10 December 2012

Pacific & Orient (P&O, 6009): Divestment review

Finally, Pacific & Orient (P&O, 6009) announces its detail of divestment, according to the announce as follows:


From the details, if the share purchase agreement (“SPA”) is completed accordingly, P&O is expected to have a one-off gain of RM0.71 per share. Based on this price, we can approximate the total value of POI asset to around RM1.41 per share.

Now, let go to the annual report of P&O to check the contribution of POI to the group. Apparently, POI is the main contribution to P&O earning. If the performance of other three segments (that are, information technology, investment holding and money lending) are maintained, the earning of P&O is expected to be mainly contributed by the remainder 51% POI earnings. In other words, it is expected P&O earning will be around half of its current EPS.

Overall, this SPA is very encouraged that reveals the intrinsic value of P&O and rewards those long term investors who have P&O for at least one year.

Review the last quarter's performance
Current quarter: "Pre-tax profit increased by RM5,051,000 for the current quarter compared to the corresponding quarter of the last financial year. This was largely due to write back in allowance for impairment of insurance receivables and absence of impairment loss of available-for-sale financial assets for the current quarter compared to the corresponding quarter of the last financial year."

To year: "However, pre-tax profit decreased by RM14,082,000 for the current financial year compared to the last financial year. This was largely due to a one-off bad debt written of RM20,746,000 in respect of the commutation of a reinsurance contract with a reinsurer. The pre-tax profit was further affected by higher share of losses from MMIP. These adverse factors were however, partially offset by a write back in allowance for impairment of insurance receivables due to collection of previously impaired insurance receivables."

"Comparison With Immediate Preceding Quarter’s Results
Insurance segment – Revenue decreased by RM2,578,000 for the current quarter compared to the immediate preceding quarter. This was mainly attributable to lower gross premium. However, profit before tax increased by RM5,728,000 for the current quarter due to a write back in allowance for impairment of insurance receivables in the current quarter. The pre-tax profit could have been higher had it not been for the increase in share of losses from MMIP."

From note B11, insurance receivables is (5,605). Thus, adjusted EPS should be around 6sen, that is still very nice.

Now, with the assumption that the EPS will be halve after the SPA is completed, coming EPS of four quarters will be 3*4 = 12sen, plus the one-off gain of RM0.71 cash. If we cash out all cash from P&O after the acquisition, with current price of RM1.30, our expense will be around RM0.60. Thus, the PE will be RM0.60/0.12 = 5, it will look cheap. However, based on RM1.30, the PE will be above 10 that looks less attractive. The former is worthy to be considered if you believe CEO will use the cash wisely to grow the business.

Again, all the estimations are based on the aforementioned assumptions. Once these assumptions are violent, investors should take neccesary action upon them immediately.

Lastly, my recommendation to P&O is: No recommendation. This is because there is lots of homework needed to reduce the uncertainty of the estimation.

That's all for today. More fascinating articles and sharing will be updated from time to time in Xaivier Blog. So, you are welcome to subscribe our feed, look at our sitemap or simply visit our Homepage for latest sharing.

Written by: Xaivier Chia

(P/S: The above sharing is solely based on personal insight. Please do not take it seriously. However, your valuable feedback are very welcome.)

Updated: 12/12/2012

About P&O, just highlight few things for consideration:

1. What is the main source of profits for P&O? Based on last quarter report, it is its insurance segment.

2. What happens after 49% POI is sold? Contribution from POI to P&O remains 51%. Of course, in exchange of RM0.71 cash per share.
3. Prospect of P&O.
I think it is highly dependent on the ability of Group to use the cash widely so that the income will grow further. In short term, of couse, any good news such as special dividend can stimulate the market price of P&O. In the long term, on the other hand, it is still very dependent on the profitability of the Group. Without 49% income from POI in the future, P&O really need to be more aggresive to grow the existing POI business, make other segments more profitable, or explore new business opportunity so that current EPS can be maintained or increased in the future.
Updated: 17/12/2012

After re-read Cold Eyes senior's sharing regarding P&O, I decided to re-do my homework again.

From the title, we have been informed that the selling price is RM270million (subject to adjustments). Then from the last quarter report, the weighted number of share is 244.350 million. So, the price per share from this divestment will be RM270/244.350 = RM1.10.

However, from the note 2.3, after the adjustment, the price will be approximately to RM109.76, or EPS will be RM109.76/244.35 = RM0.45.

From note 2.4, we know that the original cost of POI is RM59.23million or Cost per share = RM0.24. So, the earning per share = RM1.10 - RM0.24 = RM0.86??

From note 2.7, "POB and its subsidiaries (“POB Group”) expect to realise a net gain on divestment of the Sale Shares amounting to approximately RM173.54 million assuming that the Proposed Divestment had been effected on 30 September 2012.", then gain per share will be RM173.54/244.35 = RM0.71. So, plus the original cost of POI, it is expected to have RM0.24+RM0.71 = RM0.95 per share??

Since the estimation is approximately matched to what Cold eyes senior has written (POI worth RM1.90 = RM0.95*2), I assume my computation is correction.

So, the final question is still the same, can invest in POB or not in this price? I believe you will know my question to this final question, that is, it depends on your perspective.

For me, I only like POI so far since only POI contributes significant profit to POB. For short-term, with RM1.30 cost to buy RM1.90 asset, it got potential profit of around 46%. Let's make a discount of 10% from RM1.71, then we get RM1.71 as my fair value. Consequently, there is an 30% potentail profit from POB, if and only if, the divestment is completed accordingly.


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