Saturday November 7, 2009

Lityan’s quick turn after Lembaga Tabung Haji steps in


WHAT is it with the burst of market activity whenever Lembaga Tabung Haji (LTH) invests in a significant way in a listed company?

Clearly, one of the stocks that grabbed the most attention in the earlier part of this week had to be Lityan Holdings Bhd. Having recently completed a restructuring exercise that stretched over two years, the company had been expected to have its shares requoted on Bursa Malaysia on Oct 30 without much ado.

But boy, did it pump up the adrenaline level of the local bourse! Three trading days and one unusual market activity query later, the stock is riding high at RM2.65, which is a whopping 93% higher than its opening price of RM1.39.

So why the interest? Is it simply because this system integration and information technology solutions player emerged from Practice Note 17 status as a subsidiary of LTH?

Certainly, with Lityan’s low public shareholding spread – LTH holds a 56% stake – this was a huge contributing factor for the stock’s steep ascend.

So why Lityan?

On the business side, Lityan’s news flow would qualify as sexy, with intense speculation on the company’s earnings potential resulting from a tie-up with Huawei Technologies Co Ltd as well as other Middle East project tenders.

AmResearch says that Lityan has tendered for projects worth a total RM4bil, with the bulk of it originating from projects under Telekom Malaysia Bhd’s (TM) HSBB (high speed broadband) project rollout.

Specifically, Lityan is eyeing packages of projects involving contracts for the provision of Internet protocol television-related infrastructure worth RM80mil.

There is also a larger package from the HSBB projects that Lityan is eyeing, which is worth over RM2bil.

This involves last-mile connections using fibre optics (also known as fibre to-the-home (FTTH) to replace existing copper lines being used by TM. This FTTH project will likely be split among two to three contractors.

“Our channel checks suggests that Lityan is one of eight companies that have been shortlisted for the project. Lityan will be partnering Japan-based Sumitomo and China-based Huawei in its bid for this FTTH project,” says AmResearch.

Meanwhile, Lityan’s existing order book of RM180mil is equivalent to three times its 2008 financial year revenue, which is expected to keep the group busy over the next 24 months.

In the last few years, the pilgrim fund has made some interesting investment choices. A check on Bloomberg shows that LTH has holdings in 71 companies listed on Bursa.

“LTH goes for capital gains over the long term. It prefers taking strategic stakes in companies deemed to offer synergistic benefits. LTH wants to grow with its companies,” says a source close to LTH.

Notable holdings of LTH include a 67.87% stake in TH Plantations Bhd (which it floated in 2006), a 29.91% stake in Pelikan International Bhd and a 9.94% stake in Mudajaya Group Bhd. Somehow, LTH’s entry into a company is always greeted by fanfare.

Remember in April this year, when LTH took a stake in Sino Hua-An International Bhd?

The latter’s share price skyrocketed from 28.5 sen on April 27 all the way to its high of 57 sen on June 10. Year to date, the stock is up 122.22% to close Thursday at 50 sen.

Filings with Bursa shows that LTH emerged as a substantial shareholder in Sino Hua-An in April after it bought 1.91 million shares, thus raising its stake to 56.12 million shares or 5% of the paid-up capital. As of Nov 4, LTH had a 5.87% stake, or 65.91 million shares.

Sino Hua-An’s principal business is the production and sale of metallurgical coke, and its by-products are used to make steel.

It halved its net loss in the second quarter to June 30, 2009, to RM13.3mil, compared with a loss of RM23.6mil in the first quarter. The improvement was attributed to the stabilisation of coke prices from the first quarter to the second quarter.

OSK Research says that the narrower loss in the second quarter suggests that the worst is likely to be over.

“We believe the company is well on track to return to the black in the second half as it benefits from China’s RMB4bil stimulus packages and measures, and firmer steel, and hence coke, demand,” it says.

OSK values the company based on 7.8 times of its 2010 financial year earnings per share, and derives a 12-month target price of 87 sen.

More waves

Meanwhile, another LTH investment that created just as much waves was in Silver Bird Group Bhd, when the fund acquired 21.56 million Silver Bird shares from 3i Group plc, a London-based listed private equity firm, in August 2007.

Silver Bird was already loss-making in the previous two financial years when LTH emergence as a substantial shareholder, with a 15.18% stake on Sept 4, 2007.

The acquisition was made even more significant because it marked the pilgrim fund’s entry into the food and beverage sector.

The stock had been in the doldrums at the 40 sen level, but with LTH’s entry, the stock took a life of its own and sprung to action, touching a high of RM1.11 on Oct 9, 2007.

That aside, Silver Bird hasn’t been doing too well due to a mixture of reasons that included its poor Singapore operations and the high price of wheat and flour. However a turnaround appears to be in the works.

For the third quarter to July 31, 2009, it did however rebounded to make a net profit of RM331,000 from a previous loss of RM4.31mil. On a nine-month basis, profits were RM828,000 from a loss of RM21.25mil.

Year to date, the stock is down about 30% to close Friday at 68.5 sen.

On a more sombre note, LTH is also the second-largest shareholder of loss-making oil and gas player Ramunia Holdings Bhd, with a 29.68% stake. This is perhaps the black sheep in its stable of holdings.

The fund emerged as a substantial shareholder in early November 2007 with a 5.1% stake, three months after MISC Bhd planned a reverse takeover of Ramunia.

The deal with MISC was announced.

With the confluence of positives at that time, the stock ran from its RM1 level to reach its high of RM1.91 on Feb 12, 2008.

LTH upped its shareholding aggressively after mid-December 2008 and raised its interest to 29.7%, which still remains till today.

As most investors are aware, the deal with MISC fell through due to ‘unsatisfactory due dilligence findings’.

The investment in Ramunia Holdings Bhd has clearly turned bitter for the fund. If business does not improve, it could fall into the dreaded Practice Note 17 (PN17) category, which would certainly have dire consequences for LTH.

There is, however, some glimmer of hope because Sime Darby Engineering Bhd has proposed to buy Ramunia’s Teluk Ramunia fabrication yard for RM530mil cash.

With the interesting choices LTH has made so far, investors will certainly be curious to know which listed company the fund is eyeing next.

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