Petrolimex International Trading Joint Stock Company (PIT: HOSTC)

Date: 9 May 08
Current Price: 19,600 Dong
HOSTC Level: 500.33
Company website: www.pitco.com.vn

According to the latest financial report 4th quarter of 2007:

Total number of shares: 9,770,479
Total Current Assets: 378,636,000,000 VND
Total Current Liabilities: 169,223,000,000 VND
The company has no long term liabilities.
Net-net assets: 209,413,000,000 VND
Per share value: 21,433 VND

Current market price of 19,600 VND is a slight 8.5% discount to the liquidation value of the company. This is amazing because the company is first of all profitable and have been so for the past 2 years that I have data. In addition, the company has a healthy growth in revenues and profits, growing revenues and profits in the prior 3rd quarter and 4th quarter of the year 2007.

Of course, the company has a small profit margin but this should be expected of companies trading in commodities of which this company is one. This company also part of the Petrolimex group.

Worth a further look.

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To Increase Charter Capital to VND 140B in 2008- Company announcement

Apr 01, 2008 — The Petrolimex International Trading Joint Stock Company (Ticker: PIT) has announced its 2008 Annual General Assembly of Shareholders’ resolution.

The meeting approved 2007 audited financial statement, profit distribution and dividend payment. Accordingly, the revenue reached VND 1,565.3 billion, pre-tax profit was VND 42.2 billion. PIT decided to pay 2007 dividend at the rate 15% (of which 10% will be paid by stock and 5% in cash).

In 2008, the company estimates to gain net revenue of VND 1,700 billion, pre-tax profit of VND 45 billion and dividend rate 15%.

After paying 10% dividend by stock, in the third or forth quarter of 2008, the company will issue 3,252,500 common shares to raise charter capital from VND 107.5 billion to VND 140 billion. Total issuing value is VND 32,525 million.

Among these shares, 2,149,500 shares will be sold to existing shareholder at the ratio 5:1 (a shareholder who owns five shares can buy one new share at the offering price VND 10,000/share).

600,000 shares will be made private placement to strategic shareholders with an offering price at least equals 80% of the average price of five consecutive sessions dated from the record date. These shares are limited in transfer within a year.

Other 503,000 shares will be issued to Board of Directors (BoD), Board of Supervisors (BoS) and employees at the price which is about 70% of the average price of five consecutive sessions dated from the record date. These shares are limited in transfer within a year.

Furthermore, the meeting also approved other important issues as increasing charter capital to VND 200 billion (in the period 2008 – 2010), reports of BoD and BoS, compensation for BoD and BoS, amending the company’s regulation, choosing Auditing & Accounting Financial Consultancy Service Co., Ltd. as an auditing firm for 2008, resignations of Mr. Van Nghia Trang and Mr. Binh Viet Tran, voting two new BoD members: Mr. Trung Tuan Bui and Mr. Nam Van Pham, assigning Chairman to hold CEO, and change Branch in Binh Duong to Petrolimex Binh Duong Trading Co., Ltd.

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First of all, I must say that the company’s current press release is one of the most informative I have seen for Vietnamese companies. They clearly specify the price of the private placement and how the shares will be placed. The only thing I want to know is “who” are the people who will be buying the placement.

The company issues a guidance of having a profit of 45 billion VND, an increase of 30% over the prior year. This is a reasonable result. At the current market price, the PE would be only about 4x. This is very cheap.

I would have liked the dividend to be paid in cash entirely but at least it is paying 1/3 of their dividend in cash. The rest will be paid in stock. This is not ideal but tolerable. However, looking at the terms of the placement, I think that it is relatively fair to existing shareholders as they will be able to participate in at least 2/3 of the new share issue at a favourable price of 10,000. The dilution to existing shareholders for the rest of 1/3 of the placement will be about 11% of the current issued shares. This is reasonable, especially if you look at the terms of the issue:

600,000 shares will be issued to “strategic shareholders” at a price of “80% of the closing price from the record date”. Ordinarily, I would have said that this would be a good way for the company to raise capital at a fair price… (other than debt considering that the company has no long term debt) However, in this case, the company is selling at a really rock bottom price valuation wise, so the wisdom of raising capital when the share price of the company is so depressed is a little questionable. Notwithstanding this, I will let this pass considering that the entire issue to strategic partners will be only 6% of the total outstanding shares now.

The other part of the issue I find the most interesting. Shares will be issued to the existing employees who will have to pay a discounted price of “70% of the closing price”. I am very very supportive of this type of employee incentive. Looking at the ownership structure, insiders own very little of their own company’s stock. This is not an ideal situation and hopefully with this placement, the company’s officers will have some stake in the company they are working in and hopefully this will impart them with the right shareholder orientation as well. A 30% discount to the closing price is not a big sacrifice for existing shareholders considering the potential benefits of the insiders having some “skin in the game”.

The other thing to note is to see, after the placement, if the insiders or the “strategic investors” sell out or will they keep the shares. My bet is that they will keep the shares since the premium is not so much and that considering the potential share appreciation, they will stand to make much more. Of course, I will have to monitor this and if they start to sell out their shares heavily, I would have to reconsider my investment thesis.

The only worry is that to get a cheaper price, the so called “strategic shareholders” would try to depress the price prior to and during the 5 days whereby the price of the placement is going to be calculated. But I think this is a minor problem. If anything, any share price weakness due to this particular reason should be welcomed as an opportunity to buy more shares cheaper.

I will be watching this company closely because I believe that this placement, unlike many I have seen in Vietnam and elsewhere will further strengthen the company in terms of shareholder orientation and at the current price, this will likely be a great investment. Other than Gilimex, I would gauge this company as one of the better “working capital” stocks to own in Vietnam.