LCTITAN - Quarterly Update

My previous article here. 

Last week, LCTITAN announced its quarterly result.  We saw 8 consecutive quarters of losses totalling 108 sen.  Over this period, LCTITAN NTA declines from 5.45 down to 5.12, or 33 sen.  

Not quite sure yet why 108 sen of earnings loss only caused 33 sen decline in NTA.  Normally, if a company spends RM100 on capex, the impact to earnings if depreciate over 5 years is RM20 i.e. the other way round.  NAPS is a Balance Sheet item, i.e. impact of spending on Balance Sheet should be larger than impact on Earnings, not the other way round.

Nevertheless, as a result of the published earnings loss, price open with a small gap down, and made an intraday new low last Friday, before closing at the previous support price level of 1.07.  Many short term traders will be looking at the price action the next week or two. 

Typically, I could be looking out for divergence signs.  Negative continued losses news like this should typically be followed by lower prices, where a possible accumulation zone could be RM1.   However, price actions can surprised us.  All else equal, no rush to accumulate when prices are declining.

For perspective, long term charts look like this - it hasn't quite put in a double bottom yet, even if it feels close (feels can last 1-2 years, or months, or weeks, or days):

Other Fundamental Updates

1. This Quarter vs LY same quarter - still loss, but better

2. This Quarter vs Prior Quarter - still loss, but better

3. Future Prospects - still uncertain, company says little

4. Capital Commitments - still at least another RM1.2 billion (and more) to go

5. Long Term Borrowings - the loans for LINE project is in USD Secured term loans and due to weakening Ringgit, the presentation currency showed nearly +20% growth, even if in USD terms, it increased less.

6. Market Cap vs Equity

Buffer from Balance Sheet perspective - substantial

• Market cap is RM2.5 billion, vs Equity of RM11.7 billion.  Market is fearful, because it is valuing every RM1 of equity as being worth only 21 sen.  
• Total loan is RM7.2 billion.  Equity is already less loans.  So, even if we doubled the loan, the remaining equity is worth RM4.5 billion, still higher than market cap.   Market is very fearful.
• Total capital commitment is RM1.2 billion.  So, even if we doubled the loan, reduce the current capital commitment and assume it is worth nil (which Board thinks it is worth nil?), remaining equity is RM3.3 billion, still higher than RM2.5 billion.

Buffer from Earnings perspective - substantial

• Total 8 quarter losses = 108 sen x 2.312 billion shares outstanding = RM2.5 billion.  Equity coverage is 4.7 times i.e. Surplus = 3.7 times.
• 3.7 times x 8 quarter (2 years) = 7.4 years.
• This suggests that if RM1 earnings loss translates to reduce RM1 in net worth (it doesn't), then, this company can continue to withstand another 7.4 years of losses that we've seen over the past 2 years.
• I doubt LCTITAN will continue to see 30 consecutive losses (or 7.5 years of losses) similar to last 8 quarters.

Question - what is LCTITAN's intrinsic value?

There are usually 2 perspectives here - from future earnings perspective and from a break-up value perspective as a floor.

Most of the time, we use a future earnings perspective because we don't know when a company will break-up - the latter depends on opportunities that we cannot predict in advance.  

From a future earnings perspective, LCTITAN has gotten a bad rep, due to 8 quarters of consecutive losses.  As a business, we need to be profitable, not keep losing monies.  

However, there are 2 glaring gaps for those who thinks LCTITAN is not worth anything given the continued losses.

1. Why are shareholders and management continuing to invest in LCTITAN?  Why turn every RM1 cash into 21 sen immediately by spending?   Board and Management must have their reasons and it's clearly not nil.  Likely, they see the intrinsic value, beyond the stock market valuation.  (However, there is no reward for coming out to say their stock is clearly under-valued as it becomes a broken record with every continued loss reported).
   
   
2. What if this loss turns out to be temporary?  Then, the stock market reaction becomes manic-depressive, going from utter depression to euphoric mania.

What is the play here?

To me, this is a "turnaround" play, not a dividend play.   

The basic idea is to have a position at the bottom (wherever that is), so that if/when price reverses, we ride the turnaround.

We can't position too early - if too early, the average price is too high.

We can position a bit late, but more than half the time, the rise could be too rapid as this stock is severely under-valued.  Meaning by the time it is recognized as bottom, FOMO (Fear Of Missing Out) sets in and the rise can be rapid (or not).

So, noone knows where is the bottom, and many are looking out, so, this leads the market to look ahead, typically by around 6-12 months.  Meaning, if someone knows the truth and thinks that the turnaround will happen by then, they'll buy now and not wait until it is announced.

So, the only way to know if someone is buying now, is Technical Analysis - the analysis of price and volume.  Even then, it's still 50-50 guesswork.  Last Friday, they were not buying, as price made new low.  Last Friday was definitely not capitulation i.e. not setting up rapid rise yet.

 

Pure Fundamental Analysis -waiting for the next quarterly report to show a turnaround - is typically 9-15 months too late.

Target Position Sizing

As at last Friday, my LCTITAN position size is 2.04% of the market value of my portfolio excluding cash.  Since my last article in Jan 2024 (which my last buy was RM1.11), I had done 4 significant sales between RM1.4x to RM1.5x, and then, waited and then bought back at RM1.1x twice at smaller transaction size than my sales.  My last buy was on 8 March 2024 at RM1.11.  Still waiting to see the bottom to maybe add a bit more.

For a long term, uncertain, turnaround play, 2% of portfolio is about right for prudent investors where neutral is 3% capital owning 33 good quality long term stocks.  For aggressive investors they could aim for 3% capital position or more but not more than 4% relative to the other strategy.   Higher than 4%, you are deviating from your strategy.  I never own anything (except for MAYBANK) to be more than 5% capital and for those of you who has massive risk appetite, if you are contemplating to use leverage, you are a gambler.

Our investment goal is not to be proven right.   Our goal here is to position our investment portfolio so that we can continue to make new all time highs regularly.   If your goal is to let your portfolio to make new all time highs regularly, you definitely don't want to be too heavy on a single play like LCTITAN - else, this can cause your portfolio to stay low for an extremely long time.

This quarter may not be the worst result / show the worst result - I have no idea when.  But as Buffet says, there is only 1 rule in investing which is - don't lose monies.  I blogged about this here.

Summary and Conclusion

LCTITAN's quarterly update result last week was more or less expected - the continued losses was not surprising, because we know it won't be easy to turn around. However, it's not as bad as it could be and is hinting on "better" signs.

Nevertheless, my personal view is there is more than 50% chance, that the next 3 quarters will continue to show losses.  Whether it is "better" or "worse", I'll leave it to the experts to comment.

Nevertheless, I am already positioned for the turnaround, with 2.04% capital.

This is a highly emotional stock - over the next few years, I won't be surprised if Mr Market turns from utter depression to highly speculative mania.

Good luck.

PS.  This is not my best turnaround play idea.