After sharing my mini homework regarding the multiple proposals of LBS Bina Group Berhad (5789), the market price of LBS (5789) dropped another 10% from RM1.00 to RM0.90. In other words, another 10% discount in terms of investing cost. Therefore, I decide to revise the valuation on LBS (5789) in this post.
Revenue upon the disposal
Since the total disposal revenue will be around RM653million, and the total share number of LBS is around 386million, then the revenue per share will be RM1.69. In other words, Zhuhai holdings (the buyer) plans to spend around RM1.69 per share to acquire the two assets (that are, Land Plots and Lakewood Golf Club) of LBS (5789).
With price of RM0.90 to acquire LBS, then sell the two assets to the buyers with RM1.69, it appears to be a very attractive deal.
Earning per share
So, why the EPS is only expected to be increased by 63sen? Hmmm... Earning = revenue - cost. Therefore, the cost of the two assets is expected to be around RM 1.00 per share, or around 386million.
Expected cash per share upon disposal
Total cash and receivable cash (gradually in a period of 5 years) upon this disposal is around RM538million or RM1.39. (p/s: I purposely ignore the shares given by the buyer to avoid too optimistic valuation).
Assumptions and safety margin
Now, with the assumption that this deal will be completed within 6 months, with a 70% discount to buy in this "dream", my buying price should be lower than RM0.97 (RM1.39*0.70).
Contingency plan (or Plan B)
Since the disposal may be cancelled (just like what happens on MISC recently), to be very careful, we still can further reduce our risk in any investment, that is, with a very attractive (low) buying price.
In the last two years, the dividend income from LBS (5789) was 2.5sen. To be avoid the return rate in terms of dividend is less than bank, our buying price should not be higher than RM0.62 (2.5sen/4%) or RM0.83 (2.5sen/3%).
Price / Earning ratio
With earning of around 9.77sen, for PE 8, the buying price should NOT be higher than RM0.78. For PE 10, the buying price should NOT be higher than RM0.98.
Based on some simple valuation, it appears that the fundamental supporting price of LBS (5789) is around RM0.80, if the disposal is fail. Nonetheless, this valuation excludes many unforeseen circumstances (such as, the investors' EQ and market trends in the future).
The lower the better
As a value investor, the lower the better. Therefore, I only 'cut-lose' my investment when my assumptions are violent, and thus, my previous valuation will be invalid.
I must highlight that the borrowing of LBS is quite significant, and should be involved during valuation as well.
Based on the Q4 2012 report:
Current bank borrowing + Bank overdrafts was around RM121million.
Non-current bank borrowing = RM229million.
Total around RM350million
Therefore, with the total disposal revenue of around RM653million, if LBS will settle the RM350million borrowing from bank (to save interest), then the remaider revenue will be around RM300million or around RM0.77 per share (RM300million/386million shares).
To increase the rate of success and minimize the risk, maybe price below RM 0.77 will be another good entry point.
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Written by: Xaivier Chia
P/S: The above sharing is solely based on personal insight and information that believed to be reliable. Your valuable feedback are very welcome.