Walk The Talk with Mercury Industries Berhad With Me. Dare You?

Walk The Talk with Mercury Industries Berhad With Me. Dare You?

Traffic jams are getting worse and worse by the days. So much so that I know of  many people checking on the internet about the traffic flow before going off from the office. Who likes to be stuck for one hour or more when it normally takes only a 15 minute's drive? Imagine crawling inch by inch and burning precious petrol for the extra 45 minutes going through stress and frustration. Worse still if one suddenly feels the urge to answer to the call of nature.

The reason is very simple. There are just too many cars on the roads. No thanks to an explosive new cars sales recorded in 2012. Volume surged 33% to 611,000 vehicles, 6,000 more sold in 2011. The local manufacturers association (MAA) released a 2013 forecast of 634.000 units which looks quite conservative, in a country with a still low circulating car park and a GDP expected up 5.6%.

Also with the prices of cars going cheaper by the days, the 2013 forecast seems a foregone conclusion. Who could have imagined a Honda Jazz being sold at less than RM75,000.00 today?

Mercury Industries Berhad

The good car sales business is good for one "very small company" called Mercury Industries Berhad, Malaysia's 2nd largest car paint producer. The company is principally involved in the manufacture and trading of automotive paints and other related products used in the auto refinish industry.  Mercury's products cater mostly to the auto refinish industry which is demand-resilient. Therefore, its revenue will not be greatly affected by the economic conditions of the country.

I said "very small company" because Mercury has only a share base 40,182 shares owned by  2,277 individuals according to its 2012 Annual Report. The top thirty largest shareholders hold collectively 79.79% of the shares. So the famous phrase of "less men more share" couldn't be more true this time. Its 2012 Annual Report showed that it has a cash hoard of RM12 million and zero debts.

On August 30th 2013, Mercury announced its 2nd Qtr 2013 results. Predictably, the 1st half year's earnings was around 8 sen plus, almost the same as the few previous quarters. But the cash in the kitty has risen to almost RM16 million, thus increasing its cash per share to almost 40 sen!

During the last three years, Mercury has been earning an average of 16 sen per share. It has also rewarded shareholders with three 8 sen dividend as well. What if it continues to do the same for the next ten years?

Yes, this is the good part I am coming to. ASSUMING for the next ten years, the earning of 16 sen remains the same. The 8 sen dividend payout each year remains the same for the next ten years.  ASSUMING bank's fixed deposit rate of 4% per annum remains the same for the next ten years.

The current share price of Mercury is about RM1.20.

RM1,200 deposit in a bank

An deposit of RM1,200 would earn RM48 a year based on the Bank's fixed deposit rate of 4% annum. A ten year period would earn the depositor a total of RM480 and nothing else!

Investing in 1,000 Mercury's share at current price of RM1.20.

The investor paying RM1,200 for 1,000 Mercury shares will receive a dividend of 8 sen or RM80. A ten year period would earn the investor a total of RM800. (That is RM320 more!)

But that is not the end. Remember, Mercury is earning 16 sen each year. Minus the 8 sen dividend and there is still a 8 sen balance with the company. A ten year period and that 8 sen would snowball to 80 sen (RM800) per share! Plus the existing 40 sen and that would be RM1.20 (RM1,200) cash per share! Can Mercury still be trading at RM1.20 which is the same as its cash per share in ten year's time? My experience with cash-rich stocks is that as its cash hoard keeps increasing over the years, its share prices also follow up automatically. Its share price has to be traded above RM1.20.

Still back to Mercury's share in ten years' time, its cash per share of RM1.20 still belongs to that 1,000 Mercury shareholder!  Imagine if the company decides to payout that amount as a special bumper dividend or increase its' annual dividend from 8 sen to a higher amount.

By then what will happen to the share price? Will Mercury's share price still be at RM1.20? Logic tells us that when a company's cash per share keeps on rising each year, its' share price will also keeps heading north each year. What will you do if you are the major shareholders? Take it private? Declare a big dividend payout? Do nothing? Try doing nothing and surely it will attract predators coming in to take over the company or building up a big stake to have a big say in the direction of the company.

Look recently what nearly happened to icapital berhad, a closed-end fund? With too much cash and not putting it into investment, it attracted fund that was eyeing its cash pile. Recently, it announced a special dividend payout for the first time since its listing on October 2005. According to a report, the special dividend was paid out because it wanted to utilise the tax credits under the Section 108 of the Income Tax Act, 1967 which will expire on 31 December 2013.

Walk The Talk

Yes, I am convinced that Mercury is a good long term bet and as such, I will walk the talk and not the other way round. No point saying something is so good when one did not even own or purchase it. Although I had already purchased 15,500 shares of Mercury bought at RM0.86 on December 12th 2011, it wouldn't be fair if I keep on introducing Mercury as a good investment if I do not purchase additional Mercury shares at around current price.

Therefore, I have decided to be in the firing lines of my words by buying another 11,000 shares of Mercury (bought at RM1.15 on August 28th 2013) to add to my existing 15,500 shares. It takes a lot of guts to buy shares in this severe market downturn, but that is what I call buying with conviction regardless of market conditions especially when others are selling. Together I now hold 26,500 shares of Mercury.

Time will tell if I am right or wrong. In the meantime, anyone dares to be with me with Mercury ... for the next ten years?

The recent market downturn.

Questions from "Layman" regarding the recent market downturn.

How do you perceive the current downturn trend?

Any KLSE entry point for consideration?

This is what I wish to share with "Layman".

Market will always go up and down from times to times due to a lot of various factors which you and I cannot control at all. For me, one must have an entry price for a particular stock which one has been aiming for some.

For example stock A has been trading at a price range of between RM2 to RM2.50 which you are not willing to pay for it. Suddenly it came down to RM1.70, will you buy? Buy at a decided price regardless of market conditions. Buy even more if your decided price stock bought goes down lower.

If you are confident of that stock (which I presumed you have done the homework), then you have nothing to fear.