I am a large cap investor. But while scanning through some of the smaller companies on Bursa Malaysia, I am really amazed at how cheap things have become. I checked out TA Enterprise Berhad and found that it is trading at RM0.62 which gives it a total market value of RM885 million.

Now that sounds like a lot of money… but remember that TA has a nice cash pile. At last count on 31 July 2008, TA’s net cash position was around RM728 million.

TA Enterprise Berhad
I’m sure most of you have heard of TA but if not, it’s basically a financial services (mainly stock broking) and property development company. Its claim to fame started in the 1980-90s during which TA became one of the most profitable companies on the KLSE. The company later hit the wall when founder Tony Tiah was convicted of corporate offences but has since recovered to become a cash and asset rich vehicle.

In a nutshell, TA is SO INCREDIBLY CHEAP that based on the current share price, you can have the whole company and end up with a lot of prime KL properties for free.

Once again this is all theory. Last week I wrote an article explaining the concept of Enterprise Value and using MAS as an example of how to buy a multi-billion dollar company for free.

In the case of TA, its Enterprise Value (Market Value less Net Cash) is around RM160 million. At the same time it has over a billion ringgit worth of business assets and prime properties. Clearly the company is a steal at this price.

If you are a corporate raider this is definitely a prime candidate. If TA was in the US or Canada, people like Carl Icahn and the Reichmann brothers would have swooped on it long ago.

Unlocking Shareholder Value
There has been talk that TA was looking to spin-off its property assets into another listed vehicle. I haven’t been following this and how it’s supposed to enhance shareholder value.

But in the current market environment, the easiest way to unlock more wealth for shareholders is through share buy backs.

TA’s Net Tangible Assets per share is around RM1.60 per share, meaning that if it buys back its own shares at only RM0.62 it is paying less than book value for its own shares. The result is that NTA would go up even further. Let’s see how that can happen:

TA has 1,427.4 million shares in issue. Tony and Alicia Tiah hold 480.5 million shares or 34% of TA Enterprise. Based on the share price of RM0.62, their shares are worth some RM298 million. OK obviously they don’t need any advice from me

But let’s say TA buys back 500 million of its own shares. At RM0.62, that would cost the company RM310 million. Net cash is reduced from RM728 million to RM418 million. Based on 31-Jul-08, TA’s balance sheet would like something like this:

The 500 million shares get cancelled. This reduces total issued shares from 1,427 million to 927 million shares. So the company becomes smaller and has less assets. However the Net Asset Per Share increases. All shareholders who don’t sell are now holding on to shares that are worth more than before. Each share is now worth RM2.08 (in theory) compared to RM1.57 before the buy-back.

Assuming they don’t sell, Tony and Alicia Tiah will now hold 52% of the company. This will cement their control over the company.

Earnings Per Share goes Up
Cash typically earns a return of 3% or less. When a company uses cash to buy back its shares, it is swapping this 3% return for a higher return. In the case of TA, if for example its PE Ratio is 5 times, it means that the shares will return 20% to shareholders (100 divided by 5). This is also known as the Cost of Equity. If the company uses its cash to buy its own shares, it is trading the 3% return for a 20% return. As a result Earnings Per Share will increase. And the share price will eventually increase to reflect this.

Asset Play
Although TA is cheap, just to clarify that I am NOT advocating a buy here. TA’s earnings are volatile and will be impacted by the economic slowdown. Historically this company has been more of an asset play and does not really display attributes of a company that can sustain long term earnings growth.

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Warren Buffett