TADMAX (4022) - (Tadmax Resources) There Is An Interesting Speculative Angle For This Stock






 
Tadmax is previously known as Wijaya Baru Global Berhad (WBGB). It is principally involved in property development. It has recently secured approval from TNB to construct a power plant for RM3.5 billion.
 


 
There is not much that can be said about its historical results. The group does not have much revenue and has been incurring small losses in past few quarters.
 
Balance Sheet
 
The group has shareholders' fund, borrowing and cash of RM303 mil, RM50 mil and RM10 mil respectively. This translates into net gearing of 0.13 times only. Very healthy balance sheet.
 
(Note : the bulk of the group's asset is made up of "forest concession" of RM218 mil. I can't tell how real this figure is. Is that related to its 80,000 hectares plantation land in Papua New Guinea ? Having said so, this is not a big issue. Even if the value is not realisable, gearing is still very low and comfortable) 
 
Prospective Earning
 
In the next few quarters, the group is expected to see material contribution from property development. According to the Company, its Mizumi project in Kepong has seen 80% booking (is that confirmed sales ? Very often, the booking will not translate into sales if banks refuse to lend to the buyers, which is the major headache faced by developers nowadays). 
 
The Mizumi project has been well received because it is closed to MRT station and is priced affodably (RM388,000 onwards). According to FY2016 annual report, the gross development value (GDV) and gross development cost (GDC) of the project is RM981 mil and RM735 mil respectively. Based on assumption that the GDC has not included interest expenses and the group funds it by using 70% gearing, total borrowing would be 0.7 x RM735 mil = RM515 mil. Based on 5% interest rate, total interest expenses is RM25 mil. In this regard, PBT would be RM981 mil - RM735 mil - RM25 mil = RM221 mil. Based on tax rate of 25%, rough estimate of net profit is RM166 mil. Based on assumed completion period of four years, annual net profit could be as high as RM42 mil.
 
But this is not the end of the story. In FY2016, the group incurred total losses of RM13.7 mil. That was mostly due to depreciation charges and staff costs. Add this to the Mizumi profit, we are looking at estimated consolidated profit of RM28.3 mil per annum (best case scenario, I would say). 
 
This is still not the end of the story. There is a rights issue that you need to take into consideration.
 
Rights Issue
 
The group is in the midst of undertaking a rights issue, which involves issuance of 219 mil new shares. Upon completion of the rights issue, share cap will increase to 758 mil. This will translate into fully diluted EPS of 3.7 sen. The question now is after rights issue, what is your final cost of investment and what is the PER ?
 
On 22 May 2017, the company fixed the rights price at 40 sen. Since the rights price is very similar to the prevailing market price, let's just assume the ex-all price is more or less the same at 40 sen (for simplicity sake).
 
The warrants' exercise price has also been fixed at 40 sen. Based on conversion premium of 20%, the likely trading price would be (1.2 x 0.40) - 0.40 = 0.48 - 0.40 = 8 sen. 
 
For every 4 rights shares, you will get 7 free warrants. So, every rights share is entitled to 1.75 free warrants, or RM0.14 (being 1.75 x 8 sen). Knocking this off against the 40 sen subscription price, effective cost for the rights is RM0.26.
 
Since the rights is undertaken on 2 for 5 basis, the average cost will become (2 x 0.26 + 5 x 0.40) / 7 =  36 sen.
 
Sorry for introducing so many numbers. I hope you are not confused. Let me try to sum it all up : if you buy the shares now at 40 sen and participate fully in the rights issue, your cost will be lowered to RM0.36. Of course, this is based on assumption that the warrats trade at 8 sen.
 
That is still not the end of the story. The rights will cause the price to move all over the place, but at the end of the day, it is the EPS that matters.
 
As calculated earlier, fully diluted EPS could be 3.7 sen over next few years. Based on 40 sen trading price post rights issue, the stock is potentially trading at closed to 10.8 times PER. 
 
I leave it to you to decide whether this is a price you are comfortable with. 
 
Chin Hin's Boss
 
As mentioned by respected blogger koko888, Chin Hin's boss has recently acquired a stake in Tadmax. According to him, the last time that happened to Boon Koon, the stock price subsequently shot up by a lot. I can't really feel it when I first study this stock. But after going into the details of the rights issue (and to a lesser degree, the Mizumi contribution), I am beginning to have a better feel of how things can potentially happen.
 
First of all, the group is relatively clean, so we can put aside balance sheet risk (unlikely to go bankrupt). Secondly, if managed properly, earning could be quite reasonable over the next few years. The above two combined fulfil the basic requirements for Chin Hin's boss to get involved.
 
Now come the sexy part : the free warrants. The rights issue will create a flood of free warrants. If they push up the price of the mother shares post rights issue, the free warrrants will also rise with the mother shares, and they can slowly unload them to make some tidy profit, which can help to lower their original cost of investment.
 
Well, this is just my speculation of how things can potentially evolve. Please don't take it too seriously. Always stick to fundamentals when you invest your money.
 
Power Project
 
As for the power project, I suggest you totally ignore it. It is too early stage, and cost too much to know for sure how it will create value for shareholders. According to the company, feasibility study alone will cost them RM27 mil. In the event that they manage to pull it off, there is likely to be a MASSIVE rights issue to fund the project (which costs RM3.5 billion). We cross the bridge when we get there. In the meantime, suffice to just focus on Mizumi, rights issue and Mr. Chin Hin. 


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