Stock to review: Paramount Corporation Berhad (1724) Current Share price: RM0.91

Principal activities: Paramount Corp Bhd is an investment holding company. The group has three reportable operating segments - Property, Education and Investment and Others. The Property segment which generates maximum revenue is engaged in the development and construction of residential and commercial properties and property investment. The Education segment is involved in the operation of private educational institutions. Investment and Others segment is involved in the investment holding and provision of group-level corporate services.

Current Position of the Group

1. The Group basically is a property developer and another main contributor would be the education segment. They have sold the controlling stake of KDU in which the disposal is completed and they have a gain of RM460mil which was completed on 20 February 2020, which is why the results of the Q1 is the best ever. Although this is a one-off event, I want to highlight later in this review that it is necessary and a positive one. The utilisation of the cash is as follows:

a) There is a distribution to the shareholders for the said disposal amounting to 29 sen. This means giving back to the shareholders which is a positive one, which is to reward shareholders for their loyalty.

b) They have RM132mil which is still unused, which could be use to buy new land to add on to their landbank. In this current environment we're in it is a positive one because most companies do not have sufficient cash, however Paramount have. Like what people say cash is king. In a business sense, I could actually get a cheaper price on any land I wish to purchase, correct? Since so many companies are struggling, I could buy a land in a strategic location with a big discount. Or maybe I could JV with someone who have land in a strategic location but have no money.

Update as at 7/7/2020: News is out that they have purchased another land in Kedah to expand their existing projects township. See what I mean by buying cheap land?

https://www.theedgemarkets.com/article/paramount-purchases-land-expand-bukit-banyan-township

Update as at 16/7/2020: They bought a land 2.5km near to KLCC for RM244mil meaning if you see above disposal of education left unutilised amount of RM132mil meaning they fork out approximately RM112mil extra for the land. I view this acquisition as positive because near KLCC and I believe they bought it cheap. On right track.

https://www.theedgemarkets.com/article/paramount-buys-land-near-klcc-wing-tai-units-rm244m-develop-premium-condos

c) They have already repaid more than RM133mil of borrowings based on the utilisation of disposal. The impact of this would be lower finance costs to the Group which could be seen in the balance sheet. I'll summarised the movement between 31 March 2020 vs 31 December 2019 so we could see the actual movement in the balances sheet. I'll combined the current liabilities and non current liabiliites together. RM746mil (31 March 2020) vs RM912mil (31 December 2019), which gives us a decrease of RM166mil. As mentioned, this will reduce the finance costs hence it will result in profit being higher.

d) Cash in bank balances increased from RM134mil (31 December 2019) to RM498mil (31 March 2020) which is an increase of RM364mil.

Strengths 

1. Good fundamentals: NTA: RM2.61, PTBV: 0.35, PE: 1 (this one is distorted due to the one off disposal, hence based on prudent concept I'll give it 6, which is still good). Price to book value is low for property development companies historically around 0.6, so if we work backwards we'll get RM1.56.

2. Dividends of 4.5 sen, Ex Date 8 July 2020, based on current share price of RM0.91, around 5% yield. This is based on current calculation, if based on full year it will be higher. If were to buy now, you will still be eligible to get the dividend on top of future capital appreciation. This company consistently pay out dividends in each financial year. Please refer to the table on point 3 below.

3. Positive earnings for every quarter. I like companies which have high EPS, because that's value creation to the shareholders. Please refer below:

4. Competency of the Management

a) As mentioned above, I'm saying the disposal is good for the company. Why is that so? Many people perhaps will say once I disposed of the education arm, my revenue would actually decrease. I agree, because with my remaining stake of shares in KDU, my revenue would be x 20% if my remaining stake is 20% for example, hence lower revenue contribution. Let's see in a broader perspective in a business. The disposal is part of the Group's plan to monetised its assets and deteriorating performance of it's education arm, due to lesser profit being made. Thus, since they get a good price for it, hence it make sense that you take the opportunity to dispose of it as your margins had reduced due to more costs being incurred. Due to this, they are better positioned, due to the cash received right before Covid-19 they are able to have extra cash to go through this pandemic. It seems like pure luck, but it isn't. Further due to the disposal they actually return part of it to it's shareholders and also yearly dividends. You can see many companies in Bursa not as generous as them after a windfall.

