Stocks with likelihood of corporate exercise: Pineapple Resources

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Pineapple Resources Bhd

PINEAPPLE Resources Bhd is a subsidiary Chuan Huat Resources Bhd, a leading distributor of iron, steel and building material products. Pineapple is involved in the distribution of IT-related products and accessories.

Pineapple does not seem to be highly profitable. Revenue ranged between RM44 million and RM59 million from 2010 to 2013, but margins were thin. Net profit has been declining since 2011, registering RM766,000 on revenue of RM52.6 million in 2013. Profitability worsened further in 2014, with half-year profits declining 38.7% to RM261,000 despite a 11.2% increase in revenue to RM26.1 million.

Notwithstanding the weak profitability, Pineapple’s balance sheet is strong for a small company. As at end-June 2014, it had net cash of RM8.8 million, compared with current market capitalisation of RM17 million. Its net cash backing is 18 sen per share, or 58.1% of the current share price of 31 sen. The stock is trading at 0.6 times book with a 12-month trailing P/E ratio of 28.3 times.

The company has a low free float, as Chuan Huat has a 63.9% stake. Interestingly, if Chuan Huat opts to privatise the company, it will cost only RM6.1 million to acquire the remaining shares they do not own, all of which can be recouped from the company’s cash.

It should also be noted that Pineapple’s IT operations appear non-synergistic to its parent, which focuses on building material products. Chuan Huat itself has fairly sizable operations, with annual revenue of RM700 million. It remains to be seen if the Chuan Huat group could undertake a restructuring in the future, to take advantage of Pineapple’s cash reserves and listed status, or perhaps to restructure some of its other group assets. However, investors should note that the stock is fairly illiquid.

This article first appeared in The Edge Financial Daily, on October 14, 2014.