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INTRACO: NTA 77 cents, stock price 48 cents. Bargain stock?
Monday, 10 December 2007
This is the fifth in a series of articles by external contributors
NAMES LIKE Carl Icahn and Thomas Boone Pickens, Jr, probably would not ring a bell in many Singapore investors’ minds. But Mr Icahn and Mr Picken were ranked by Forbes 2007 as 18th and 369th richest men in the US, with a net worth of US$14.5 billion and US$2.5 billion, respectively.
They have one common investing trait – they are corporate raiders.I have always been intrigued by their strategy of buying into undervalued companies and breaking them apart to derive the intrinsic value of the businesses.
What are the traits that these investors possess? What are the types of companies that they target? (For more, read Fortune Magazine's article on Carl Icahn by clicking here: The hottest investor in America)
Intraco – Is this a mini-conglomerate up for grabs?
Listed in December 1972, it sourced for competitively-priced raw materials, commodities and manufactured goods for the domestic market to support Singapore’s industrialisation programme.
It also created export markets for locally manufactured products and promoted external trade.Today, the company looks like a mini-conglomerate, and has interests in:
a)agri-business and foods; b)energy and environment; c)industrial materials; d)building materials and security solutions; e)semiconductors.
In 2006, the Group delivered revenue of $407 million while net profit attributable to shareholders stood at $6 million. Net profit margin was only a paltry 1.5% and its market capitalisation currently is $47 million.
Such attributes do not attract institutional investors.But what caught my eyes is the fact that the Company is trading at substantially below its NTA.
As at 30 June 07, the NTA was 77 cents, compared to its recent traded share price of 48 cents. This represents a 37% discount.
If we were to evaluate based on its EV/EBITDA, the discount would be greater.
The Company has no long-term debts while the bulk of its short-term credit lines were used to finance its industrial materials trading division.
If this were a property company, I probably would not care less as property companies are well-known to trade below NTA.
Intraco has 5 main business segments, which probably are not faring too well. I believe this is no fault of the managers. It’s just that the business operation in each segment is too small to have any significant economies of scale. These segments are not able to integrate with one another to create cost savings.
Let’s examine each division in detail.
Agri-Business and Foods
Intraco trades in frozen seafood.
This segment does procurement and processing of products like coffee, frozen seafood, rice, fertilizers and other agricultural commodities.
Sales amounted to $15m in HY2007 compared to $6.5m in HY2006 - but the division suffered an operating loss in HY07.
Industrial Materials
Very similar to the agri division, it trades in industrial materials, which include metals & minerals, plastics and petrochemicals.
The division recorded huge sales of $112.5 million due to better performance from plastics and metal & minerals. Operating profit more than doubled to $0.9 million.
Building Materials and Security Solutions
Again, another trading arm - this time in lighting, cables, water-themed parks/aquariums, biometric, RFID airport baggage handling etc. It also has another small business here called IntraWave that leases telecommunication equipment for MRT North East Line to Singapore mobile operators.
IntraWave generated sales of $3m for HY2007 on $15.4 million assets while the rest of the division generated sales of $12.3 million on S$13.9 million assets. The bulk of the $0.8m operating profit was largely due to its write-back of remaining un-utilised provisions for warranty. Sales and profit productivity seems to be awfully low in this division.
Semiconductors
I have no idea what is this division doing in Intraco. I would have associated a semiconductor business with a technology company, not a global trader. While this division distributes semiconductor and computer components, it also provides embedded and design services.Based on HY2007 results, this segment is the only one making decent profits. It contributed $1.4 million operating profit (still 37.5% below its HY2006 operating profit of $2.3m)
Energy and Environment
This last division totally baffles me. It is supposed to do special effects lighting. It recorded a loss on the back of $377k sales. In FY2006, this division contributed a loss of S$300k on sales of $700k.
Target for corporate raiders?
So what is so exciting about Intraco?
Let’s look at the quality of its assets. Based on HY2007 results, the Group has $32 million in inventories, $64 million in receivables and cash of $40 million in current assets.
And it has about $14 million in property, plant and machinery.Liabilities include $52 million trade payables and short-term debts of $24 million. Over the past few years, the Company has a history of making small provisions and bad debt written down. But these are in small quantities.
Hence, we assume that bulk of the receivables would be collectable.For a trading company, the most important asset is not the tangible assets but the intangibles. In Intraco’s case, these are the global networks that the Company has built up over the years - and they are not even reflected in the balance sheet.No amount of money can help you build a network that covers ASEAN, China, India, Middle East, Taiwan, South Korea, Japan, New Zealand, Europe and South Africa.
If you don’t believe me, just look at Li & Fung or Olam in the Singapore context. Network is what got them this far. On top of that, these companies value-add by adding services to make their relationships with customers more “sticky”.
At Intraco’s existing market capitalization of only $47 million, one could theoretically mount a take-over bid, bearing in mind that the Company has a cash position of $40 million. It's a self-financing acquisition.
Selling off the loss-making non-core business segments would then generate cash to pay off the financiers. Those that cannot be sold can be closed down to stop the cash outflow.
As for the shareholding structure, the largest shareholder in the Company only has 29.9% (or $14 million worth), just short of the 30% mandatory take-over mark.
Listed in their 2006 Annual Report, the top 20 shareholders held 61.33% of the Company, most of them being individual investors.Is this a value trap or is the market truly inefficient?
Mephisto is a 30-something investor who follows the market closely.
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