PMI: more questions than answers

PMI published its offer document for the take-over offer. To recap, the joint offerors, companies controlled by Khoo Kay Peng, offer RM 0.045 per PMI share, which must be one of the lowest offers ever recorded on Bursa Malaysia.

More information can be found here: http://cgmalaysia.blogspot.com/search/label/PMI

The offer document does not answer issues raised, and even adds some more. These kind of documents are supposed to deal with important issues, but in Malaysia they are very good in avoiding them.

[1] The main issue is that the offerors bought their shares from (primarily) the Hope Foundation, and that this price is used for the price offered to the minority investors. But the Hope Foundation seems to be connected to the offeror, there are many indications to be found on the internet, for instance in an article in "Malaysian Business", the previous name was even "MUI Foundation" and the shares it traded in where all connected to the offeror. But if this is indeed the case (and it seems to be very likely), then that means there is a huge conflict of interest, it would be in the interest of the joint offerors to make an offer as low as possible to the Hope Foundation, instead of an arms length offer. It would also explain why a large shareholder (Hope Foundation) would sell its shares for about the lowest price ever. Although this issue seems to be obvious, and the authorities are aware of it, it is never raised in the offer document, not even once. There is simply no mentioning at all of the Hope Foundation.

Here is a link from the website of Raja Petra, also about the Hope Foundation (I haven't been able to check the accuracy of the rather wild allegations though):

http://www.malaysia-today.net/mtcolumns/40479-tan-sri-dato-dr-khoo-kay-peng

[2] Investors who sold their PMI shares on August 24th or 25th for RM 0.040 will get half a cent extra per share, since the offer was already unconditional on August 24th. A pretty straight forward ruling, the announcement regarding the offer on August 26th was simply two days too late. The Securities Commission made this ruling on October 7th (good and fast action, I have to admit), PMI objected on October 10th (rather strange, it looks very clear that rules have been breached) and the SC overruled the objection. All correct, but why did the SC suddenly need 3.5 months to reach this conclusion, when their first ruling took less than two weeks? Because of this the whole process is hugely delayed. The impact will be very small, most trades on those two days were anyhow done at RM 0.045, investors have to reclaim their money if they made any on RM 0.040 and some will even have forgotten that they sold their shares those days. The total impact will be a few Thousand Ringgit at most. The delay by the SC is puzzling.

[3] The independent advisor will be Hwang-DBS. This company did another independent advice for the same offeror, more details can be found here:

http://cgmalaysia.blogspot.com/2011/09/muib-and-pmcorp-horrible-deal-from-past.html

In my opinion, both that Related Party Transaction between PMCorp and MUI and the independent report were the worst in Malaysia in the last 10 years, and that says a lot. Hwang-DBS is never punished in any way, shape or form (the authorities are aware about the horrific details of this deal but apparently are unwilling to take any action, for reasons only they know best). But to allow this same company to do another independent advice for the same major shareholder is pretty unbelievable.

[4] There is no mentioning at all in the document of the last Rights Issue by PMI and the projections done there. Interestingly, in that brochure PMI was projected to have losses in 2009, 2010 and 2011 (which is what happened), but to deliver profits from 2012 onwards. Why would shareholders accept a low offer just when profits are projected to kick in? At the very least there should be an update on these projections.

[5] There is no detailed discussion about the assets of PMI, mainly a building, a piece of land and shares in MUI: is there a way to unlock value, can or will they be revalued, etc.

[6] What is interesting (and this is almost completely ignored in the report) is that PMI is trading above the offer price, the last closing price is RM 0.06, 33% above the offer price. Since February 8, 2012 all transactions have been higher than the offered price.

It must be noted that quite a few breaches of rules by PMI have occurred (together with many Corporate Governance issues), but that so far nobody received even as much as a reprimand.

