Tuesday, 13 September 2011

MMC, RPT's and its Major Shareholder (2)

The first Article about this matter:




I highly recommend all articles from Where is Ze Moolah about MMC: http://whereiszemoola.blogspot.com/search/label/MMC


An article from The Star about this deal:



This Related Party Transaction (RPT) was controversial from the start. The amount of money (all in cash) makes it one of the largest ever, RM 1,700,000,000. But the timing is also important: the brochure is dated March 6, 2009, in the midst of the worst global recession of the last 50 years. To put things in perspective, cash was very hard to come by, AAA corporate bonds were yielding 10-15%, most shares were going for below NAV (some below cash, meaning the company came for free) and/or for single digit Price Earnings Ratio’s (sometimes as low as 5) with very juicy dividend yields.

I had another look at this proposal (the circular alone is already more than 220 pages), and found the following items.

[1] The Senai Airport had been making steady losses for a long time, it was also predicted it would lose money in 2009, but the change would come in 2010.

In other words, the “profits” would come from deferred tax assets. But since the company has been making steady losses over the years, it isn’t sure if there would be sufficient profits in the future to set-off. I find this type of accounting highly aggressive and not suitable at all in this kind of situation.

In 2010 they did indeed use the deferred tax to be able to book a “profit” of RM 63.2 million, the profit was RM 30 million less than they forecasted:. If they booked the same amount of tax deferred (RM 113 million) as planned, then the Profit Before Tax was actually a loss of RM 50 million.

[2] The Senai airport was valued at RM 420 million to 620 million:

But as recently as in 2008, it was revalued:

The shareholders Funds were actually negative; thanks to the revaluation it turned into RM 185 million. And only one year later (in which the airport again lost money), it is suddenly worth a few hundred million more? In 2003 it was bought from Malaysia Airport Holdings Bhd for only RM 80 million in an arm's length transaction.

[3] For valuation purposes the valuers used the aggressive DCF (Discounted Cash Flow) method: 

I have seen many instances where this method can lead to incredible high results. Basically it assumes all will go well in the future (number of passengers will grow, amount of cargo will grow, land will be developed into residential and commercial buildings which all will be sold at a nice price, etc). In reality, there are often many problems, growth rates have been overstated, financing is not easy to get, the economy is in a recession and buildings are not sold, plans are delayed leading to cost overruns, etc, etc, etc. 

In the case of the Senai Airport, the valuer was able to plan all the way up to year 2053! I have 30 years experience in making mathematical models and I can assure the reader that it is very hard to plan ahead for 2 years, let alone 44 years. But needless to say, with so much uncertainty so far ahead in the future, you can end up with about any valuation that you want. Can anybody tell me if we still need airports in 2053, how an airplane will look like, how passengers and cargo are transported? Cargo is for instance predicted to grow from 5,800 tonnes to 400,916 tonnes. Just a small change in growth rate would give completely different results. Also, would all the other Malaysian airports and Singapore’s Changi airport sit still and let Senai take a much larger piece of the pie, without putting up a decent fight?

Here are some assumptions:

“economic conditions have changed since the dates of valuation ….. which might impact the assumptions adopted in the respective DCF method of valuation”. 

Why did they not simply redo their valuation to incorporate the changes? The deal was done in the middle of a severe global recession, that sounds highly relevant.

[4] Another issue is that the last audited accounts are from June 2008, nine months old. But the Guidelines write:
In other words, the accounts should have been audited. Even if this rule did not exist, it should have been done in my opinion. Since 2001 we are in Full Disclosure Based Regulation with high standards of disclosure, due diligence and corporate governance. A huge RPT of 1.7 Billion certainly deserves accounts that have been audited just a short while ago. It doesn’t cost much effort or money.

[5] The independent advisor, Hwang-DBS (which we also met at the RPT between MUIB and PMCorp: http://cgmalaysia.blogspot.com/2011/09/muib-and-pmcorp-horrible-deal-from-past.html), made the following recommendation:

fair and reasonable”, “in the long-term interest of MMC” and “we recommend that the non-interested shareholders of MMC vote in favour”. It can’t get clearer than that.

But on another place they wrote:

“Has not independently verified any information …. for its reasonableness, reliability, accuracy, correctness and/or completeness”?

How can they on one side make a very clear recommendation, and on the other side admit they haven’t checked anything at all?

The Securities Commission writes this in their Prospectus guideline:

And this in their Due Diligence guideline:

This looks like a contradiction with what Hwang-DBS wrote, "proactive role", "substantiate ... information", "more detailed verification and investigation".

[6] What I completely miss in the prospectus is a simple, above the board valuation, based on cost:

1.  What was paid for the assets?
2.  How much was invested additionally?
3.  How much money was taken out (by dividends)?

As far as I can find in the prospectus:

1. 2m (land in 1996), 80m (Senai in 2003), 332m (land in 2007), 4m (land in 2008)
2. 158m
3. Not disclosed, let’s assume conservatively: zero

In other words, RM 576 million is invested in total, 86% of which in the last 2 years, during good economic conditions. My question is: why are these assets worth RM 1,124 million more during the largest global recession of the last 50 years?

[7] On pages 64 and 65 a comparison is made between NAV and price for this RPT versus NAV and price of several listed companies. Hwang-DBS however does not mention that the NAV of the MMC deal is a RNAV, revalued based on all sorts of assumptions while all the NAV’s of the listed companies are not revalued. They could be based on land that they bought 50 years ago and still is in their books at the same price. I have seen dozens of revaluations of listed Malaysian property players and the RNAV always was substantially higher (never lower) than the NAV, sometimes twice as high, sometimes four times as high (in extreme cases even more). By using RNAV for the MMC deal versus NAV for the listed companies, Hwang-DBS is really comparing apples with oranges.

[8] Another item that I miss is: what would the alternative be? What could MMC otherwise do with the 1.7 Billion RM? The answer would have been: “a lot”. If they had bought a basket of assets (shares, bonds, commodities), all trading at very low prices, then that basket would now easily have doubled. But is their SATS acquisition now worth RM 3.4 Billion?

And another option of course would have been to simply return (a good part of) the money to the shareholders in the form of a bumper dividend, leaving it up to the shareholders what to do with the money.

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