The idea
BUY 250 million or more of the 331 million outstanding Insas Bhd warrants. They are trading at 0.5 sen (at the point of writing), or almost nothing. Even if the price of the warrants were to rise to, say, two sen with the mopping-up of the warrants by a large buyer, the total investment amount would still be minuscule (less than a RM5 million bet).
The reason
It is not because the warrants are priced incorrectly. The reason for the almost valueless warrant is that the exercise price is 90 sen and the warrants will expire on Feb 28, 2026 (less than two months away). Because the stock price is below 90 sen, or more precisely 87.5 sen, investors should not buy the warrants and then pay 90 sen per share, when the shares can be bought for below 90 sen. So, the warrants valuation makes sense.
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But we know the valuation of the Insas Bhd ordinary shares does not make sense. The total outstanding number of shares is 663 million, and at 87.5 sen a share, it has a market capitalisation of RM580 million. Yet, the company has a net cash of RM1,062 million. And as shown in the table below, the net assets of the company are at least RM2,229 million — and almost 90% are liquid assets that can be realised into cash quickly. The fundamental value per share is about four times the current stock price (see table)!
You might then ask, why not just buy the ordinary shares? And why is the market so imperfect that it does not reflect the much higher fundamental value?
See also: The year in review and what lies ahead
As we have previously written, Insas is a perfect example of a “value trap”. The current major shareholder, board of directors and management are not aligned with minority shareholders to realise the company’s maximum potential. Cash is hoarded despite generating incredibly low returns (at times, less than bank deposit interest rates). Presumably at some stage, a privatisation exercise is likely.
Given the above, unless a new and independent shareholder(s) gains a substantial block of shares that can influence the future direction of the company and force the board of directors to act in the interest of all shareholders, the actual value of the company cannot be realised for minority shareholders.
Of the existing 663 million ordinary shares, the present major shareholder is reported to own 25.04%. Likely, the controlling block is larger, including friendly parties. To be substantial and influential, one would need, say, 20% of the paid-up capital or some 133 million shares of the 663 million now issued. The average daily volume of transaction on Bursa Malaysia is only 635,771 shares over the last 200 days. There is no possibility of acquiring such a large block of shares, and certainly not anywhere close to the stock price now.
Herein lies this unique opportunity.
There are 331 million warrants that are expiring in two months and almost worthless. At the current warrant price of 0.5 sen, they are valued at RM1.655 million. Even assuming the price goes up to an average of two sen, the cost is RM6.6 million.
Assuming an investment fund collects 250 million of these warrants during the next few weeks at, say, two sen each and then pays another 90 sen to convert them into ordinary shares, the total investment cost would be RM230 million. This gives the fund ownership of Insas’ enlarged share capital of between 25% and 27%.
For more stories about where money flows, click here for Capital Section
With a shareholding of more than 25%, it becomes a new ball game. Just forcing the board to pay out the existing cash of RM1,062 million plus the cash from the warrant conversion of 331 million at 90 sen, or RM298 million, would mean a cash dividend of RM1.36 a share (based on the enlarged number of shares of 994 million). Since the warrants were converted into ordinary shares at only 90 sen each, and the warrants cost is minimal, the entire shareholding of this new substantial shareholder of some 25% would, in fact, be better than FREE — free 25% shareholding plus RM110 million in excess cash back. And the fundamental value of the company would still be in excess of RM1.17 a share (or valued at about RM300 million).
There is potentially at least RM400 million in capital gains from this exercise. Is this a “sure bet”? It all depends on whether you can execute. And whether you are prepared to go all the way (a general offer for the remaining shares), if necessary.
And to the Securities Commission, Bursa Malaysia and some of our friends who manage large pools of funds in Malaysia, it is our “proof of concept” — that shareholder activism can drive the beleaguered Bursa to once again be an outperforming stock market for all investors.
Portfolio commentary
In the interest of full transparency, Tong’s Portfolio owns the Insas warrants as disclosed in the portfolio table. Also, Avarga Ltd, a company substantially owned by me, manages an equity portfolio that includes Insas Bhd ordinary shares.
The Malaysian Portfolio gained 0.9% for the week ended Jan 7, faring better than the benchmark FBM KLCI, which fell 0.2%. Insas Bhd – Warrants C (+100.0%), United Plantations (+4.6%) and Malayan Banking (+1.9%) were the biggest winners while LPI Capital (-1.3%) and Hong Leong Industries (-0.7%) ended in the red. Total portfolio returns now stand at 206.1% since inception. This portfolio is outperforming the FBM KLCI, which is down 8.4% over the same period, by a long, long way.
Meanwhile, the Absolute Returns Portfolio gained 3.5% for the week, lifting total returns since inception to 47.3%. ChinaAMC Hang Seng Biotech ETF (+11.7%), Ping An Insurance-H (+9.1%) and Trip.com (+8.2%) were the notable gainers last week. The sole losing stock was Berkshire Hathaway (-1.3%).
The AI Portfolio was also up last week, by 3.3%. Last week’s gains boosted total returns since inception to 6.7%. The biggest winners were Naura Technology (+12.2%), Horizon Robotics (+8.0%) and Amazon (+4.7%). The two losers for the week were ServiceNow (-1.5%) and Marvell Technology (-0.4%).
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
