Saturday, October 24, 2015 Berhad - Priced Like A Rubbish

Ok, before I start, I would like to admit that I am still "shiok" by kcchongnz's comment on his blog on i3. Yes, I have stop writing due to family and work commitments. I will try to write more frequently as I do miss writing to be honest. As for KC, I hope he'll continue blogging as he really wrote many good articles.

Alright, lets get started. Berhad (ICAP), despite its dotcom sounding name (in fact it is .biz) is not a tech company nor it is a company but it kinda run like one. ICAP is a close ended fund which is listed on KLSE. In other words it is an Exchange Traded Fund (ETF), BUT ... one that is actively managed. ETFs have always been associated with passively managed index funds. Maybe that's the reason why ICAP is being called a closed ended fund instead. For more information about ICAP I suggest you read the earlier posting from a friend of mine:

[Aboi] All About iCap Part 1
[Aboi] All About iCap Part 2

My posting today is about an interesting opportunity provided by the market - in current highly expensive market especially.

"Price is what you pay, value is what you get" - Warren Buffett

In ICAP case, price is what you pay, NAV is what you get. At the first glance, you would see a 20% discount to NAV or a Price to Book (P/B) ratio of 0.8

Price on 23/10/2015 : RM2.28
NAV on 22/10/2015 : RM2.84

What this means is that, if ICAP were to tutup kedai (close shop) today, its shareowners (as the managements like to call), would make 25% immediately.
(Correction: It should be 25% not 20% as previously stated)

Lets take a closer look. Latest quarterly filing shows that ICAP holds RM257.4 millions in cash or RM1.84 of cash per share. Here's the interesting part, if you take the cash portion out as illustrated below:

Price: RM2.28 - RM1.84 = RM0.44
NAV: RM2.84 - RM 1.84 = RM1.00

Do remember ICAP is a fund. What that means is that anyone who buys ICAP at RM2.28 is essentially paying 44sen for RM1 worth of assets. Why? Because that RM1.84 of cash you'll get it back anyway if ICAP were to tutup kedai - Now. That's a hefty 56% discount for all ICAP's holdings. It is like if you buy Padini straight from the market, you'll pay RM1.47. But if you buy from through ICAP, you only have to pay RM0.65 for a share. Sure it has management fees and many other fees, but it definitely doesn't warrant such a steep discount.

The table above is the P/E and P/B ratio I got from Bloomberg. I won't go too deep into each of those. I'm not a fan of P/E ratio but it is good to provide a quick glance on companies valuation. Apart from Wellcall and F&N, ICAP is not holding an expensive group of stocks. For Boustead, P/E might look expensive but P/B seems cheap. MSC losses might be a little concern. Teng Boo applies the principal of value investing for this fund, so yea....he won't hold expensive stocks. Anyway, when investing in a fund, you'll have to trust the fund manager.

Let's take a look how the ratio would look like if the 56% discount is applied to those holdings.

Now, that is CHEAP.  The weighted average P/B ratio for all that is 0.7. That means, on top that 56% discount, you'll get another 30% discount on the weighted average book value. P/B ratio is usually used for non going concern companies in other words, for companies that are going to "lingkup". And I don't think any of these holdings are going to go bust anytime soon.

Please to bear in mind, those discounts are by no means your potential upside. It is a margin of safety. The upside if ICAP were to close the discount the upside is 25% plus any price appreciation from the holdings. All these depends largely Teng Boo and co's skill which I definitely trust.

On the management side, I would only comment briefly. The fund is holding about 65% cash. One might ask, if the fund is holding cash why not return to the shareowners or even liquidate the fund? And management fee is paid why ICAP is holding cash.

My short answer is, I would feel a lot more comfortable if a fund is holding more cash at current market valuation. In fact, many local mutual funds are holding circa 20% in cash. And holding cash is part of asset allocation. Anyway, that's just me.

Disclosure: I have positions in the stock mentioned.  

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