiar with the matter said yesterday.
  
  Business Times was told the provident fund had in the past two months held informal talks with DRB's dominant shareholder, Tan Sri Syed Mokhtar Al-Bukhary, at the shareholder level to facilitate the sale. DRB is the single largest shareholder in EON Capital with a 20.2 per cent stake in the lender.

Yesterday, OSK had a report based on the article. LOL!! Don't you wonder why the need for them to do so? Well, you do have consider the issue of the countless times when all these news based on sources were denied by all parties concerned!

Have a look at the following snippet of what OSK wrote.

• Merger Of The Two “Caps”?
  It was speculated in an article over the weekend that EPF could be the latest suitor for DRBHCOM’s 20%-stake in EONCAP with a higher offer price of RM9.50/share. According to the report, EPF could then merge both EONCAP and RHBCAP. Pending any further details, we are maintaining our BUY call and target price of RM7.90 on EONCAP. Meanwhile, we are of the opinion that the recent reported
  offer prices of between RM9.00 and RM9.50/share are not impossible and would revise our target price should the M&A news flow become more tangible.

Ironic cause OSK themselves acknowledged it's mere speculation!!

And guess what today, Business Times continued with the story yet again. (Why?)

• EON Capital enters the fray for RHB Cap
  The Utama Banking Group board is due to meet by as early as today to consider the EON Capital bid said to be in concert with the Employees Provident Fund, sources say

The mighty sources strikes again! Crikey!

• EON Capital enters the fray for RHB Cap
  By Francis Fernandez
  bt@nstp.com.my
  
  February 6 2007
  
  EVEN as suitor Kuwait Finance House (KFH) unravelled its bid yesterday for RHB Capital Bhd, the country's fourth largest financial group, a new party, EON Capital Bhd, was said by some sources to be preparing to join in the fray.

And to refresh everyone's memory, I had just blogged on EonCapital recently. See As Expected: EON Capital!

How?

You buy these sources stories?

Do you?

Really?

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Warren Buffett Articles IX

Saw this article written by Mr. Robert Miles on Warren Buffett. Mr. Miles, a long term shareholder of Berkshire Hathaway, had penned the folloing books, Warren Buffett Wealth: Principles and Practical Methods Used by the World's GreatestInvestor, The Warren Buffett CEO: Secrets from the Berkshire Hathaway Managers and 101 Reasons to Own the World's Greatest Investment: Warren Buffett's Berkshire Hathaway. It's a great article, worth a good read. ( Article Source : 10 Secrets Hidden in Warren Buffett's Wallet )

Here is a snippet from it - the 10 secret!

>>>>

SECRET NUMBER 1:
Invest in an old economy company that's a leader in an industry you understand.

Banking may not be the world's oldest profession, but it's one of the oldest, so a bank is clearly an "old economy" company. The Illinois National Bank [INB] was established in 1931 — right in the middle of the Depression — by Eugene Abegg, with a beginning net worth of $250,000 and $400,000 in deposits. By the time Abegg's bank became part of Berkshire, it wasn't only the largest in Rockford, it was also one of the most profitable in the country. And since banking is a business that Warren understands, it was a perfect match for his emerging conglomerate.

SECRET NUMBER 2:
Invest in companies with consistent earnings.

In the 38 years before INB became a part of Berkshire, it had registered an 11.7 percent annual growth in book value and a 15.6 percent annual growth in time deposits. In its very first year, the bank earned $8,782, which set the benchmark for the company. Under Abegg's management, for nearly 50 years, the bank consistently returned two percent annually on assets. That's three times better than the average large bank, so it's not surprising that Buffett considered Abegg's management to be extraordinary.

SECRET NUMBER 3:
Pay only a reasonable price even for an outstanding business.

When Buffett bought Illinois National Bank, he paid $15.5 million for 98 percent of the business, not an insignificant amount of money. At the time, though, the bank was earning some $2 million on $100 million in deposits, and had a book value of $17 million. So Buffett bought it at 7 times earnings and less than its book value. But Warren knew exactly what he was doing. Within five and a half years Berkshire was repaid for its investment, and within eight years the bank had paid its parent company $20 million in dividends. Within a decade the bank was worth four times its original purchase price.<>

Buffett learned a long time ago from his mentor, Ben Graham, that "Price is what you pay, value is what you get," and he's never deviated from this investment approach. Warren paid a reasonable amount for Illinois National Bank, and value — in fact, excellent value — is what his Berkshire shareholders got.

SECRET NUMBER 4:
Buy a lot of the company, and keep it.

Contrary to popular opinion, Warren believes in concentration over diversification. Whenever he can, and if he has the money, he will buy all of a company rather than buy pieces of it through the stock market. Another one of the important lessons he learned from Ben Graham is that, whether in whole or in part, his valuation of a business and its stock are one in the same.

Warren typically purchases at least 80 percent of a wholly owned company and encourages the founder to keep a small interest in it. By retaining some ownership, the founder will be compensated based entirely on how well his particular company is doing, which will encourage him or her to focus on earnings and net worth rather than on stock prices or stock options or other businesses within the enterprise.

