An adaptation of an article sends to me:
Investors can sometimes find a deep value stock with the market price way below its intrinsic value. However, many found it is frustrating investing in it with the persistence of undervaluation for a long period of time. Most investors are not patient enough and would just give up and walk away, while a few diehard value investors remain patient to wait for its value to be unlocked.
What gives a diehard value investor confidence that value will be unlocked so that he can realize the profit expected from his investment? There are different kinds of value stocks, and the precise answer is different. But the answer lies in one word: catalysts.
A catalyst for a stock is a revelation or event that propels the price of an undervalued stock dramatically. It can be anything: an earnings report, an analyst revision, a new product announcement, announcements of a special dividend, stock buyback, an offer to buy a company or merge, a management change, a move by an activist investor and etc
Below are some speculations on how the value of Insas could be unlocked.
If the management desires, it can increase the dividend payment annually, or declaration of special dividend and formulate a formal dividend policy which it can easily do so with the cash and cash equivalent it possesses. Many investors do look for dividend as a recurring income in their investments. A yield matching the fixed deposit rate will certainly great. Dividend distribution also gives a positive signal to investors.
The presence of an activist investor, or a group of investors with deep pocket could use his/their own cash or carry out a risk arbitrage, if possible, to acquire 33% of the outstanding shares from the market and go for a conditional MGO. In this case Dato’ Sri Thong and PAC will have no choice but to make a higher counter offer.
Insas could also carry out a restructuring exercise such as streamline low profitability business car rental (Close down 5 non-performing car rental branches, increase utilization of hourly rent Tribecar Pte.Ltd with target revenue growth RM 15 million to RM 21 million FY2019), or selling off its business with losse, luxurious goods segment and etc which are hampering the growth of the whole company. This will also act as a catalyst. With the proceeds of the sale of some of these under-performing assets, and concentrate in redistributing resources to grow it other associates companies DGSB, Numoni and Ho Hup. Better still with “Cash is king” opportunities will present itself for Insas to acquire some great companies with better growth and profitability prospect.
An investor may be able to identify a potential catalyst that can unlock the value. But the timing is still not known. A typical horizon can be of two-three years, but can sometimes be as high as five years. Assuming an investor of Insas is very confident that the share price of Insas could rise to double from its price now of 77.5 cents to RM1.55 in the next few years due to its grossly undervaluation, if the holding period is one year, this will mean a 100% compounded annual growth rate (CAGR); for two years, it will mean 42% CAGR, 26% for three years, 19% for four years, and 15% for five years. These CAGR are considered as very good. As we know, Insas’s share price is even at a much higher discount than the 50% assumed, even a long holding period can still give decent returns. Note the above has not considered any new growth of the business of the Group. We know that its main contributor, Inari, does have some growth potential.
What gives comfort and holding power to the value investor is that he knows what he is waiting for and how long the wait might be.
There are more other potential catalysts—growth in earnings as business segments become increasing profitable, spin-offs, reorganizations, a new and good acquisition, big fair value gain on investment securities or simply a change in perception of investors, etc. Where there aren’t visible catalysts, activist investors sometimes get in and do the needful.
Note: The next catalyst time line:
The Board has taken note of the shareholders’ comments and will look into formulating a formal dividend policy depending how market recovers in the next nine (9) months. The Company has via an announcement on 26 November 2018 increased the interim dividend payment from 1 sen to 2 sen in respect of the financial year ending 30 June 2019.
Latest development of Plant 34 in Batu Kawan: Construction of Block A with a floor space of 240,000 sqft has been completed and we target to build in the facilities by Jan-March 2019. Production of a new product is expected to commence by second half of 2019.
Block A has been allocated to one of our current customers while Blocks B & C are targeted for new customers. We endeavour to diversify our customer base while still maintaining good relationship with our existing customers. There are potential customers for the remaining 2 blocks, however, we are qualifying customers to select those with good products margin in the niche segments.
Health sensor is mainly used in lifestyle apps and activity tracker devices such as wearables and smartphones. We are in the right technology area as there is growing demand for health conscious real-time monitoring devices. MiniLED is mainly used in billboard advertisement. Our MiniLED production has started in small scale and it is important project for our Company which aligns to digital and modern applications.
Focus on managing costs and margin, and the implementation of Industry 4.0 to acheive greater efficiencies towards lowering of the manufacturing costs.
INSAS-WB (3379WB); Maturity Date: Feb 25, 2020. Exercise Price: MYR 1.00. If Dato’ Sri Thong convert the INSAS-WB, he will need to make conditional MGO at price of RM 1.00 + INSAS-WB price on FEB 25 2020. If Dato’ Sri Thong do not convert INSAS-WB then it is free for all to gather 50% + 1 share and take over control of INSAS.
Numoni is a fintech startup. While it has not been able to gain traction in the e-payment industry, it continues to hold remittance licenses in Malaysia and Indonesia, as well as e-wallet license in Malaysia. Numoni is currently working on partnership or trade sale opportunities as the e-wallet businesses grow, at the same time continuing to develop its product platforms. We believe fintech continues to be important space for the Group to invest alongside its other Tech portfolio.
INSAS last 10 FY Summary: Net worth CAGR: 9.81%.