Maybulk: IPO of POSH (4)

The prospectus for the coming EGM of Maybulk contains an independent advice of KPMG Malaysia.

This is the same adviser who wrote the independent advice in 2008, about which I wrote before, in rather harsh terms.

The current advice is much better. Cynics will say that it would have been very hard to do a worse job than the one in 2008. It is also in line with a (belated) general improvement of independent advice across the board for Bursa listed companies.

There are some interesting parallels with 2008, although unfortunately KPMG doesn't revisit the 2008 report.

Regarding the PAT of POSH, the following graph is presented:

Looks rather convincingly, doesn't it?

But there is an eerie similarity with the picture presented in 2008:

The last column is based on only 9 months, the full 12 month result would be USD 81M, while the company made a PAT of USD 88M in 2009.

The rather strange fact (which isn't mentioned at all in the 2014 report) is that POSH made a higher profit in 2008 and 2009 than each year after that, despite:

• Receiving a huge capital injection by Maybulk in December 2008;
• A rights issue in 2012;
• The retained earnings over all those years.

This was what KPMG wrote in 2008:

The results of 2008 were more or less known in December 2008, so let's compare those with the results of 2011 and 2012, the timeline that KPMG indicated in the above paragraph.

It turns out those profits were only USD 26M (2011) and USD 54M (2012), a whopping 68% and 33% lower than the profit in 2008, while KPMG forecasted "substantial growth over the next three to four years".

So much for the rather poor forecasting capabilities of KPMG. And they can't blame the global recession for that, the acquisition of POSH by Maybulk in 2008 was right smack in the middle of it.

For the benefit of the reader, the full earnings picture of POSH, all amounts in USD:

2006:  0M (company just started)
2007:  9M (first acquisitions, paid-up still very low)
2008: 81M (injection 160M from PCL, 221M from Maybulk)
2009: 88M
2010: 28M
2011: 26M
2012: 54M (rights issue of 150M)
2013: 73M
 
Is this indeed a "track record of strong financial performance", as is claimed in the 2014 prospectus by the Chairman? Based on the last three years results, may be. Based on the last six years not really, I think.

Return on Equity in the last three years was 4.6%, 9.0% and 11.1% despite being rather leveraged, not impressive.

There doesn't seem to be growth in revenue over the last three years. Most of the growth in profit comes from "Other operating income", not sure how recurring those are (below numbers have not yet been adjusted downwards):

Another interesting topic is the valuation by KPMG, this is the current one:

This is the valuation of 2008 based on adjusted NA:

And their valuation of 2008 based on DCF:

What is remarkable is that the valuations of 2008 and 2014 are almost identical, while:

• A large capital injection was made in 2008, 58% of which was from Maybulk;
• There was a rights issue in 2012 bringing in even more capital, USD 150M;
• POSH has accumulated earnings over 5.5 years between the valuation in  2008 and 2013, close to USD 300M;
• In 2008 there was a huge global recession going on, with all valuations very cheap, while in 2014 valuations appear to be on the high side;

Admittedly, the rights issue in 2012 brought done the cost price for Maybulk somewhat, from USD 6.50 to USD 6.03, but that still only explains a small part of the above.

The only way to explain the peculiar valuations is to assume that KPMG's valuation of POSH in 2008 was simply much too high, unrealistically so.

For one part (the DCF valuation), KPMG should fully take the blame.

For the Asset valuation, that was partly based on the valuation of Clarkson, about which I wrote under the title: "Clarkson, the valuer who didn’t believe his own valuation".

That title was indeed deemed to be correct (the authorities have confirmed that), the valuation of Clarkson was made on September 15, 2008 and was not valid on the day the prospectus was issued, November 25, 2008. In only a bit more than two months time values of vessels had collapsed, like almost all other asset values, making the valuation much too high.

The important question is: why did nobody question the valuation of Clarkson?

There are many maritime experts in the board of directors of Maybulk, POSH and PCL who should have known about the problems in this industry.

But even the non-maritime experts of those boards of directors,  the writers of the prospectus AmInvestment Bank and the independent adviser KPMG, they should have guessed that the valuation might not be correct anymore, and should have actively sought clarification.

Why did no one contact Clarkson at the end of November or early December 2008? They were just one single phone call or email away.

