In Part 2 of this article, we shall still continue with reviewing Keck Seng’s notes to the financial statement – investment on equities which is also priced at a book value lower than the current market price! According to notes accompanying its fourth quarter results ended Dec 31, 2006, the book value of these investments amounted to RM146.7mil, but based on market value as at end-December, they were worth RM567.2mil. Some details:

• Keck Seng owns 4.9 million shares in PPB Group Bhd and 2.8 million shares in Chin Teck Plantations Bhd.

When the Financial Reporting Standards 139 (FRS 139) are fully enforced, all companies including Keck Seng would have to mark-to-market their investment in equities, and state the surplus or deficit over cost as earnings or losses in the profit and loss accounts.

• As a result, Keck Seng could see a surplus of RM420.5mil on its investment in equities, which could boost its NTA by RM1.74 per share.

All in all, basing on a conservative estimation arrived at by adding surpluses from the revaluation of Keck Seng’s Johor land bank and its equity investments, the company’s total NTA could reach as high as RM15 a share compared with RM4.34 currently.

The undervaluation of a company’s investment in equity is not new.

This has also happened in an earlier case pertaining to a second board public listed company, an information communication technology company FSBM. Word got around in the market that its net tangible assets (NTA) per share stood at RM2, against its share price of RM1.22.Some quick details:

• The high NTA was due to the fact that FSBM had an investment of RM1.1mil, comprising 2.3 million shares in Nasdaq-listed Amaru Inc, which was listed in November 2004. At that time (one month ago), Amaru shares were trading at about US$5.

• If FSBM had disposed of the shares at that price, the company would now be sitting on capital gains of US$11.5mil. Based on FSBM’s paid-up capital of RM51mil, this should add 70 to 80 sen to its NTA, thus giving the stock a worth of at least RM2, on paper. “

• More interestingly, FSBM’s investment in Amaru Inc actually yield another higher windfall gain which is Amaru’s May’06 stock split of 1 for 4 :-

• Just before the stock split, FSBM’s shareholding in Amaru increased to 2.45 million shares due to bonus issues and settlement of debts via Amaru shares. This brought the total cost of FSBM’s shares in Amaru to RM2.73mil.

• Theoretically, for a US$5 stock to split into 4, this would mean that one share should now trade at a cost of RM1.25. However, after the share split, Amaru continued to soar and its shares rose to close at US$2.70 last Wednesday. This would be a 116% increase from its theoretical cost of RM1.25.

So what does this mean for FSBM?Basically, at a cost of RM2.73mil for 2.45 million shares, the company now has 9.79 million shares worth RM95.16mil.When we add this windfall gain from stock split/bonus issue of Rm95mil to the company’s present NTA, and the stock now has an NTA per share of RM3.09 leading to a material potential capital gain.Accordingly to its managing director Datuk Tan Hock San, it is part of the company’s corporate strategy to eventually dispose of the Amaru shares when the time is appropriate.If FSBM sold a quarter of its stake in Amaru in this financial year, the gain would contribute about RM20mil to the FSBM’s bottomline. This is a significant enhancement of its earnings per share (EPS).So, what does this signal us to? Well, do learn from FSBM and look more closely to the existing and potential net tangible asset. You might get some good surprises!

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