Restructured firms, the new hidden jewels

Restructured firms, the new hidden jewels.

Here is an original member-only article from February 5th 2002.

Properly restructured firms are now the new hidden values. But you got to do your homework to find some -and we have!

Below is an original "member only" article, exactly as published on February 5th 2002.

In Thailand you now got to get beyond the obvious and understand (and so favor), the restructured smaller, medium & larger cap listed companies.

The ones where foreign or local loans have been mostly eliminated and the business re-focussed to a much leaner/meaner operation. Many are newly re-invented export oriented. The earnings are turning and one can reasonable see very good current and longer term profit prospects.

Most are doing very well already and command still low valuations.

My top picks now are companies like OGC (41.5) STECON (22.6) SSF (11.2) STPI (2.78) and even more speculative, VNG (17.2). These are restructured & refocused firms whose 2002 p/e are very low, but sort of in disguise as their just past financial history is not representative or, includes large extraordinary accounting items.

In the now, as I perceive, slowly recovering electronics industry, I favor KCE (45.5) and SVI (11.8); two also sort of restructured stories which the market probably does not give proper credit for. Note: I wanted to keep the below list to a maximum of 7 names. Had the limit been set at 8, I would have chosen PDI (13.3). Yet, I have cooled my enthusiasm a bit lately on PDI (13.3)

Restructered stories on leading companies, making real things for real people:

OGC 41.5

STECON (22.6)

STPI (2.78)

SSF (11.2)

VNG (17.2)

2 electronics stocks I pick. They also are restructured firms with good profit prospects, but which I think the mkt. may not have fully discounted:

KCE (45.5)SVI (11.8)

On STECON

While I mentioned STECON at lower prices then now, I did not have time yet to give you the main reasons:

I have confidence on further positive business improvement this year, as explained before. STECON is the kind of stock you buy at the beginning of the business cycle.

The main points being:

1) I can upgrade my sales forecast for this year from some 3.5 Billion to over 4.1 Billion Baht. Mainly because this company get more jobs now from the private sector and this they did not have in the recent past..

All projects currently will be completed within twelve months and so the company can book solid revenues this year. Management expects revenues from the private sector as compared to total sales, will account for 25% rising from 10% in last year. STECON company should register 28% in sales growth for this year. Private sector sales/contracts have higher margins.2) This company is able to maintain its backlog order momentum at some 8.0 Billion Baht amid a rough road of a long down-turn, for the local & regional economies. The implied reputation of this company is quite solid. The Stecon chairman is a former deputy finance minister whom I have met.

I project its backlog order tends to firm-up further as private enterprises feel more confident to expand their capacity and as the final bottoming of the low on this business cycle here is more and more evident.3) I am upbeat on STECON's margins improvement. Talking to another analyst we think gross margin to rise to 13.5% from 12% and also a raise in core net profit margin to 8.3% from 7%, mainly because:- As stated, this company gets more jobs from private side, which usually provideshigher margins than government.

• The company signed contracts with cement and steel manufacturers to buybuilding materials at discount from market prices.
• Lower interest expense as company pays back its loans.
• The competition remaining is in dire state and so STECON indirectly benefits.

As I wrote to you all already on February 1 '02:I would start shifting funds out of Banpu(28.75) and into Stecon (21.3) ".

Clearly Stecon (along with CPF) is now my new larger cap stock selection of choice. Also I note, Stecon restructured it's massive debt in record time for Thailand, exactly one year. This is now all behind them.

I believe STECON can probably earn around 4 Baht a share this year. So that is a year 2002 p/e of 6. Bouncing-off the bottom of the Thai/Asian business cycle, I find this is too low. While the company is restricted on not paying cash dividends for 5 years (due to bank restructuring agreed convenents), I think they will instead issue warrants, every year. These will trade in the SET market (usually within 6 months of when first issued) and so represent a quasi- dividend -as they can later be sold in the open market. The first warrants will go XW on this February 19, 5 shares to get 1 new warrant. The conversion/exercise price of these new warrants (one warrant = one new share) is set at 10 baht. Hence they are in the money! February 5th '02.

Best Regards to all visitors,

Paul A. Renaud & Team.