True to this principle, in the case of the Illinois National Bank, Buffett purchased almost all of the company. And he probably would have kept it if it hadn't been for the Federal Bank Holding Act of 1969, which was passed soon after the acquisition. As a result, in 1980, after 11 years of ownership, and as required by law, he spun off the wholly owned bank to his shareholders. Interestingly, given Buffett's philosophy, had the act not forced the liquidation of this investment, Berkshire Hathaway might have evolved quite differently and become an insurance and a banking empire.

SECRET NUMBER 5:
Invest in businesses with experienced managers in place.
When Warren Buffett bought Illinois National Bank, Eugene Abegg had been running the business for almost 40 year and was already 71 years old. Even so, Abegg had every intention of staying on to manage it, and Buffett wouldn't have had it any other way.

In fact, this is one of the most important elements in the development and success of Buffett's empire. Buffett buys companies with successful managers in place, and keeps them in place so they can continue running the businesses as they always have. Also, unlike other conglomerates, at Berkshire no attempt is ever made to "synergize" the acquired company into other subsidiaries and drive the founding entrepreneur out of the business.

SECRET NUMBER 6:
Leave talented managers alone to do their jobs and compliment them from a distance.

Just as one might manage a small portfolio of stocks, Buffett manages his wholly owned businesses from afar. He never takes the keys, and he never suggests how the companies should be managed. He doesn't schedule any meetings with his managers, and he doesn't expect them to submit budgets. He just leaves them alone and lets them do what they do best.

He does, however, compliment them on the job they're doing, and he does it through an annual letter to Berkshire's 300,000 shareholders. In fact, it was in his first letter to shareholders, in 1970, that he praised Eugene Abegg for the job he was doing. "Eugene Abegg," Buffett wrote, "had the problem in 1970 of topping a banner year in 1969 — and in the face of an unchanged level of deposits, managed to do it. While maintaining a position of above average liquidity, net-operating earnings before security gains came to well over two percent of average deposits. This record reflects an exceptionally well-managed banking business."

Buffett's annual letters, which are also available at his website www.berkshirehathaway.com, have become one of his primary methods of recognizing, motivating, managing, leading, and retaining talented and independently wealthy managers. And it works. Having completed over 100 acquisitions over the past 37 years, Buffett has never lost a CEO to a competing enterprise.

SECRET NUMBER 7:
Buy companies from owners who care more about who's buying the business than how much they'll get for it.

Berkshire doesn't have managers in place to run acquired businesses, so it's imperative that the founders and managers of the companies it buys stay on after the acquisition. Buffett knows that if the manager cares more about a high sale price and less about the management philosophy of the organization that's acquiring his or her creation, chances are the merger won't work. And that's because the more a manager is concerned about the purchase price, the less he or she is likely to be concerned about the company's employees. This is one of the reasons that Warren will rarely, if ever, engage in an auction for a business.

SECRET NUMBER 8:
Invest in companies whose managers are frugal and care about costs.

Warren knows that the best way to make more money is to spend less. "Our experience," he wrote in his 1978 letter to shareholders, "has been that the manager of an already high cost operation frequently is uncommonly resourceful in finding new ways to add to overhead, while the manager of a tightly-run operation usually continues to find additional methods to curtail costs, even when his costs are already well below those of his competitors. No one," he added, "has demonstrated this latter ability better than Gene Abegg."<>

SECRET NUMBER 9:
Don't force experienced managers to retire.

Because he knows the value of experience, Buffett has never established a mandatory retirement age at Berkshire. In fact, the opposite policy is in effect — founders and managers are encouraged to continue painting their business masterpiece for as long as they have a passion for it. While corporate America retires its leaders at 65, Berkshire often buys companies whose managers are already over that age. Even so, while the average CEO is on the job for six years before retiring, the typical Buffett CEO has an average tenure of 23 years. Eugene Abegg was six years past typical retirement age when Illinois National Bank became part of Berkshire, and he continued to build his business for another 11 years before he passed away at the age of 82.

SECRET NUMBER 10:
Above all else, know the character of the manager.

As Warren says, he acquires managers, like Eugene Abegg, who have "every bit of the care and drive that they would have exhibited had they personally owned 100 percent of the business. No rules are necessary to enforce or even encourage this attitude; it is imbedded in the character of these managers long before selling to Berkshire. Their good character has become Berkshire's good fortune."

Like an astute banker, Buffett's genius lies in his ability to read a business owner and manager, often from the comfort of his small office in Omaha, Nebraska and determine his or her character and motivation. And the Oracle of Omaha has rarely, if ever, misjudged any of those managers. In fact, Buffett's decision to purchase the Illinois National Bank, and to bring Eugene Abegg into his company, set the standard by which to judge all of his wholly owned businesses and their CEOs. And even though it is a high standard, Warren has clearly never regretted setting it. In 1980, when Abegg died, he memorialized him in his annual letter saying, "As a friend, banker and citizen, he was unsurpassed." And that's exactly the kind of thing he would no doubt say about all the managers he's welcomed into the Berkshire Hathaway family.

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LKT Industrial

I have made a posting on Sahamas forum on LKT Industrial.

Click here for the posting: http://sahamas.net/forum5/2446.html

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