b) The CEO, Mr Jeffrey Chew Sun Teong is an ex-banker, former OCBC CEO. As per Annual Report 2019, he has 6,817,940 ordinary shares or 1.109% of the Company. Most of his shares he obtained through Long Term Incentive Plan (LTIP) which is when you achieved your KPI, then you get rewarded. This guy got it this way, which means his own interest is alligned with the Company's performance which is the creation of value to the shareholders. The controlling shareholder/owner and him is not related at all, so the shares obtained is basically through his own effort. Paramount experienced consistent growth of revenue over the past 5 years under him. (Page 73 Annual Report 2019). This also tells us that there are good corporate governance in the company.

5. Steady Share Price

The drop during the year is attributable to the special dividend of 29 sen for the disposal. The share is currently steadily going up. Aside from that, the investor or shareholders that bought this share could sleep very well every night. You can just ask around. That's a reason for it. If you're a person working on a full time job, there is no need to worry of a sudden drop in the price of the shares when Dow Jones (US) is dropping like crazy. Reason being this share is resilient. It's not the same if you're holding "goreng stock" or Glove Stocks. "Goreng stock" once the momentum dies, you will get stucked for some time, and barely recover because if you checked the financial performance, most making losses every quarter. For Glove stocks be careful because for every investor that wins big another 9 losses. If you think you're the outlier, please try. As a reminder, money is very hard to earn for a reason. Company with good fundamental, as an investor you can sleep without worrying but in the condition you know the price you enter is deeply undervalued.

6. Positive operating cash flow for every quarter - Please refer below

For those that do not understand I explain in summary. Operating cash flow means the money that go in your bank (meaning liquid cash) which is derived from your principal activity/day to day operations. Some Company show profit is high, but if you see cash flow from operating activities always negative (outflow) means you can't get your customer to pay. What's the point then? Another illustration is if a person is being lay off by the Company and has no savings, what do you think of the person as to how to go through day to day life? Relate back to a Company and you get the idea.

7. Top 30 shareholders make up of the following BIG funds as at 24 April 2020. (based on annual report 2019, refer below). I summarised for you the list, you count see out of the 30, got how many is FUNDS. I see got 12 FUNDS! Another reason is because this stock is "halal" meaning Syariah compliant. Those of you who buy unit trust, some of the funds are these. If you have those unit trust under the below, your returns from it likely to come from Paramount, because of its steady growth and dividends. This stock no analyst covers it, but as you can see below how come so many funds but no analyst from investment bank cover it one? If you see so many big brothers also holding tell me can you sleep well at night without worrying?

a) DBS Bank Ltd - 18,833,500 shares (3.065%)

b) Public Smallcap Fund - 6,805,400 shares (1.107%)

c) Lembaga Tabung Haji - 3,949,400 shares (0.642%)

d) Kenanga Syariah Growth Fund - 2,896,780 shares (0.471%)

e) Manulife Investment-HW Syariah Flexi Fund - 2,589,580 shares (0.421%)

f) CBNY for Dimensional Emerging Markets Value Fund - 2,453,655 shares (0.399%)

g) Great Eastern Takaful Berhad - 2,372,620 shares (0.386%)

h) Public Optimal Growth Fund - 2,047,860 shares (0.333%)

i) Manulife Investment Syariah Progress Fund - 2,046,040 shares (0.332%)

j) Kenanga Islamic Funds - 1,786,400 shares (0.290%)

k) UOB Kay Hian Pte Ltd - 1,754,130 shares (0.285%)

l) Kumpulan Wang Persaraan - 1,689,020 shares (0.274%)

Future Prospect

1. Please refer below:

2. They have a JV in Thailand, meaning they are tapping into the market, aside from their existing project in Sungai Petani and Shah Alam. There is an undersupply in Kedah for residential properties, hence the group had already ventured there rather than competing with so many players in an oversupply of properties in Klang Valley.

