Initially whilst scrutinizing the Notes to the Financial Statements, many would be confused and /amazed by tons & tons of information about accounting principles and the detailed composition of the Balance sheet items.

Then suddenly you saw in the Fixed Asset Section the wording:

“that the company ‘s leasehold properties and other properties have not be revalued since X years ago.”.

Eureka ! you saw something. Next you review in your mind based on what you know of the current property development and other known facts, you suddenly realized that the company’s fixed assets are worth more than the book figures. So what’s next? We then look at the market based ratio which is the existing net tangible asset or NTA ( Total Assets less intangible assets/ total number of shares) and add in this revaluation surplus which makes the POTENTIAL NTA very much higher than the market share price! Well this is actually happening to one of the local public listed company, Keck Seng (M) Bhd which was reported in the Star (6/4/07) pertaining to the undervaluation of the company’s fixed assets.Perusing through its annual report 2005, we can see the reasons -the market has yet to fully appreciate the potential revaluation surplus of the company’s rich assets, especially its huge land bank in south Johor.

Keck Seng has businesses in property development, hotel management, plantations and palm oil milling.

According to the company’s 2005 annual report, about 10,000 acres in south Johor are still valued based on prices at the 1980s level. The surplus from the revaluation of land, especially in Ulu Tiram, Bandar Baru Kangkar Pulai, Pasir Gudang and Tanjong Langsat, could be significant since land and property prices in south Johor have appreciated due to plans to develop the Iskandar Development Region. ( refer to my earlier articles on IDR) Let’s examine it further by using some more details:

• In 2005, Keck Seng sold 181 acres of plantation land in Ulu Tiram to the state government for RM45.4mil, or about RM251,000 per acre, which resulted in a one-off gain of RM39.5mil.

• Assuming a price of RM251,000 per acre, the total land bank in south Johor could be worth RM2.5bil, which is a surplus of RM2.3bil from the current book value.

• This could enhance Keck Seng’s net tangible asset (NTA) by a whopping RM9.50 per share.

• Don’t forget that the company’s plantation land bank could eventually be converted for property development, which would fetch better pricing as it is close to the urban area.

Other factors like its commercial properties are also undervalued at below market prices. The net book value of Menara Keck Seng at Jalan Bukit Bintang, for example, was last valued at RM63.5mil, or RM240 per sq ft, in 1996. The MAS building at Jalan Sultan Ismail was sold last year for RM130mil, or about RM481 per sq ft. Based on the same price per sq ft, Menara Keck Seng could be worth RM127mil, double its current book value. The company also owns properties in Singapore, which were last valued in the 80s; two hotels in Canada (1997 and 2000) and another hotel in Hawaii, last valued at 2000. The morale of the above illustration on the analyzing of the company’s annual report ( notes to the financial statement) is that this company has not been properly valued in terms of its NTA due to the potential revaluation surplus in its fixed assets segment. This can applies to other companies in terms of its fixed assets and other types of assets.Next article is also on the undervaluation of investment in equities.

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