In Kim Eng's "2011 7 small cap picks", noticed in the pictorials of the rabbit hat.
Copied from Kim Eng report:
Superb value for money
Our two value stocks have one thing in common – both derive their value from the assets they have on the ground. RH Petrogas and Gallant Venture are trading at huge discounts of 30â70% to our conservative valuations.
If you can afford to wait for the huge value still buried deep underground to be uncovered, we reckon you will reap outsized returns.
Gallant’s much sought after landbank in Bintan, for example, is held at cost of just $3 psm but is currently being sold at $110 psm on average!
Gallant Venture – entering a virtuous cycle of growth
Back in 2007, Gallant traded as high as $1.56, or 3x its book value, as the market viewed with wild enthusiasm the development potential of its valuable landbank in Lagoi Bay, Bintan. However, the stock was severely hit during the financial crisis, tumbling to as low as six cents, as buyers held back and development plans were put on hold for lack of financing. It was a big blow but it did not deter Gallant from continuing to invest in Lagoi Bay by laying down the infrastructures and building the landscape to increase the attractiveness of its land parcels for future sales.
By 2010, its investments bore fruit. Land sales resumed, more land deals were secured, and the construction of Lagoi Beach Village, a central component of its Lagoi Bay township, started. In addition, Landmarks Berhad will resume the development of its Water Resort City soon.
However, Gallant’s share price is still trading below the 2007 peak. Currently trading at 19% discount to its book value, the stock is grossly undervalued because a large chunk of the company’s assets is its landbank in Bintan, which is held at a cost and only a fraction of the prevailing market price.
In our valuation method, we have made a few conservative assumptions. Gallant’s industrial park business has been valued at breakeven levels.
However, management has guided that their industrial parks are actually seeing new and returning customers as wages in other locations such as China have increased significantly over the past few years. For Lagoi Bay land sales, we have factored in a 10âyear period for it to be fully sold and have used prevailing market prices to estimate revenue for future deals. Management, on the other hand, is aiming to achieve completion of sale for Lagoi Bay in 5 years.
Another potential catalyst is the attractiveness of Bintan as a home for commuters, which in turn will determine the demand for residential developments in Lagoi Bay. The key in the success is the overall commuting time, for which Gallant is committed to reduce over the next few years by offering express immigration clearance services and having direct access to Singapore’s Central Business District by ferry.
Earnings to double in 2011 but share price a fraction of previous peak
Gallant’s earnings have been muted in the past few years as it was unable to offset taxes incurred for its industrial park and utilities businesses against losses of unprofitable subsidiaries. But from this year, we believe earnings should receive a significant lift from ongoing land sales and contribution from its iron ore subsidiary.
We expect the company to post a net profit of $9.3m for FY2010 (EPS of 0.4 cents), buoyed by the recognition of land sales revenue by as much as $30m. We estimate another $30m will be recognised in FY2011 from its total outstanding orderbook of $55m (after taking into account FY2010’s recognition). This, together with the contribution from its new iron ore subsidiary, should lift its FY2011 net profit to $18.5m (EPS of 0.8 cents).
In all, we think that the new phase of rerating has just begun. In 2007, investors were willing to pay up to $1.56 (Price to book of 3x), with lower tourist arrivals, less land sales, and very little visibility in construction progress. Hence, the current share price offers an excellent opportunity to buy into the next phase of growth at its onset, in our opinion.
We already see solid evidence that Bintan is making good progress to becoming the next preferred tourist destination in the region, building new shopping mall, hotels, and an integrated water resort city. Besides, tourist numbers have been on the rise for the past 5 years, lending weight to the increasingly popularity of the tropical island.
The current valuations should not remain long as more investors are made aware of this undervalued company, and more development progress is achieved in the coming
years.
Last edit: 13 years 5 months ago by DBT. Reason: spacing
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