SAB: Still at a discount after discounting its discounted valuation.

At RM3.60 per share, Southern Acids (M) Berhad (KLSE:5134) is valued at RM493m.

The company has been profitable for the past 20 years, except for FY09. Although a constant annual dividend of 5sen/share since FY14 isn’t particularly exciting, it has consistently paid dividends for at least 20 years. Additionally, it boasts a very solid balance sheet with net cash in excess of RM300m.  

SAB operates in 3 core businesses:

1)        oleochemical manufacturing

2)        healthcare services

3)        milling & cultivation.

However, the crown jewel of the group lies in its 260.82ha of freehold land. This land is strategically located between the matured township of Kota Kemuning and ongoing township developments of Bandar Rimbayu (IJM), Eco Sanctuary (Ecoworld), TwentyFive.7 (Gamuda) and Tropicana Aman (Tropicana).

Let’s estimate the net realisable value of SAB’s key assets using sum-of-the-parts method. This calculation excludes other smaller assets such as:

1) a 2.4% stake in listed Paramount Corporation Berhad (RM5.09m based on closing price of RM1.22)

2) An office at Centro Tower with a book value of RM4.37m

3) 3.25 acres of industrial land in Klang with a book value of RM3.32m

4) A corporate office with a book value of RM2.67m.

	Assumptions/ valuation*	Estimated amount* (RM’m)
260.82ha of freehold land at Thangamallay Estate	RM56.44 psf(1)	1,584.65
232-bed Sri Kota Hospital	PE multiple of 20x	(2)477.58
Cash	Excluding minority interests(3)	305.47
Milling and cultivation	PE multiple of 8x, 63% stake	(4)215.64
Oleochemical manufacturing	20% of net asset value  (31 December 2023)	25.61
	TOTAL	2,608.95 (RM19.05/share)

*See appendix

To be realistic, discounts are applied to these assets/ businesses:

 

	Discount	Estimated amount (RM’m)
260.82ha of freehold land at Thangamallay Estate	75% discount (common for property stocks). Also, excluded potential value appreciation from connectivity to West Coast Expressway	396.16
232-bed Sri Kota Hospital	10% discount	429.83
Cash	20% discount	244.38
Milling and cultivation	Discount of 2x PE multiple	161.73
Oleochemical manufacturing	Zero value(5)	0.00
	TOTAL	1,232.10 (RM9.00/share)

Applying a further 20% discount to the overall discounted valuation, we arrive at a total valuation of RM985.68m (RM7.20/share).

Despite this valuation, the share price still reflects a steep discount of approximately 50% after considering the discounted value.

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Appendix

 

(1) Ten year ago, in 2014, Gamuda purchased 104.1ha of leasehold agricultural land nearby for RM392.2m, or RM35 psf, with the intention of developing it into TwentyFive.7 township. (https://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download/?name=EA_GA_Attachments&id=62463)

Assuming the land appreciates at a compounded average growth rate of 3% and applying a 20% premium for freehold land, it arrives at a land price of RM56.44 psf.              

(Leasehold properties typically cost 20% less than a similar freehold property. https://www.iproperty.com.my/guides/freehold-vs-leasehold-title-malaysia-what-property-buyers-should-know-64117) Conversely, freehold properties usually cost 25% more than a comparable leasehold property. When we exclude the building and compare freehold land to leasehold land, logically, the premium should be more than 25%. To be conservative, a premium of 20% is adopted.

(2) To be conservative, we use the lower of FY23 PBT (RM31.42m) and annualised FY24 PBT (9MFY24: RM28.356m). A corporate tax of 24% is applied to estimate the estimated annual net profit.

With a target PE multiple of 20x, this amounts to approximately RM2.06m per bed.

Reference:

Based on IHH’s offer for Ramsay Sime Darby Health Care, which had 1,375 operational beds as at last Tuesday, the joint venture between Ramsay Healthcare Ltd — one of the world’s largest hospital operators — and Sime Darby Bhd was valued at about RM4.12 million, or about US$1 million, per operational bed. (https://theedgemalaysia.com/article/ihhs-offer-ramsay-sime-darby-puts-spotlight-kpjs-undervaluation)

 

(3) 

As of end of FY23 (31 March 2023), the group was in a net cash position of RM383.48m. Since SAB owns a 63% stake in Indonesian subsidiaries, proportionately, 37% of the cash in Indonesian Rupiah is excluded as non-controlling interests.

(4) To be conservative, we use the lower of FY23 PBT (RM74.56m) and annualised FY24 PBT (9MFY24: RM42.79m). A corporate tax of 25% is applied to estimate the estimated annual net profit.

(5) The oleochemical manufacturing division was profitable in FY22. However, it incurred losses in FY23 and 9MFY24. To be conservative, zero value is assigned to the loss-making business.