Since the sale of its investment banking and brokerage arm
to Affin, Hwang Capital (Stock Code 6688) quoted on the Bursa Malaysia stock
exchange has been a cash rich company since. From the latest quarterly
financials announcement for quarter ended 31 October 2015, Hwang held liquid
readily convertible into cash available for sale securities amounting to
RM436million (~RM1.7 per share) Note that RM250million (approximately RM0.98
per share) has been earmarked for potential acquisition of new business and Hwang
has up to 7 April 2016 to announce on its proposed new acquisition should it
had identified (if any).
Shareholders may be in for a surprise bumper dividend of at
least RM0.98 per share should management decide to return the excess cash for
failing to identify any target acquisition.
Based on the current market value of its share price of
RM2.38 (last closing as at 18 February 2016), market is implying a valuation of
0.5 based on the P/B (Price to book) ratio of its moneylending consumer
financing business and P/E (Price to earnings ratio assuming annualized EPS of
RM0.14) ratio of 4.7 which may seem fair for a small scale money lending
business with total loan book of RM369million.
The latest gross interest margin on its loan book is
approximately 10%. Assuming a 50% impairment to its loan book (which is a
pretty bad case but not entirely impossible for the unsecured consumer
financing business space), the liquidation value of Hwang Capital still stands
at around RM2.40 per share, which is around its current share price. This may
indicate a fair margin of safety. Note that Hwang does not have any significant
financial liabilities. It had also recently declared a decent dividend
amounting to RM0.10 per share which translates into a 4% dividend yield.
Share price has been on an uptrend since mid-2014, gradually
increasing in price since. Could the price increase be in anticipation of a
pending corporate action involving another round of bumper dividends from its
reserves?
Final thoughts:
Pros: Potential unlocking of share value via dividend
distribution catalyst, acquisition of earning accretive business, decent margin
of safety via annual dividend distribution and liquid asset backing
Cons: Extension of timeline for new acquisition of business
thus delay in full realization of share value/narrowing of discount to NTA,
Management hoarding cash (low probability), acquisition of value destroying
business.
Note: This is not an investment advice. Buy and sell any
securities at your own risk.
Disclosure: None.
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