Friday, 24 October 2014

Tomypak: CG issues

I wrote several times about Kuala Lumpur based fund manager Claire Barnes and the Apollo Fund which she manages.

In the latest quarterly report "FX headwinds & unheeded duties of care" corporate governance issues regarding Tomypak Holdings are described:

"A particular irritation has been the collapse of corporate governance at Tomypak Holdings, a Malaysian manufacturer of flexible packaging."

For a more detailed description I refer to the above link.

Of further interest is:

"We [the Apollo Fund] therefore expect the Securities Commission to require a General Offer, albeit at the low price of RM1.30."

Any readers with an interest in this company are invited to contact Claire Barnes.

The 5-year graph of Tomypak's share price:

The Apollo Fund is not the only fund which writes about corporate governance issues in their investment holdings. Singapore based Lighthouse Advisors for instance publishes public newsletters on their website with comments related to listed companies. Hopefully more funds will follow suit.

Wednesday, 22 October 2014

Australia 'paradise' for white-collar criminals

I wrote several times in a negative way about the Australian financial industry, and the lack of enforcement: here, here, here and here.

I have insights in a few (rather dodgy, to put it mildly) companies listed on the Australian exchange, and am indeed shocked, I think that most of those companies would not have been allowed to list on Bursa Malaysia. Next to that, the financial statements of the smaller listed companies compare very badly to the statements of ACE listed companies.

It seems that the chairman of the ASIC (Australia's Securities Commission) seems to agree on that, according to this article on Sydney Morning Herald's website.

Some snippets:

Australia is a "paradise" for white-collar criminals because of its soft punishment of corporate offences, the Australian Securities and Investments Commission chairman, Greg Medcraft, says.

Mr Medcraft said the only realistic response was harsher jail terms and bigger penalties for white-collar crime.

He also repeated calls for a national competency exam for financial advisers in the lead up to a crackdown on the industry and more funding for ASIC to investigate the finance sector, including a user-pays funding model.

Finance industry players were not "Christian soldiers", Mr Medcraft said on Tuesday, but were motivated by fear and greed.

"You have to lift the fear and suppress the greed," he said.

"This is a bit of a paradise, Australia, for white collar.

"The thing that scares white-collar criminals is going to jail and that's what scares them everywhere in the world."

"The penalties, particularly civil penalties, in Australia for white-collar offences are basically not strong enough, not tough enough. All you're doing is giving them a slap on the wrist [and] that is not deterring people."

In the past few years ASIC has come under fire over its handling of scandals at the financial planning arms of the Commonwealth Bank, Macquarie Group, and Storm Financial.

At recent Senate and parliamentary committee inquiries the corporate regulator was accused of being too slow to act against dodgy financial planners, of lacking transparency and being too trusting of big business.

Mr Medcraft admitted ASIC had made mistakes, but said its capacity to investigate and pursue corrupt financial advisers had been curtailed by a lack of resources.

He vowed to be more transparent about ASIC's enforcement actions and said the regulator would "not be captive to the big end of town".

"If we want to react faster, then having more resources to be able to do it is important," he said.

The Australian Securities and Investments Commission plans to devote more resources to scrutinising and investigating the financial advisory industry while also forcing the sector to lift its game through better education, monitoring and reporting of breaches.

EPF not allowed to vote in RPT

Bursa has made its final decision, EPF is not allowed to vote in the CIMB-RHB Capital-MBSB deal. The reasons behind this can be found here:

EPF’s position is not the same as the other shareholders of RHB Capital premised on the

(a) EPF’s controlling stakes in RHB Capital (41.5%) and MBSB (64.5%) place it in a position of significant influence in these companies;

(b) as the single largest shareholder of RHB Capital and MBSB and a major shareholder in CIMB Group, EPF may benefit from the transaction as a shareholder of MBSB and/or CIMB Group. As such, its overall position would differ from a party who is merely a shareholder of RHB Capital, especially given the differing terms and valuations applicable to the 3 affected companies; and

(c) EPF has prior knowledge of the Proposed Merger as it was notified by CIMB

I think that this decision is spot-on. I think that EPF should be able to block the whole deal if it thinks it is in their disadvantage.

But given that the EPF does indeed support the deal, it should not be able to push the deal through by being allowed to vote. This is after all a Related Party Transaction (RPT), and it is one of the Corporate Governance areas of great worry in Malaysia.