Conclusion and some insights

Ordinary shares

Target price: RM1.50, Current price: RM0.91 upside of +64%

This share is for long term holder. Shares always move steadily up. If you're the kind of people want fast gain better go buy Glove stocks. Please don't buy this stock because you will make losses. Even when Dow Jones dropped for 2 days straight red, it's still steady maybe drop 1 sen only. Even if it doesn't move much easily every year you can get 6% dividends aside from capital appreciation. Now bank dividends so low what's the point keeping cash? In addition, we Chinese love to buy Wawasan 2020 or now it is call Amanah Saham Malaysia 2. Why need to always enquire bank got extra lots or not when you have this? Think about it...

Warrants

Target price: At least RM0.23, Current price: RM0.115 upside of +100%

Those who might have smaller capital might be able to leverage to the upside of the Company by getting into company warrants, which is Paramon-WA currently trading at RM0.115, Expiry date 28/7/2024. 4 years company warrant which looks promising. There are no special dividends for the disposal anymore, thus it would not affect this warrant. 

4 years Company warrant is conservative to say currently at RM0.115 can I say if it were to easily double which is RM0.23 over 4 years which is 25% per year reasonable? The other day I use the calculator to calculate the intrinsic value of the warrants it's around RM0.40. When I got time I will update how I get the value in this article, with step by step naration and assumptions used. The upside is so huge but if you trade before the warrants, the amount of warrants quite limited and it is extremely difficult to get if you notice. Because very few people is selling it. So if got chance buy bit by bit if you trust it will give you a windfall of money since under property sector, this warrant has the longest expiry and supported by strong fundamentals.

Some Speculation (Depends on whether you want to take into consideration. Previously I did not write this because I always put a price on a stock based on facts which exclude speculations, due to speculation is speculation it is not factual. However I share some of my insights about this counter which is extra. One of the point is because the papers already make known some of the facts which means I can share now. I have known the two points for quite some time, just didn't write)

1.  Digital bank license.

Please refer to the link: https://www.theedgemarkets.com/article/interest-digital-bank-licences-picks

This is regarding the digital bank license which is huge in my opinion. Like I mentioned earlier, the CEO is an ex-OCBC banker, so they do have the expertise to venture into this area. I think this is self explanatory, which you guys know how big this is. Like I say this is speculation, because at the end of the day you don't know if Paramount will get the license or not. So I will tell you they are interested in this and if I'm not wrong you need to have like RM100mil as your base capital in the event you want to setup. I also mentioned right Paramount have some extra cash due to the disposal?

2. Shareholding of Southern Acids Berhad in Paramount (you can refer to the above where I screenshot all the 30 largest shareholders, I will summarised again here). I assume all start with "Southern" is related companies. For confirmation you can check Southern Acids (M) Berhad, it is also a listed company, but the volumn is near zero.

a) Southern Palm Industries Sdn Bhd - 52,131,100 (8.484%)

b) Southern Acids (M) Bhd. - 27,043,100 (4.401%)

c) Southern Realty (Malaya)  Sdn Bhd - 14,695,100 (2.391%)

If you total up it is 93,869,300 or 15.276%

So show so much already, what I want to highlight here? If you check annual report of Southern Acid Berhad, it has quite a lot of strategic piece of land. So since it hold 15% of Paramount, it might have a chance to develop some of those lands. Go and see Southern Acid Berhad annual report in detail about their land, then figure it out yourself.

Overall Outlook of the Sector

Pros of the Company is that they have development in some undersupply states such as Kedah, as the mainly stated in the article the states which have oversuppply which does not include Kedah.

https://www.thestar.com.my/business/business-news/2020/07/13/property-players-call-for-proactive-action

Disclosure

I have a significant financial interest in Paramount in terms of my shareholdings in ordinary shares and warrants. I have been buying up quite a lot of warrants lately as it is really cheap and no one wants it. I think it's because it does not move much even when the mother share went up. Well I might be wrong but I don't care will just accumulate at such dirt cheap price. So before buying or selling this stock or its warrants, please think properly before deciding on your next course of action because I might dump the whole lots of my holding into you. Hence the disclaimer below.

Performance Checking

To keep track the performance of the shares and returns since the day I first write, you can access the below link:

https://klse.i3investor.com/servlets/pfs/147881.jsp

Thanks for reading!

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