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



The first Article about this matter:

 

http://cgmalaysia.blogspot.com/2011/09/mmc-rpts-and-its-major-shareholder.html

 

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:

http://biz.thestar.com.my/news/story.asp?file=/2008/12/13/business/2786964&sec=business

 

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: 

http://cgmalaysia.blogspot.com/2011/07/abolish-dcf-models-in-circulars.html

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.

MUIB and PMCorp: a horrible deal from the past

"Ze Moola" attended me on a old corporate exercise from the MUIB stable. The "independent" report can be found here:

http://announcements.bursamalaysia.com/EDMS/subweb.nsf/7f04516f8098680348256c6f0017a6bf/afd99bbf47849e5848256f2b001970f4/$FILE/PMCorp-Circular.pdf

In short, Malayan United Industries Bhd. (MUIB) had borrowed RM 1,067,000,000 from related party Pan Malaysia Corporation (PMCorp), if would not or could not pay the amount back, a horrible and highly unsatisfactory situation for PMCorp shareholders.

The only thing MUIB could do is hive of some assets to PMCorp, but it decided to give the PMCorp shareholders shares in MUIB. Problem was that MUIB's shares were trading at only RM 0.185, that would mean that PMCorp were entitled to about 6 billion MUIB shares. Aparantly that was not what the Majority Shareholders of MUIB had in mind, therefore an ingenious scheme was designed. A pretty complicated one so that most Minority Investors would not be able to see through it. Instead of shares it would give ICULS, Irredeemable Convertible Unsecured Loan Stocks. These are Irredeemable, in other words they can not be redeemed for cash, you can (or will, there is no choice) somewhere in the future convert them 1:1 for MUI shares. They don't pay dividend like shares but interest, but even this would be paid in even more ICULS. This looks already bad for PMCorp shareholders, instead of cold hard cash they would get shares in a company that had been making huge losses over the last years. But what is simply amazing is the small number of ICULS they would receive, instead of the about 6 billion one would expect (RM 1,067 million divided by RM 0.185 = 5.8 Billion), they received less that 1.3 Billion ICULS. Minority Shareholders of PMCorp were thus hugely short changed, for more than RM 800 million.

The "independent" report from Hwang-DBS Securities Bhd. was of extremely low quality, I won't bother writing what was wrong with it (about everything), will just give their conclusion:

Let's check their arguments:

(i) The par value of MUIB shares: the par value has nothing to do with valuation. The fact that the NAV of a MUIB shares is way below the par value means it has accumulated huge losses, which is an indication of a badly managed company. By even suggesting the par value HWANG-DBS is simply deceiving Minority Investors.

(ii) The ICULS can only be converted to shares in the future: that is a disadvantage, not an advantage.

(iii) The future prospects of the MUIB group: the report was dated 12 Oct 2004, MUIB was thoroughly mismanaged, had lost Billions of RM, why would that suddenly improve? The results since then:

2004: RM -405 million
2005: RM -371 million
2006: RM -210 million
2007: RM +10 million
2008: RM -74 million
2009: RM +3 million
2010: RM +36 million

In total: losses of more than RM 1 Billion.

And what happened with the proposal and the circular? It was (as usual) approved by the authorities (Bursa Malaysia and/or Securities Commission), and neither the directors of PMCorp, MUIB or the "independent" advisor Hwang/DBS were ever punished in any way, shape or form.

Needless to say, the quality of the "independent" advice circulars in Malaysia has further gone down, 99% of them shamelessly support the Majority Shareholders, no matter how bad the deal is for the Minority Shareholders: "Whose bread I eat, his song I sing". And up to this very day, the authorities have not bothered to come down on the advisers.

Recommendation: Do away with the "independent" advice, it is hurting Minority Shareholder, not helping them.

MUIIND is currently trading at RM 0.21, the MUI ICULS are all trading at RM 0.17, PMCORP is at RM 0.09, PMIND at for RM 0.045 and PMCAP at for 0.085.

The renumeration for MUIB's Chairman and Chief Executive, Tan Sri Dato' Khoo Kay Peng, is more than RM 3.2 million a year.