A new, updated valuation by Clarkson would have had a huge impact on the adjusted net assets, the more since POSH was highly geared.

And that would have enabled the non-interested directors of Maybulk to renegotiate a much fairer deal for the shareholders of Maybulk.

Maybulk's shareholders deserved a much larger chunk of POSH in exchange for its large injection in POSH, in my opinion roughly 50% of the shares instead of the 21% it would receive. Profit contributions in the subsequent years would then have made a much higher impact, and at the coming IPO of POSH Maybulk would not need to buy additional shares to keep a minimum shareholding of 20%, it could even consider selling some shares, if the price is right.

Clarkson, the valuer who didn’t believe his own valuation

Clarkson Valuations Ltd. from London was appointed the expert adviser to value the vessels of POSH. They valued the existing vessels and the vessels under construction which resulted in a huge revaluation surplus (as calculated by KPMG) of about USD 700 million, increasing the shareholders’ funds from USD 188 million to USD 899 million.

On the face value of it, this already seems strange, the vessels were bought and ordered during economic boom times and at the writing of the circular a large recession was raging. Also, most acquisitions were done only about one year ago.

Clarkson explicitly wrote the following in the circular (dated November 25, 2008):

But what is the use of a valuation at September 15 and a circular of November 25 on which date the values should not be taken to apply?

Clarkson also valued the “Newbuilds”, ships under construction. Valuing existing vessels in bad economic times is already difficult enough, valuing vessels under construction is even more hazardous.

On the basis of prompt, charterfree delivery on September 15, 2008? First of all we are more than two months further, secondly some of these vessels would take years before they would be completed.

There was also huge stress at the shipyards, what would happen if they would go bankrupt? Clarkson warned:

Clarkson’s website suddenly changed on December 4, 2008 (after the circular, but with still six days to go to the EGM):

This is about the most clear warning signal that Clarkson’s valuation of the vessels from POSH should have been withdrawn, since Clarkson themselves advised not to use their system, the values had not been updated for two months.

They didn't trust their own values anymore!

Their valuation reports were written between November 21 and November 24, 2008, if they had noticed any change in their valuation since September 15, 2008, they had the obligation to notify this.

And although Clarkson gave a whole list of red flags, it did not withdraw its valuation. In my opinion, it definitely should have, I have zero doubt about that.

In the POSH deal Directors were involved with huge experience in the maritime industry. They were on the boards of POSH, Maybulk and PCL, some were connected to Global Maritime Ventures, Global Carriers Bhd and Alam Maritim Resources Bhd, all companies in this industry. Surely they must have known about the huge stress in the industry, the falling values of vessels and that on December 10, 2008 (the date of the EGM) the valuations of Clarkson were way off.

But nobody withdrew the valuation, the EGM continued and the Minority Investors of Maybulk were hugely misled in the process.

After the deal was sealed, I found more and more credible information that indeed things were very bad in the market for vessels. For instance the following article:

http://www.compassmar.com/CMSdoclinks/2009%2005MAY14%20JANE's%20TRANSPORT%20-%20Market%20seeks%20solutions%20for%20meaningful%20asset%20valuation.pdf

But the most interesting information came from a surprising source: Clarkson themselves! The report can be found here, under “Interim Report 2009”:

http://www.clarksons.com/investors/presentations/?year=2009

Pages 3 to 6 give an indication of the stress in general for the industry, but the most relevant is page 7:

In more detail only year 2008 with vertical lines on September 15 (the date of Clarkson’s valuation) and November 25 (the date of the circular):

As can be seen, prices reached their maximums in July/August 2008, and after that went down fast. Between September 15 and November 25 prices came down about 40% for the three indices, that was why Clarkson in their valuation report kept on stressing the point that their values were only good on September 15th.

And it also clearly shows that Clarkson should have withdrawn their valuation report before the EGM.

Since POSH was highly geared, even a fall of 30% would have huge consequences for the Revalued Nett Asset Value, it would shave about USD 500 million from the valuation, a large amount by all standards.

Much later, when the deal was sealed
POSH cancelled some Newbuilds in 2010. Strangely, it only received back its refund, no trace of huge paper profits that were promised (from their year report 2009):

This valuation by Clarkson played a key role in the revaluation by independent adviser KMPG, the subject of the next episode.