$SAB / 5134 (SOUTHERN ACIDS (M) BERHAD): Awaiting Value Realization
1. Background
The company's business segments are divided into three areas: oleochemical manufacturing, milling and cultivation, and healthcare services.
2. Free Float
Company directors own half of the total issued shares, followed by Lembaga Tabung Haji with 11.3%, and the remaining 38.4% are publicly owned.
3. Financial Performance
The company's performance has been unstable, with revenue growth observed from FY20 to FY22, followed by a decline in FY23 and FY24. Notably, the company's total assets have grown, reaching RM1.02 billion in FY24. Despite an increase in cash and borrowings, the company remains net cash positive. In FY24, the company had a net asset per share of RM5.69 and a net cash per share of RM2.71, meaning 81.6% of the current market capitalization is in cash.
4. Valuation (Assets)
Considering the net cash per share of RM2.71, the value of shares in $PARAMON / 1724 (PARAMOUNT CORPORATION BERHAD) (approximately RM0.22 as the third-largest shareholder), and the land and building valuation (RM1.56), the total is RM4.49. This represents a 31.3% discount to the current share price.
5. Valuation (Assets + Earnings)
In the first method, only the company's assets were calculated. Adding the EPS of RM0.1 achieved in FY24 (the lowest in 8 years) and assuming the company continues to achieve this in subsequent fiscal years, the value per share would be RM4.59, which is a 34.2% discount.
6. Key Highlight
The recorded land value is lower than the market value. The company owns 260.82 hectares in Thangamallay Estate, recorded at RM139.87 million (equivalent to RM4.98 psf). However, 10 years ago, $GAMUDA / 5398 (GAMUDA BERHAD) purchased land 6.5 km away for RM35 psf, which was leasehold, whereas Thangamallay Estate land is freehold. This suggests the recorded land value is below market value.
7. Prime Location of Thangamallay Estate
Thangamallay Estate is located 2.6 km from TECHBOND, 4.7 km from $UNIQUE / 0257 (UNIQUE FIRE HOLDINGS BERHAD), 3.5 km from $TROP / 5401 (TROPICANA CORPORATION BERHAD), 4 km from IJM's Rimbayu, and 6.5 km from Gamuda Kota Kemuning.
8. Revaluation with Estimated Land Value for Thangamallay Estate
Using Gamuda's purchase price from 10 years ago as a benchmark, Thangamallay Estate's land could add an estimated RM6.15 per share. This would bring the company's value to RM10.64 per share (assets) and RM10.74 per share (assets + EPS), resulting in a 212.9% and 215.9% discount, respectively. However, it's important to note that the current land value might be lower than Gamuda's purchase price, making this a rough estimate.
9. Research Reports by RHB Investment Bank
RHB Investment Bank's 2018 research report indicated that SAB was undervalued in terms of assets, though the timing for value unlocking remained unclear. In 2019, RHB followed up, citing the sluggish property market as a key obstacle for the company to unlock its value.
10. Conclusion
SAB is a cash and asset-rich company generating free cash flow, with undervalued land recorded in its books. However, it could be a value trap due to uncertain value unlocking timelines, low dividend payouts, and declining growth, as seen in FY24. To unlock its land value, SAB could consider developing the land itself or partnering with Paramount, given SAB's significant shareholding in Paramount and the close relationship between the two companies. The flourishing property market presents a timely opportunity for such actions. If the company does not act, the timeline for unlocking value will remain uncertain, potentially keeping the share price stagnant for an extended period.