This Malaysian dynamo could double from here

I’m not proud. I’ll go anywhere to get a story. So last week found me in the Rivoli bar of the Ritz Hotel, Mayfair. I sat there, marvelling at the £6 cost of a thimbleful of cranberry juice and resenting the waiter’s sniffy insistence that I should wear a proper jacket.

My mood, though, was lifted by the gentleman across the table.

His name is Cheong Chia Chieh and he was beaming from ear to ear.

In a series of visits to the UK he has been conducting a charm offensive designed to boost the share price of a business of which he owns 22%. And he told me that his efforts are working. The share price of his company has recovered by 60% from its October trough, and trading volume in this once moribund counter is lively.

Now the shares trade at 40p, but if Cheong has his way they will soon be at 80p. I have covered Red Hot Media in Penny Sleuth before, but let me tell you Cheong’s story.

How to blow a bundle in Malaysia – and get nothing back

Cheong, a Malaysian, used to work for Nanyang Press Holdings, publisher of the Nanyang Siang Pau. Launched in 1923, it is the oldest Chinese language newspaper outside the mainland. One thing he learned in his time there was that advertisers spent plenty of money without having much idea of what they are getting for it. As the nineteenth century American merchant John Wanamaker put it, “half the money I spend on advertising is wasted; the trouble is I don’t know which half”.

This is particularly true when advertisers venture into foreign climes. Cheong observed foreign companies attempting to target the Malaysian consumer simply by appointing an international ad agency and throwing money at the problem. He reckoned that he could offer something better. So when Nanyang’s owner MCIL went public, Cheong took the chance to buy out part of the business along with a partner with the initials ‘RH’ (from which was derived the wonderful and unforgettable name ‘Red Hot’ Media!).

Revenues have doubled, so why haven’t share prices followed?

Today, Red Hot offers what Choeng calls “results based marketing”. To be honest, I am not sure that this is so very different from conventional marketing, but Red Hot does claim a better knowledge of the route to the Malaysian consumer, and it has built a substantial local market share.

In the last four years, Red Hot has grown its revenues from RM19.3m (Malaysian Ringgit) to RM44.3m (that’s about £9.2m) – and its pre-tax profit from RM2.2m to RM9.2m (c. £1.9m). If the forecasts of Allenby Capital prove to be correct there will be no let-up in this rate of growth.

But Red Hot’s share price has so far failed to reflect this rude health. This is due to an innate UK investor suspicion of anything east of the Thames estuary, and to RHM’s somewhat eccentric approach to investor relations. But also muddying the waters is a proposed deal that will see Red Hot inject its entire operating business into Founder Berhad in exchange for a 68% stake in the latter. Could this all lead to the change needed?

Founder Berhad is the Malaysian-listed arm of a major Chinese conglomerate, the Founder Group, which is involved in technology and financial services. Founder Berhad is a developer of fingerprinting security systems and “a renowned provider of IT solutions”. It made a profit after tax of RM763,000 in 2010. Adding this to RHM’s 2011 post-tax profit of RM10.5m (as forecast by Allenby), we get a combined number of c.RM 11.3m, rising to c. RM13.6m for 2012. Placing this on the price/earnings (P/E) ratio of fifteen that Choeng thinks is appropriate would value the business at RM204m, or £43m.

Red Hot would then be a holding company with a 68% stake in Founder Berhad worth £29m. If we divide that by Red Hot’s 36.6 million shares we get within a penny of Cheong’s target price of 80p.

Looked at another way, RHM will hold 710 million shares in Founder Berhad post the transaction. Today, Founder’s shares trade at RM0.175. Multiply that by 710 million and we get a figure of £26.2m, equivalent to 72p per RHM share, which is within 10% of Cheong’s target and some 32p above the London price of RHM.

Either way, it looks as if local Malaysian investors can recognise a good business, and are ahead of the game here. What is more, Cheong Chia Chieh promised that there would be some more good news later this year. I’ll keep you up to date.

• This article is taken from Tom Bulford’s free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.

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