Company Coverage - Gallant Venture Limited

From Company's Prospectus

1. Business Description

Investment holding company focusing on regional growth opportunities. Gallant Venture Limited (Gallant) is an investment holding company focusing on regional growth opportunities.

Operate mainly in Batam & Bintan. Its existing investments are mainly in Batam and Bintan in the Riau Archipelago, Indonesia, under 4 major lines of business:

Utilities

Industrial parks

Resort Operations

Property Development

From Company's Prospectus

Salim Group is the biggest shareholder of the company. Key shareholders of the company include Salim Group and Sembcorp.

From Company's Presentation

2. Business Operations

Utilities

- Private provider of utilities services to Batamindo Industrial Park and Bintan Industrial Estate, as well as to Bintan Resort.

- Revenue is derived from tariffs for the supply of electricity, telecommunications, wate and waste management services to the industrial parks and resorts

Industrial Parks

- Ownership, management and maintenance of industrial park properties in Batam & Bintan; activities include development of the industrial parks, sale or lease of land in the parks and rental of ready-built factories

- Revenue is derived from rental, service and maintenance charges

Resort Operations

- Provides integrated support services to the 4 resorts and 7 hotel properties in Bintan Resorts, an integrated resort development and international tourist destination that spans over 3,000 ha of land  

- Revenue is derived from ferry operations, property rental, travel agency, service and conservancy charges, and other support services

Property Development

- Properties owned totalled about 18,2000 ha valued at approx S$541m  

- Integrated master planning for industrial park and resort development in Bintan Industrial Estate and Bintan Resorts

3. Financial Highlights

(a)Book value

Let’s look at the tangible book value per share of the company. Below is the Balance sheet as of 1Q13.

Adjusting for the intangibles and applying a 10% margin of safety discount to it, we can an adjusted BVPS of 46.33 cents. (BVPS 52.24 cents)

According base on the adjusted BVPS and the share price of 32.5 cent, it is about 0.7, signalling a 30% discount value.

(b) PE perspective

In FY2012 and FY11, it achieved an EPS of 0.46 cent and 0.34 cent. Therefore on a PE multiple perspectives, you are paying approximately 70X PE. This kind of high PE multiplication, although expensive, is irrelevant as this company invest in emerging market and should be seem like a more growth company.

(c) NPV concept          

Using a very quick and simple NPV calculation and following assumptions:

*Cash Flow = EBITDA = S$103m

*Cost of Capital = 10%

*Growth of next 4 year = 4%

*Terminal Growth of zero percentage at Year 4

I get a NPV figure of approximately 33.85 cents.

4. Investment Highlights

(a) Bintan and Batam Exposure

Well, Gallant is one of the Land king in Bintan and holds land in Batam as well. Thus if investor are bullish on the property and tourism for this 2 areas, you should like Gallant as it has the potential to become the next Iskandar!!

(a) Stable Business from its utilities and Industrial parks business amid slow down

Gallant owns a portfolio of stable utilities and industrial parks. According to the Company 2013 presentation, the management guided a recurrent EBITDA of S$60-100million per annum for its utilities and industrial park businesses.

(c) Acquisition of automotive retailer, PT Indomobil Sukses Internasional (IMAS)

In December 2012, Gallant enters into acquisition of IMAS for $809.3m valuing the auto retailer at $1.55billion. Personally, I like this acquisition as I think the domestic economy of Indonesia is doing quite okay and this acquisition provides Gallant an exposure into the mid & high luxury market of the Indonesia consumer market.

5. Investment Weakness

(a) Property and resort business fails to deliver

Despite a lot of excitement generated on Bintan as the next tourism spot, it has largely failed to deliver. If anyone of you that have gone to Bintan before, you should know that the planning are rather haphazard and the only thing you can do there is really relax!!

Despite a lot of effort to remake it as a spa and golfing place, it has since failed to deliver.

This is very much the same for its property business. However, the same weakness might be the exact investment strength for some other investor. (please see above)

(b) Inherent cyclical risk

6. Conclusion

Stock market has been quite merciless to the investors in recent week. However, I have been re-reading my holy investment bible aka The Intelligent Investor, and Master Benjamin Graham did say that a falling market makes it a safer place to invest in. (as price is getting cheaper)

Looking at Gallant, I do think that the company seems to be undervalued and the recent spike (which I still haven't figured out why) might be due to people buying it on the cheap.

Base on my various arguments, i think that you can buy on "hope" and there is definitely a lot of unlocked potential within the business. 

However, its tough to value them although on various account, it looks cheap. Thus I will start accumulating this counter if the share price falls below S$0.30. If not, there is still a lot of decent company that you can invest in.

But this is definitely one of the names on my watchlist.