EPF has different percentages in each of the three companies, which means that it has a clear preference in the outcome: a relatively higher valuation for the company it has a large stake in, and vice versa.

If subsequently the minority investors shoot the proposal down, then may be it isn't that great anyhow.

Many corporate restructure exercises do disappoint, the outcome being less good than forecasted by the dealmakers who made the shiny PowerPoint presentations, showing all the synergy.

In reality, things are not that easy, cultural clashes of the employees of the different companies are quite common and economies of scale do not always work as expected.

To all Hindu readers: Happy Deepavali!

Friday, 17 October 2014

XOX: from bad to worse .....

I wrote before about XOX's corporate exercise to "massage" away its high accumulated losses. I will now give some more detail about this company, and its short but not so glorious past.

XOX is featured on Ze Moola's blog, which is often not a good sign, and this time it is no different.

In the last blog post we can see most of the directors smiling (except the person on the left) at the IPO ceremony at Bursa:

Not sure if the people who bought shares at the IPO price were also smiling, the board was distinctively red coloured, as can be seen on the right, not a single green number in sight.

The share plunged 35% on its first trading day, it must have been one of the worst performers of Bursa ever.

"Malaysian Shares" wrote two articles about the IPO, here and here.

Unfortunately for its shareholders, the share price has never recovered, in the contrary, it is now trading for RM 0.07, its lowest price ever:

XOX was a loss making company before its IPO, it is quite a surprise for me that it was allowed to be listed on Bursa. What probably helped was a rather optimistic (with hindsight) profit forecast that it issued in its IPO prospectus.

XOX was not able to hit the revenue and profit forecasts, it wasn't even close:

The above numbers are for the year up to 31 December 2011, while the company was listed on June 10, 2011 and knew already the numbers up to then. In other words, it only needed to forecast another seven months or so. And still it was able to overestimate its revenue by a factor 4, and instead of a forecasted PAT of RM 20 Million it booked a loss of RM 20 Million. Forecasting is probably not XOX's forte.

Over 2012 the company lost another RM 3.1 Million, over 2013 it lost RM 0.7 Million and over the first half of 2014 it lost another RM 1.2 Million. Not exactly shining numbers, and (partially) explaining the share graph.

To add insult to injury, on July 18, 2014 the company was reprimanded by Bursa for failing to take into account the necessary adjustments.

Which brings us to the present, and the multiple proposals that the company announced.

Apart from the earlier mentioned restructuring exercise, there are three other elements:

[1] A rights issue: this is considered to be a proper exercise to raise money, where all shareholders have the opportunity to participate (or to sell their rights if they don't want to do that).

[2] A huge large restricted issue. This is the kind of exercise that I don't like, since normal shareholders do not have the opportunity to participate.

[3] Establishment of a SIS (Share Issue Scheme) of up to 30% of the issued and paid-up capital for eligible directors and employees of XOX. My guess is that these directors and employees are substantially the same as before, in other words they were the same persons responsible for the disappointing results of the last three years, causing the share price to fall by 90%. Should they really be rewarded at this moment of time, at the expense of the minority investors? Would it not be better if the company first turns around, starts to book some decent profits causing its share price at least to equal its IPO price before the company even considers a Share Issue Scheme?

The total dilution can be seen in the following maximum scenario:

Current shareholders will have 166 Million shares after the share consolidation, and are entitled to the rights issue of shares and warrants, which will increase their shareholding (upon exercising of the warrants) to 498 million shares.

Holders of the proposed restricted issue will receive 190 million shares plus their rights issue and warrants, this might balloon to a total of 570 million shares.

Directors and employees might receive an additional 320 million shares.

In other words, current shareholders (who might include loyal shareholders who bought shares of XOX at its IPO price of RM 0.80), who inject further money to subscribe to the rights issue, and who inject even more money to exercise their warrants, will in total only receive 36% of the enlarged shares in the maximum scenario.

And almost all of the dilution due to the restricted issue and SIS will be done at a price that is only a small fraction of the RM 0.80 that shareholders paid at the IPO.

Is this the way the company wants to reward its loyal shareholders?

Note to the authorities: I am of the opinion that corporate exercises like the above should simply be outlawed. Restricted issues should be capped at a maximum of 10% (preferably even 5%) of the outstanding shares. The same should apply to SIS, ESOS and the like, please cap them at 10% (preferably at 5%).

Please take also note of David Webb's "Project Vampire".