KUALA LUMPUR, May 26 — The management of Insas Bhd thinks business prospects of its stock broking unit, M&A Securities, will be more encouraging this financial year due to the improved market sentiment and increased business generated by the corporate finance unit.
It will explore new property investment and development ventures, without giving details.
As for its IT-related manufacturing segment, it said Inari Amertron Bhd is optimistic of maintaining its profitable performance due to the high growth of the EMS (electronics manufacturing services) industry.
Insas Bhd is an investment holding company that is involved in financial services, retail trading and car rental, property investment, information technology related services, and investment holding.
It counts M&A Securities stock broking, Insas Pacific Rent-A-Car and Dome restaurants among its brands.
The company just announced earnings for Q2 FY14:
Revenue: +69 per cent to RM 80.7 mln
Profit: +35 per cent to RM 40.9 mln
Cash flow from operations: (RM 65.2 mln) vs (RM 8.7 mln)
Dividend: 0 sen per share vs 0 sen per share
Revenue for Insas Bhd’s financial service and credit & leasing division grew due to higher brokerage and corporate advisory income reported by the stock broking unit.
Pre-tax profit increased due to higher profits reported by both the stock broking and the structured finance units on the back of improved market sentiment.
Insas Bhd’s property segment did not report any significant contribution.
Its IT unit reported higher pre-tax profit due to higher gain arising from sale of quoted securities.
For its IT unit’s associate companies, Inari Amertron Group reported higher profits due to higher trading volumes and the inclusion of results contributed by the newly acquired Amertron Inc. (Global) Limited.
For its car rental business, despite the higher revenue it achieved, there was no significant improvement in the pre-tax profit for the H1 due to the lower profit margin and higher fixed costs.
1. What is it burning cash on?
Despite increases in revenue and profit, Insas Bhd has been burning cash on its operations for the first half of this year, even more than last year.
It used RM 63.2 mln in cash in H1, compared to RM 5.1 mln a year ago.
The main culprits are non-cash items at RM 80.8 mln and a negative net change in current assets, which came up to RM 123.3 mln.
It did not give an explanation in its review of its results.
What are the adjustments for non-cash items, and the negative net change in current assets?
2. Why no formal dividend policy instead of buying back shares?
Last we checked, Insas does not have a formal dividend policy.
But it does have a share buyback scheme.
Although a formal dividend policy may attract more investors as opposed to a formal dividend policy.
Still, over the past 12 months, its stock price has climbed from about 50 sen to around RM 1.20.
Insas Bhd said in its latest annual report that during FY13, it Insas back about 21.2 mln of its issued shares from the open market.
For this financial year so far, Insas has only declared an interim dividend of 1 sen per share, coming up to a dividend yield of 0.84x (Reuters).
So, why is Insas Bhd resistant against a formal dividend policy?
3. How will Ho Hup finance the development of its prime land in Bukit Jalil?
Insas is a shareholder in Ho Hup Construction Company Bhd, a listed company formerly with a PN17 status.
According to Reuters, Insas owns 4.01 per cent of Ho Hup directly, while it owns a further 12.17 per cent stake indirectly through Formis Resources Bhd, a listed company which is 12.03 per cent owned by Insas Bhd.
Ho Hup was a PN17 company until May 2 when Bursa lifted this status following a lengthy corporate turnaround exercise.
Kenanga Research has forecast net earnings of RM 17.1 mln, RM 106.3 mln and RM 146.8 mln for FY13, FY14 and FY15.
Kenanga is basing its forecast on Ho Hup being successfully lifted from its PN17 status, which will enable it to reap benefits from the development of its 24 hectares of prime land in Bukit Jalil, Kuala Lumpur.
But according to its recent Q1FY14 announcement, Ho Hup burnt RM 19.7 mln of cash on operations, and had only RM 11 mln in cash.
How will it finance the development of its prime land in Bukit Jalil?
4. Will it increase or decrease shareholdings in Inari Amertron?
According to Reuters, Insas Bhd is currently the main shareholder in Inari Amertron with a 33.31 per cent stake.
Inari Amertron has been described by Affin Investment Bank as having exciting growth prospects, a scalable business and improving franchise with a strong MNC customer base.
Inari assembles radio frequency (RF) chips, which are incorporated into all major smartphone and tablet manufacturers’ devices.
Last year it acquired Amertron, which deals in optoelectronics, and largely serves the global aerospace and defense industries, which will provide a matured and stable earnings stream for the new entity, Inari Amertron.
Inari Amertron recently transferred from its listing from the ACE Market to the Bursa mainboard.
In an article by The Star, it reported Inari Amertron as intending to get on the radar of more institutional investors when it is on the Main Market.
