And Olam responded .....

Olam defended itself with the following 44-page report. It looks pretty solid, at least they did a good job responding in detail and fast. I expect some follow-up from Muddy Waters, it is their move.

The jury is not yet out, but some investors sold their shares, just to be on the safe side, the share has fallen about 40 cent in November.

The Valuebuddies forum drew attention to the fact that Olam has been buying back its shares, for instance here. Companies that have large debts and constantly have to issue new notes should not embark on a share buyback program, in my opinion. They should first strengthen their balance sheet, and only then, if the share is indeed trading at a huge discount to its net asset value, it could consider buying back its shares. But even then, I prefer a simple, transparent dividend, the higher dividend yield will automatically attract attention, so the result will be the same.

The Wall Street Journal detailed Muddy Water's track record so far in this article.

Muddy Waters released its report about Olam

Muddy Water released its 133-page report about Olam, the link can be found here. Many issues are very (accounting) technical in nature, and it will take time to digest the information. Also, we need to see the official reaction from Olam on the report. In the Business Times (Singapore) a lot of attention for the report, which contains quite a lot of recycled old articles, critical comments made by other analysts in the past.


Carson Block, founder of Muddy Waters Research LLC, talks about Olam International Ltd.'s accounting methods, risk of failure and business planning. Block, speaking with Stephanie Ruhle and Tom Keene on Bloomberg Television's "Market Makers," also discusses short-selling strategies.



More can be found here: "Why Short Seller Carson Block Is Done Exposing Chinese Frauds"

Genneva, the role of high people and the press

A remarkable article on the website of The Malaysian Insider:

"Genneva freeze not fair to investors, says Dr M".

Former Prime Minister Tun Dr Mahathir Mohamad appeared today to defend gold trading firm Genneva Malaysia, and asked Bank Negara Malaysia (BNM) to lift the suspension of its assets.

He made his remarks today despite a recent explanation by Deputy Finance Minister Datuk Awang Adek Hussin in Parliament that Genneva’s liabilities exceeded its assets and that showed the company was unable to pay returns to its investors.

“I don’t know what is wrong with the Genneva thing, they claim that they aren’t operating this pyramid scheme,” Dr Mahathir told reporters after addressing the 3rd World Conference of Riba (usury) here.

“Investigate first because if you stop the transaction, people’s money will be locked out and they cannot use, they cannot even get the gold ... They deserve fair treatment.”

He also urged the authorities to regulate gold trading as he extolled the advantages of keeping and buying gold.

Genneva’s gold, which was advertised as syariah-compliant gold, was launched in December 2010 by Dr Mahathir, and a number of its traders were spurred on by the former PM’s recommendation.

To me, if it looks like a pyramid scheme, swims like a pyramid scheme, and quacks like a pyramid scheme, then it probably is a pyramid scheme.

Even if they use terms like "trader" instead of "investor", "consultant" instead of "agent", that doesn't change a thing, it is just using different words. Coupled with unrealistic high returns of 24% or even 36% per year, I am 99.9% sure that Genneva was indeed operating a pyramid scheme. But it seems that Dr. M. still isn't convinced.

Dr.M. wasn't the only high person who was somehow involved with Genneva, several others were also, it appears. Since Malaysia has the highest Power Distance Index value in the world people will more easily follow the advice of high ranking people. They should therefore be more careful than usually.


Another aspect is the media, where were they? They could easily have warned the public what was going on. I did some searches on The Star, and found the following references:

A golden investment that sounds too good to be true

July 13, 2009: As the title suggested, this article gives a warning. But it is not clear in its information.

"A Bank Negara official however told Starprobe that Genneva was not licensed. He could not comment further as no complaint had been lodged against the company". Bank Negara had already started an investigation into the Bestino Group, did it really need a complaint to swing into action? 

Genneva sells gold and is not a ponzi scheme, says firm

July 15, 2009: “There may be Ponzi schemes in the market but it is obvious that Genneva is not one of them,” group senior manager Tony Yao said". I am afraid that is not obvious to me. This article takes some sting out of the one published two days before.

Only one week later, on July 21, 2009 Bank Negara commenced investigations:

Bank Negara Malaysia has commenced investigations into Genneva Sdn Bhd and Etika Emas Estet Sdn Bhd under suspicion of conducting illegal deposit taking activities in breach of Section 25(1) Banking and Financial Institutions Act 1989 (BAFIA) and Section 4(1) of Anti-Money Laundering and Anti-Terrorism Financing Act 2001 (AMLATFA).

The raids on these companies were conducted at their premises in Kuala Lumpur following information received from members of the public. Relevant assets and documents of the company were seized for the purpose of investigation.

The Star did allow Genneva to sponsor its Penang Starwalk 2011 giving credibility to the company which it used on its website.

