After the announcement, Keck Seng saw its share price — which had been trading around the RM3.80 mark for the better part of two months — rise by over 20 sen in two days. Last Wednesday, the stock gained 19 sen or 4.9% to close at RM4.09. On Thursday, it reached a 15-month high of RM4.19 before retreating to RM4.14 at market close.

However, besides the restructuring, there have been no other announcements by the company.

While investors in general view the settlement of the inter-company loans favourably, those close to Keck Seng do not feel that is the reason for the recent run-up in its share price. If that is the case, why the optimism about Keck Seng?

“After so many months of silence, market talk is that with the economy slowly recovering, the government is expected to make a significant announcement concerning Johor and the Iskandar region.

“Keck Seng’s properties might then gain from a pick-up in activity, which is sorely lacking at the moment, given that the property market in Johor is extremely soft,” says a fund manager.

According to Keck Seng’s latest annual report, its landbank in Johor is located in Pasir Gudang and Ulu Tiram, among others.

However, says an industry observer, as Keck Seng streamlines its operations, the company will find itself in a better position to embark on expansion, whether through the acquisition of land or property.

In July this year, Keck Seng completed the sale of its Four Points Hotel in Canada for C$12.7 million (RM40.7 million).

The recent restructuring is not expected to have any impact on Keck Seng’s earnings because of the way it is done.

To recap, Keck Seng is proposing to acquire 98.63% of Lim & Lim Plantations Bhd and 70% of Lusaka Holdings Sdn Bhd from wholly-owned subsidiary Banang Bersama Segamat Sdn Bhd.

It is acquiring the stake in Lim & Lim for RM20.1 million and paying RM9.2 million for the stake in Lusaka and another RM60 million for 3% of cumulative preference shares.

Both payments will be settled via a contra of inter-company account balances and if any balance needs to be paid to Banang, it will be from Keck Seng’s internally generated funds. The proposed internal restructuring will be made at a cost and on a “no gain/no loss” basis to Banang.

In addition to rectifying the inter-company loans, said the announcement, the restructuring is to take advantage of the real gains property tax exemption and the government’s liberalisation move, where the transfer of shares does not require Foreign Investment Committee approval.

Even before the restructuring, Keck Seng’s books were healthy, backed by its stable of land and properties. As at end-June, Keck Seng’s cash and short-term investments stood at RM355.3 million while its short and long-term borrowings amounted to RM50.45 million. Its net assets per share stood at RM4.83.

According to Keck Seng’s FY2008 annual report, its land for agriculture and housing development carries a net book value of RM245.4 million while its buildings, including Menara Keck Seng in Kuala Lumpur, have a net book value of RM270.5 million.

Keck Seng’s plantation landbank stands at 3,271ha, all of which is fully planted. The biggest contributor to the group’s revenue and earnings is its manufacturing division, which comprises its palm oil mill and refinery operations, followed by property and plantations.

For 1HFY2009, manufacturing, property and plantations contributed 80.5%, 6.7% and 3.4% respectively to group revenue.
“There is no question that the company is financially sound. However, one of the main issues with Keck Seng is how the company will unlock value in its properties for its shareholders” says a property analyst.

Keck Seng’s gross dividend for FY2008 of 10.5 sen per share (dividend yield: 2.5% based on last Thursday’s price of RM4.14) was also lower than what was paid out in FY2007, when the company’s gross dividend per share was 12 sen. As for FY2009, the company has declared a gross interim dividend of four sen so far. 

However, to be fair to Keck Seng, its prudent practices have helped it weather the storm. While the property sector in general has experienced a slump, the Johor property market is considered even more difficult than most. Coupled with volatile crude palm oil (CPO) prices and pressure on its leisure segment as a result of the A(H1N1) flu pandemic, there is no denying that the outlook is challenging.

However, for 2QFY2009, the company managed to beat analysts’ expectations when it posted a slightly lower y-o-y net profit of RM34.2 million despite revenue falling to RM236.3 million from RM407.8 million.

But it should be noted that the improved results were due to an impairment writeback on quoted investments. In fact, Keck Seng says in its notes accompanying its earnings results that it would find it hard to match its 2008 level. 

“While the macroeconomic outlook remains challenging, Keck Seng’s 2QFY2009 performance has begun to show signs of improvement in the operating environment. The stabilisation of CPO prices and the global equity market rally augur well for the group’s manufacturing, plantation and share investment earnings. However, it may be premature to turn bullish at this juncture as the economic recovery is still in its nascent phase,” says ZJ Research in its Sept 4 report.

ZJ has a “hold” recommendation on Keck Seng, with a fair value of RM3.94. Standard & Poor’s is more cautious about Keck Seng’s prospects, pegging a “sell” on the company with a target price of RM3.50. 

“Plantations will continue to gain from firmer palm oil prices but the gain will be offset by a margin squeeze in the manufacturing division,” says S&P.

This article appeared in The Edge Malaysia, Issue 776, Oct 12-18, 2009.