Gunung Capital Berhad (GUNUNG - 7676)

Dear readers, it has been a while since my last post. I have been away because of various reasons due to work and personal issues. Anyway, I am now back to blogging, but with a different new concept. This blog will still be on finance and investment issues, but with a zest of my personal interest outside the finance world.

Anyway, today I will be sharing with you guys on what have I been up to these past few months. These are my findings after closely analyzing the development of this company over the last nine months. This is a company which will not be on the radar of most analysts but has a juicy turnaround story.

Prior to September 2010, Gunung Capital Berhad (Gunung) was simply an unexciting latex commodity trading arm for Latexx Partners Berhad (Latexx) as both companies has the same  substantial shareholder, Low Bok Tek (a.k.a. “Robotech”), apparently the wealthiest man in Taiping.

However by September 2010, Gunung completed a successful corporate restructuring and acquisition, a capital reduction which effectively wiped-off RM30.6mil in accumulated losses, and a rights issue with detached warrants which raised RM21.2mil (which was oversubscribed by 63%). Around RM17.0mil of the proceeds of the rights issue was utilized to purchase a 51% equity stake in GPB Corporation Sdn Bhd (which came with a RM321mil contract to charter land-based transportation assets and service to 84 PLKN camps). Based on the performance of GPB in FY2010, the purchase price was a superb deal for Gunung.
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In November, Gunung’s 100% owned subsidiary Gunung Resources Sdn Bhd, secured a 3-year contract to charter out a fleet of vehicles (84 units of Ford Ranger and 168 units of Kia Pregio) at a monthly rate of RM490,000, to Korakan Corporation Sdn Bhd (a company believed to have a service contract with Mindef).

Also in November a new major shareholder, Dato' Syed Abu Hussin bin Hafiz Syed Abdul Fasal entered with a 18% equity stake, substantially purchased from Low Bok Tek’s company Erayear Equity Sdn Bhd. Dato' Syed, a low profile businessman (more research is warranted), was appointed as a Non Independent Executive Director/CEO of Gunung on 8 December 2010, whilst Low Bok Tek remained as a Non Executive Chairman.

Results speak for themselves. Although the contribution from GPB to Gunung was small in FY2010, given that Gunung consolidated only 51% of earnings from July 2010, from the annual report GPB
generated revenues RM66.8mil and RM11.2mil net profit in FY2010.

Thus, assuming a 100% equity stake in GPB (of which Gunung has announced the signing of the relevant Sales and Purchase Agreements in April 2011 to purchase the remaining 49% of GPB), GPB alone would generate an annual EPS of approximately RM0.11 per share (un-diluted for warrants outstanding) for Gunung. Combined with the contribution from Gunung Resources Sdn Bhd, and the contribution from new contracts announced (namely a mobile clinic with 1 Malaysia Development Bhd, and 18 units of buses with the State Government of Perak), I am expecting an annual EPS (un-diluted) of around RM0.14 per share. Based on a simple PER of 10 times, this would translate into RM1.40 value per share (with the current share price of RM0.72 this is a substantial return).
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The exciting part is that Gunung has started to pay dividends (first dividend since listing in 1996), with a first interim dividend of RM0.01 per share paid for the first quarter of FY2011. I am expecting this to continue for the next 3 quarters, with calculates into an annual RM0.04 dividend (or a gross yield of 10%)

Furthermore, I have noticed that Dato’ Syed has been consistently increasing his stake in Gunung, now with a 22% stake. Compared with Low Bok Tek’s (via Erayear Equity Sdn Bhd) and Nominees amounting to a 21% equity stake, the stage is set for a possible fight for control. As such, I am expecting that Low Bok Tek may be willing to sell out is his stake in Gunung to concentrate on his Latexx Partners Bhd, which is currently undertaking an exercise to make Latexx Partners Bhd the largest nitrile glove manufacturer in the world (this would make him the ‘King’ of nitrile glove manufacturing, a title that a ‘Taiping lad’ would dearly strive for). So who will be taking up his stake in Gunung?, this will be an interesting question that only time will confirm.

Looking at the price chart from the entry of Dato' Syed as a shareholder, the price has risen by nearly 100%, and it seems that an accumulation of shares has been consistent. This reiterates my view that Dato' Syed may be strengthening his equity position before the imminent sale by Low Bok Tek of his equity stake.

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In conclusion, based on my analysis, I am looking for big things to come from this counter over the next 6 months, with minimal risks (as long as the overall equity market remains stable).

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