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, |
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) |
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.
