Monday, September 03, 2007

Liang Huat Aluminium Ltd – Return From the Dead?

[This note was previously published under a different title, it has since been remodified because I was working with the wrong charts.]


While perusing the list of top actively traded stocks today, I came across a stock called Liang Huat Aluminium. I printed out Liang Huat’s financial statements and had a look at its stock chart, and I must say Liang Huat is one of the most unusual stocks I have looked at in a while.

The SGX chart of Liang Huat (click for larger image) indicates that the stock was suspended some time back in late 2004, and only recently resumed trading recently. It opened at $0.12 and has since slide down towards about $0.06 per share.

Let us investigate this this stock in more detail.

Capital Deficiency

Liang Huat Aluminium is one of the few companies I have come across that has a “capital deficiency.” In fact, it is the first company I have come across that has such a massive capital deficiency compared to its assets:

What a capital deficiency simply means is that a company has more liabilities than assets. In Liang Huat’s case, it has $139,885 in total liabilities and $5,811 in total assets, for net a capital deficiency of $134,084. This effectively means that shareholders of Liang Huat owe the creditors of Liang Huat $134,084. Given the number of outstanding shares at 1,110,630,000 (this is a lot of shares for such a small company), this translates into a net asset value of -$0.12 per share.

The balance sheet indicates a negative net worth for the company based on book value alone; thus any positive valuation of the company must depend on projections of earnings paying down the liabilities of the company before shareholders get anything.

Earnings Turnaround

(click for full image)
Liang Huat’s income statement provides more optimism than its balance sheet. It has experienced a significant turnaround in its business operations and has turned a 1.22c per share loss into a 1.1c per share profit.

Assuming that Liang Huat maintains its operations turnaround and positive performance, this means that the company will still be paying down liabilities for a few years before the shareholders get anything. Let us be very optimistic and assume that Liang Huat is able to earn 3c per share per year for the next few years. This will allow Liang Huat to pay down its NAV of $-0.12 in about four(4) years.

Insider Sales

What will, perhaps, give us a better picture of what is going on with Liang Huat is the actions of its insiders and substantial shareholders. A visit to the SGX website reveals the following string of announcements related to Liang Huat:

Liang Huat’s insiders apparently have been aggressively paring down their stakes in the company. This appears to be part of a restructuring exercise due to the fact that Liang Huat has a lot of debt.

Return from the Dead?

Liang Huat appears to have been relisted after a long hiatus from the market due to poor operating performance. It is heavily in debt and has recently returned to profitability, ostensibly because of favourable operating conditions in the form of the revival of the construction market in Singapore.

I have very little idea how to value this company, but it would certainly be interesting to try. Would anyone like to have a go?


Anonymous said...

You might want to check your charts, liang huat is trading at less than $0.10 for the past whole year. Only after the recent consolidation did it hit above $0.10. I guess your charts re-adjust thus give u a false perspective.

Little Willow said...

thx for the note i have made appropriate modifications.

fergus said...

Hi, thanks for doing this write up.

Just my point of view.. Previously, liang huat was a relatively big company. At least according to past annual reports I read. There was a time where they were regional, with turnover of 140+ mil per year.

What happened then would probably be the usual construction problems that struck companies like weepoh, csc, yongnam, bbr, l&m, and the other companies, during the 2001-2003 period.

From what I read, essentially the negative equity is due to the huge bank loans, primarily from uob and maybank..

Also, the earnings turnaround part has been fudged a little.. To be exact, the other operating income during 2007 and the other items during 2006.. This should be cancelled off, because 2007 was a write back of the provision done in 2006.. Even with that removed, its somewhat like a turnaround from loss to profit.. Not as remarkable as -1.22 to 1.1 of course.

The reason for the insider sales, is not because they want to sell, but because the upper management shares has been pledged to the creditors (uob and maybank) as collateral. So uob and maybank has the right to sell them to get back cash. Thats unfortunate for the major shareholder.

The return from the dead part, is part of this large controversial topic in channelnewsasia forum. Generally because there was a 10 to 1 consolidation and new shares issued to creditors and investors.

Basically, the result is,
1) current shareholders have their stakes cut by 10
2) liabilities of loans have been converted to shares, thus no more negative equity.
3) according to the offer information statement, the EPS for FY2006 would have been changed from -1.22cents to 4cents instead.
4) new majority shareholder with 70% stake. (possible RTO?)
5) large share overhang, as creditors may not want a vested interest in the company, so they may sell off their debt converted shares.

That said, I would think the valuation is very difficult to do. The key reason is because of any business injection or some improvement in its business prospects. (which may be possible with a new shareholder)

caveat emptor.