In fact, the company made the news in a stockbroker report saying that Khazanah was interested in taking a 20 per cent stake in Inari Amertron, but Khazanah later denied the claim.
The share price of Inari Amertron has increased more than four times from RM 0.58 to RM 2.69 in the past one year.
At the same time, Insas Bhd said its IT unit’s equity accounting for Inari Amertron’s after-tax profits for this H1 is RM 15.6 mln, up by almost three times from RM 5.5 mln last year.
According to Affin Investment Bank, the rising rate of LTE adoption in the world will mean increased demand for advanced RF filters, which will translate into stronger growth for Inari Amertron’s RF division.
With exciting growth prospects, will Insas Bhd maintain the current shareholding in Inari Amertron for contributions to its financial performance, or will it be open to taking some profit if institutional investors come knocking?
5. Why not buy Inari Amertron instead of Insas?
Why shouldn’t investors buy Inari Amertron?
It has a much stronger growth story, it just transferred to the main board of Bursa it is still in a net cash position after the Amertron acquisition.
It has a good track record of generous dividend payouts, with a dividend payout ratio (DPR) of 40 per cent for each of the past two years, and it has a ‘sustainable earnings profile’, as described by Kenanga.
And above all, investors can be directly exposed to the growth in demand for RF chips, which is a proxy to the growth in mobile communications.
The only catch is that it is more expensive than Insas Bhd, with a stock price of around RM 2.70 and a price-to-book (P/B) ratio of 8.99 compared to Insas Bhd’s RM 1.19 and P/B ratio of 0.84 (as of 6 May 2014).
Why should investors choose Insas Bhd over Inari Amertron?
6. Why is Insas Bhd allowed to buy into a company so cheaply?
Insas Bhd announced recently that its wholly-owned subsidiary Topacres Sdn Bhd spent RM 3 mln on buying a 60 per cent stake in a company called Special Windfall Sdn Bhd from Tribeca
Capital Sdn Bhd and Red Zone Development Sdn Bhd.
Special Windfall Sdn Bhd owns 100 per cent of Tahap Wawasan Sdn Bhd, a company that owns a piece of freehold land in Nilai, Negeri Sembilan.
The 10.2-acre piece of land has been valued by Chartwell ITAC International (Kajang) Sdn Bhd to have a market value of RM 13 mln.
Insas Bhd mentioned in the Bursa filing that Special Windfall Sdn Bhd is entering into an agreement with Dato’ Gan Kong Hiok and Gan Eng Hian to acquire the entire issued and paid-up share capital of Tahap Wawasan Sdn Bhd for RM 9.5 mln and agreement to repay Tahap Wawasan’s debts amounting to almost RM 4 mln.
So Special Windfall paid about RM 13.5 mln to acquire a company that owns a piece of land that is worth about the same amount of money.
Tribeca Capital Sdn Bhd and Red Zone Development Sdn Bhd will own a 20 per cent stake each with a subscription price of RM 1 mln per 20 per cent stake.
Insas Bhd said Special Windfall Sdn Bhd intends to develop a residential project at the piece of land in Nilai as part of a joint venture with Tahap Wawasan Sdn Bhd.
How did Insas Bhd pay just RM3 mln for a 60 per cent stake in a company with a RM 13 mln asset?
7. Where did Insas Bhd clarify that Red Zone Sdn Bhd is a related party?
According to the website of Ho Hup Construction Company Bhd, executive director Wong Kit Leong has an indirect interest of 23,115,000 ordinary shares of RM1.00 each in the company by virtue of his substantial shareholdings in Red Zone Development Sdn Bhd, a substantial shareholder of Formis Resources Berhad which is the holding company of Formis Holdings Berhad.
According to the website of Formis Resources, its executive director Monteiro Gerard Clair is linked with Red Zone Development Sdn Bhd.
Insas Bhd owns shares in Formis Resources and Ho Hup Construction Company.
Red Zone Development Sdn Bhd is one of the sellers of Special Windfall Sdn Bhd to Insas Bhd’s subsidiary Topacres Sdn Bhd.
Where did Insas Bhd clarify that Red Zone Sdn Bhd is a related party? We can’t seem to find reference to it.
8. Is investment in Nilai land development going to lead to more expenses?
In the same filing to Bursa, Insas Bhd said Special Windfall Sdn Bhd intends to develop a residential project at the piece of land in Nilai as part of a joint venture with Tahap Wawasan Sdn Bhd.
Insas Bhd said the development is expected to generate “a reasonable return on investment” and provide a platform for future investment in viable property development projects.
When is development expected to start on the land?
Who will foot the property development bill?
Is Insas Bhd expected to invest in property development costs?
And what will be the “reasonable return”?
We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.
So far, we have not had a reply (which is why you are seeing this message). — Investor Central
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