This article first appeared in Corporate, The Edge Malaysia Weekly, on July 4 - 10, 2016.

EKSONS Corp Bhd could be one of the most underrated stocks in the timber sector as its share price has lost 35% since touching its five-year high of RM1.55 on April 17 last year. It closed at RM1 last Thursday.

Poor results in its financial year ended March 31, 2016 (FY2016), have weighed its share price down but the company has a strong balance sheet with net cash of RM124.7 million as at March 31, representing 79% of its market capitalisation of RM157.71 million. Compared with its share price of 98 sen last Tuesday, Eksons’ net cash per share is 77.5 sen.

The company’s cash-to-market cap ratio is 0.79 times while that of its peers Focus Lumber Bhd and WTK Holdings Bhd is 0.45 times and 0.18 times respectively (see table).

The cash-to-market cap ratio essentially refers to the liquidity and financial stability of a company. If a company has a high ratio, it is considered financially stable. But a very high ratio could also mean that the company is not investing enough or that it has not been paying decent dividends. This could raise questions as to whether the company’s management is doing a good job.

Other listed timber companies, such as Minho (M) Bhd, Ta Ann Holdings Bhd, Jaya Tiasa Holdings Bhd, Subur Tiasa Holdings Bhd and Priceworth International Bhd, are in a net debt position.

Interestingly, Eksons, which is one of the largest manufacturers of tropical thin plywood in Asia-Pacific, is one of the cheapest timber counters on Bursa Malaysia based on its price-to-book value ratio of 0.33 times compared with rival Tekala Corp Bhd’s 0.76 times and Jaya Tiasa’s 0.63 times. Focus Lumber and Ta Ann are trading at a P/BV of 1.31 times and 1.19 times respectively.

Eksons’ performance in the last three financial years has been lumpy. It suffered a net loss of RM4.48 million in FY2016 after its earnings jumped from RM18.9 million in FY2014 to RM67.28 million in FY2015. Revenue fell to RM132.56 million after growing from RM248.1 million in FY2014 to RM392.2 million in FY2015.

The drop in revenue was attributed to lower production because operations at the company’s Sibu plant were suspended. Following that, certain tax assets were derecognised, which gave rise to a deferred tax charge of RM7.8 million.

Eksons executive director Tang Seng Fatt declined to comment for this article.

So, is Eksons a valuable stock for bargain hunters or could its investors get caught in a value trap?

The company is much smaller than its billion-ringgit peers such as Ta Ann and Jaya Tiasa, which means it does not appear on the radar screen of institutional funds.

In fact, one would be forgiven for not being aware that Eksons has attracted several prominent individual investors, including low-profile investment guru Dr Neoh Soon Kean and corporate leaders such as Datuk Lim Kok Boon, Low Han Kee and Khoo Yok Kee.

According to its 2015 annual report, Neoh, Lim, Low and Khoo owned 0.79% (1.3 million shares), 0.61% (one million shares), 0.52% (857,800 shares) and 0.44% (715,700 shares) of the company respectively as at Aug 11, 2015.

A well-known academician, Neoh is the founder and executive chairman of Dynaquest Sdn Bhd, an investment consulting and publication firm. He was a lecturer at Universiti Sains Malaysia and is currently one of the rating committee members of Malaysian Rating Corp Bhd.

Lim was a director of Eksons from 1997 to 2004 and played an instrumental role in the rescue and restructuring of the company, then known as Chongai Corp Bhd, which was financially insolvent. He is now an executive director of property developer MCT Bhd, which gained a backdoor listing via the takeover of GW Plastics Holdings Bhd in April last year.

Low, meanwhile, is non-executive director and former managing director of direct selling company Amway (M) Holdings Bhd while Khoo is an executive director of foundation and piling specialist Pintaras Jaya Bhd.

A minority and one of the top 30 shareholders of Eksons is visibly frustrated as he comments on the company’s dividend track record, calling it a “classic value trap”.

“The company has so much money but it hasn’t paid a single sen to investors since 2013. I also don’t see it venturing into a new business or acquiring assets. Since there is no major expansion plan, why not make good use of the money [by paying dividends]?” he asks.

A back-of-the-envelope calculation shows that Eksons should be able to distribute a dividend per share of at least three sen, which is equal to less than RM5 million in total and accounts for only 4% of its cash hoard.

The minority shareholder remarks that while Eksons is fundamentally strong and financially healthy, it is difficult to convince investors to buy the stock as it has no dividend yield and price-earnings ratio to show at the moment. 

“Eksons, in my opinion, is a counter for long-term investment. I feel that it is trading at a huge discount and I’m waiting for an opportunity. But right now, the shares are illiquid. Management should improve the company’s earnings, pay dividend and consider a share split,” he says.

An analyst with a local research house says while cash position and P/BV are some of the indicators investors may consider when making an investment decision, there are other factors to look into as well.

“Based on Eksons’ earnings in the past five years, the company seems to be profitable but the surge in net profit in FY2015 was mainly due to a one-off gain from an asset divestment. One of the possible concerns about this stock would be its trading volume and liquidity,” she comments.

Managing director Tay Hua Sin is currently the single largest shareholder of Eksons with a 45.46% stake. The 62-year-old Singaporean was appointed a director in March 2000 and has more than 20 years of experience in the regional timber industry.

Tan Sri Abdul Aziz Husain, the brother-in-law of former Sarawak chief minister and now Yang di-Pertua Negeri Tun Abdul Taib Mahmud, is also a substantial shareholder of Eksons with 13% equity interest. He is the company’s chairman and non-executive director.

Eksons owns two plywood mills in Sabah and Sarawak. The first plant, which was commissioned in 1992, is in Sibu, Sarawak while the second plant, which was commissioned in 2002, is in Tawau, Sabah.

It is worth noting that the shortage of logs in Sarawak has halted operations at the Sibu plant, which has an installed capacity of 135,000 cu m per year.

However, the Tawau plant, which has an installed annual capacity of 150,000 cu m, is operating at optimum level. It is also equipped to produce low formaldehyde emission plywood.

Demand for plywood is expected to continue to be soft as the Middle East, which is Eksons’ main market, has been affected by the fall in oil prices. Over 90% of the company’s products are for export.

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