Stocks With Likelihood Of Corporate Exercise: Kaf-Seagroatt & Campbell

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Kaf-Seagroatt & Campbell Bhd
KAF-Seagroatt is a well-established stockbroking company, and also one of the few standalone ones left in the country.

Its shares appear attractively priced with a price-to-book of 0.93 times, with a strong balance sheet that boasted net cash of RM147.2 million as at Aug 31, 2014. This is equivalent to a substantial RM1.23 per share, or 65% of its market capitalisation.

The company is well-known for its prudent management under the founding husband and wife team of Datuk Ahmad bin Kadis and Datuk Khatijah bte Ahmad, who are now in their early 70s, and who hold a collective 73.41% stake in the company. In their personal capacity, the couple also hold other financial services companies under the wider unlisted KAF group, including KAF Investment Bank.

With its shares tightly held, KAF-Seagroatt’s stock is fairly illiquid. Nonetheless, its low valuation and large cash rich holding could make it a potential future candidate for merger and acquisition (M&A) activities.

It is worth noting that there have been a number of M&A activities among the country’s investment banks in recent years. In 2012, RHB Capital had acquired OSK Investment Bank at 1.77 times book while this year, Affin Holdings paid 1.3 times book for HwangDBS’s investment banking business. Since 2000, the average acquisition price for investment banks has been 1.3 times book.

In FY May 2014, KAF-Seagroatt’s pre-tax profit rose 0.9% to RM21.0 million on the back of 34.5% rise in turnover to RM50.8 million. For 1QFY15, turnover declined 11.7% to RM11.8 million, while pre-tax profit fell 45.5% to RM4.8 million. ROE was modest, averaging 6.8% over the last four years.

The stock is trading at a trailing 12-month P/E ratio of 19.1 times. The company pays dividends consistently. For FY2014, dividend per share was 7.5 sen, translating into a decent yield of 4.0%.

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This article first appeared in The Edge Financial Daily, on November 17, 2014.