HWANG - Super Undervalued

Background:

Hwang Capital (Malaysia) Berhad or HWANG is previously known as Hwang-DBS (Malaysia) Berhad. I will skip HWANG’s history but roughly it has sold its assets (stockbroking, investment banking, investment management and commercial banking) and distributed dividend per share of RM2.50 previously. What’s left with HWANG now is money lending business and “others – (likely to be property investment)”. For FY14 (ending 31 July 2014), money lending business contributed RM18.0m Profit Before Tax (PBT) or 99% to the Group’s PBT while “Others” contributed RM0.1m or 1% to Group’s.

Continuing operations doing well with PBT +77% to RM17.9m

In the latest quarterly announcement to Bursa on 25-Sep-2014, HWANG mentioned that its continuing operations PBT is up 77% YoY to RM17.9m. This is due to: i) increase in income arising from investments of proceeds from disposals of core financial businesses, ii) net gain on disposals of securities and iii) lower loan loss impairment. This is positive as it shows that HWANG earnings is sustainable even after the disposal of its asset. Book value improved to RM3.07 from RM3.03 in 3Q14.

Proposed dividend of 2.5 sen

HWANG recommended final single tier dividend of 2.5 sen. However, this is subject to approval in next AGM (likely to be passed). Assuming the 2.5 sen is paid every half yearly, total dividend is 5.0 sen representing 2.5% yield. This is the basic assumption only as the Company has lots of cash and can easily afford to give more.

Sitting on huge pile of net cash RM372.2m

On the asset side, HWANG has Cash and short term funds – RM81.2m, Securities Available For Sale (mostly unit trusts in Malaysia) – RM321.8m. On the liability side, it has borrowings of only RM30.8m.  Based on all these, the Company is sitting on net cash of RM372.2m

Theoretical Target Price of RM2.43

HWANG need to maintain its listing status for 2 years from the date of the Sale Purchase Agreement (SPA) signed to sell its asset previously to AFFIN. As the SPA date was 22 January 2014, this means HWANG should maintain its listing status until 22-Jan-2016 (not very far away as it is only 1 year and 4 months away).

Assuming the scenario that HWANG is unable to find new business, shareholder is likely to get more capital repayment. This valuation is super conservative as biggest assumption is only 80% recovery for the loans it gives out. Under this scenario, it is worth RM2.58 or 30% upside.

In normal case, at 95% recovery HWANG is worth RM2.81 or 41% upside from current share price of RM1.99.

Most conservative scenario at 80% recovery:

Details	From Balance Sheet	Recovery	Amount (RM m)
Cash & Short Term Funds	81.2	100%	81.2
Securities Available For Sale	321.8	100%	321.8
Loans, Advances & Financing (Assume 70% recovery)	393.9	80%	315.1
			718.1
Less:
Borrowings			30.8
Other Liabilities			29.0
			658.3
No of shares (m)			255.2
Fair Value (RM)			2.58

Normal scenario @ 95% recovery:

Details	From Balance Sheet	Recovery	Amount (RM m)
Cash & Short Term Funds	81.2	100%	81.2
Securities Available For Sale	321.8	100%	321.8
Loans, Advances & Financing (Assume 70% recovery)	393.9	95%	374.2
			777.2
Less:
Borrowings			30.8
Other Liabilities			29.0
			717.4
No of shares (m)			255.2
Fair Value (RM)			2.81