Singapore Equity: Compact Metal

Greetings everyone, I am Gallen and very happy to join the list of contributors to this informative and wonderful site!

As the other guru contributors are already providing great insights on macro and industry views across the different asset classes, I shall instead be sharing my opinion on individual listed companies.

Please note that the articles here represent our personal opinions and shall not be construed as any recommendation or investment advice. Kindly seek the advice/opinion of your professional financial advisor before you embark on any investments.

My opinion is that global equity markets are fairly valued (maybe with the exception of Korea) although I am still bullish on certain markets such as India, Indonesia and Japan in the long-run if they are able to successfully implement structural reforms in their economies.

Company Name: Compact Metal
Bloomberg ticker: CMI SP Equity
Share Price: SGD 0.045

Market Cap: S$36.0m

I came across this interesting small-cap Singapore company recently. At first glance, most investors would not even be bothered with this kind of loss-making penny stock.

Current core business:
Manufacturing and marketing of aluminium extrusions with core competencies in designing value-added fabrication and installation of aluminium windows, doors, frames and skylights and composite aluminium core panels for roofing and claddings.

Nothing terribly exciting especially with stiff competition and the downturn in the property market in Singapore and Malaysia.

However, the company has seen major changes in substantial shareholders and is proposing to diversify into a new business which could lead to a re-rating if fundamentals improve significantly.

The main events are summarised as follows:

10 Oct 2014: Chairman Mr Chng Gim Huat completed the sale of 28.2m shares and 28.92m warrants to Mr Ma Zhao Yang at SGD 0.08 per share.

In addition, Mr Chng also granted Mr Ma a call option for another 206.8m shares at SGD 0.08 per share and 212.08m warrants at SGD 0.0299 per warrant.

03 Nov 2014: Mr Ma partially exercised the call option to purchase an additional 84.6m shares and 86.76m warrants.

11 Nov 2014: Mr Chng Gim Huat and Mr Chng Beng Hock resigned as chairman/director and non-independent/non-executive director of the company respectively.

Mr Ma fully exercised the call option to acquire the remaining shares and warrants. However, Mr Ma only acquired another 4.7m shares and 4.82m warrants while the remaining 117.5m shares and 120.5m warrants were transferred to by Mr Zhang Zeng Tao.

In all, Mr Ma owns 117.5m shares (14.685% of outstanding share capital) and 120.5m warrants while Mr Zhang also owns an identical amount of shares and warrants.

14 Nov 2014: Mr Ma and Mr Zhang were appointed Chairman and Managing Director of Compact Metal respectively.

27 Nov 2014: Compact Metal proposed to diversify into the cement business and will hold an EGM to obtain approval from shareholders.

29 Dec 2014: Compact Metal announced a conditional placement agreement of 160m new shares at SGD 0.05 per share to Sustained Land Pte Ltd (a property developer that is wholly owned by Mr Douglas Ong Pang Chye) for investments into the proposed cement business. This placement exercise is to be approved at the EGM.

Background of Mr Ma Zhao Yang and Mr Zhang Zeng Tao
Mr Ma is a non-executive director of West China Cement (one of the leading cement producers in Shanxi province) while Mr Zhang was the general regional manager of a wholly-owned subsidiary of West China Cement.

Mr Ma owns 4.91% of the shares of West China Cement (based on 2013’s Annual Report).

Background of Mr Douglas Ong
Mr Ong controls Sustained Land which made the news for outbidding a consortium led by Far East Organisation for a plum site near Aljunied MRT station:

Mr Ong also owns 28m shares in Sysma Holdings, after selling a 60% stake in a subsidiary of Sustained Land to Sysma and is also a director of a couple of Sysma Holdings’ subsidiaries.

The key question to ask yourself is why did Mr Ma/Mr Zhang pay such a significant premium to acquire a significant but non-controlling stake @ SGD 0.080 per share vs. share price of SGD 0.048 (10 Oct 2014) and SGD 0.046 (11 Nov 2014)?

Moreover, why was Mr Ong willing to pay a premium @ SGD 0.050 per share vs. share price of SGD 0.044 (29 Dec 2014)?

Do note that Compact Metal’s latest NAV per share is SGD 0.0813 and will fall to SGD 0.0760 post the successful completion of the placement to Mr Ong.

One may argue that Mr Chng may not want to sell below book value especially with Compact Metal having a net cash per share of SGD 0.0361. However, the company has been loss-making over the past few years (excluding one-off gains) and the total stake acquired is <30% (non-controlling) so we can also argue that the stake should be valued below book.

It would not make sense for Compact Metal to enter China’s cement industry given the oversupply situation, downturn in the property market and the government’s drive to consolidate industries facing oversupply situations.

Moreover, this would represent a conflict of interest to Mr Ma who is still a non-executive director in West China Cement.

An intelligent guess can be made from this extract of Compact Metal’s announcement:
“Cement is typically used in the construction of infrastructure facilities such as highways, bridges, railways, roads and buildings”

China is pushing to increase its exports in the areas of high-speed railway technology, nuclear power plants and supporting infrastructure developments in other countries (e.g. New Silk Road project)  to move up the value-chain into higher-end exports:

Could Compact Metal’s proposed cement business be involved in some of these overseas infrastructure projects?

Interesting to see how developments unfold in this company in the days ahead…..