Glittering prospects in the gold trade

February 10, 2012: an extremely positive article (as the title suggests) about Genneva without a single warning.

"Incorporated in March 2007, the Genneva Group of companies was set up with the intention of bringing gold trading to a new level in Malaysia by breaking away from traditional models. The company’s core mission is to encourage people to trade and increase their income capacity through gold. Today, the company is represented in nine states — Selangor, Perak, Johor, Sarawak, Penang, Malacca, Negri Sembilan, Sabah, and Kedah — with seven branch and four representative offices. It also has a strong international presence within the Asian region through outlets in Singapore, China, Hong Kong, and the Philippines".

Genneva Syariah sponsors RM100,000 for Ipoh Starwalk 2012

Ipoh Starwalk 2012 has struck gold with Genneva Syariah making its debut as a platinum sponsor in the annual event.

Biggest turnout at Starwalk

Again, Genneva is a platinum sponsor and 3 proud pricewinners are shown:

There is always a moment that a pyramid scheme collapses, when too many customers want their money back. That seemed to have happened in Singapore, as reported by this blog on September 26, 2012.

Not surprisingly (but possibly rather late), authorities raided Genneva on October 2, 2012, both in Malaysia and Singapore.

But still The Star published two letters Genneva, a new age biz model and Genneva Malaysia has never failed its customers (which doesn't seem to be true, at least in Singapore) on October 5, 2012, after the raids. Both letters where highly supportive of Genneva, should The Star really have published those letters?


Everybody is hoping for a fast and transparent investigation by the authorities. But other questions also need to be asked. Why were so many high persons involved in this case? Should the press not have done some investigative research and reporting? And should the authorities not have acted more early? And why does Malaysia appear to be a magnet for these kinds of schemes?

Business Trusts, "buyer beware" is not enough

This article in The Star of September 8, 2012 indicated that Malaysia might also allow business trusts to list in Malaysia. The start of the article is very optimistic:


Malaysia will soon have a new thrust that could promote vibrancy and excitement in its equity market. The framework for the listing of business trust in the country is in the works, and it will likely be unveiled by the Securities Commission (SC) before the year ends.

Several market observers expect business trusts to appeal to both the issuers and investors alike.

“For the investors, a business trust is an alternative investment that gives the comfort of a steady stream of return in the form of dividends; this is perhaps the biggest attraction of a business trust from an investor's point of view,” a corporate financier explains to StarBizWeek.

Take Singapore-listed business trusts. If they are of any indication, dividend yields of such an instrument could range anything between 3% and 10%.


But then, some very much needed dose of realism:


To that, several bankers say there is no need to hurry.

“It is not wise to rush into introducing business trusts in Malaysia just to play catch up. We should not worry about lagging behind because we can learn from the Singapore experience,” a banker says, pointing to the fact that most business trusts in Singapore have so far been performing badly, trading below the initial public offering prices, and causing some investors to suffer losses.


In an article "Time to tighten rules for business trusts" in The Business Times (Singapore) the following was revealed in the below table, aptly titled "Not a pretty sight"

Someone who would have invested $100 in each business trust would be sitting on an average loss (including dividends) of $23 for each investment. Only two out of eleven companies would have given a positive total return, but even in those cases they underperformed the Singapore Straits Times Index (STI). On average, the business trusts lagged the STI annually by 11.5%.

As the main reason, the article writes:

"The less rigorous regime of the business trusts allowes sponsors to exercise their boundless creativity. Caveat emptor is a fair argument to make in a market populated by highly sophisticated investors. In Singapore, the average investor is far from being sophisticated.

Given their atrocious performance thus far, there is a strong case for rules to be tightened for business trusts".


Associate professor Mak Yuen Teen of the NUS Business School responded the next day in a long letter to the editor. Some snippets:


"What are the true economic benefits of allowing increasingly diverse forms of business structures for listed issuers? Do they just end up transferring wealth from public investors to sponsors and intermediaries? Do they really give investors more investment choices or do they merely obfuscate? As we seek to increase retail participation in our markets, are these different structures too complex for ordinary investors to understand, especially as even so-called experts often have difficulty understanding these structures? Is it right to expose retail investors to such investments based purely on caveat emptor, and allowing sponsors and intermediaries to hide behind prospectuses that run into hundreds of pages?

We have also done almost nothing to improve the ability of investors to enforce their rights even as we become even more adventurous in the types of listings we allow.

There has been no substantive debate on contingency fee-based class action, litigation funding or other mechanisms which can improve the ability of investors to take action against issuers, directors, trustee-managers and other intermediaries. Cross-border enforcement by regulators remains a challenge, not to mention by investors.

A disclosure-based system based on caveat emptor ("let the buyer beware") can only lead to grief for investors if it is not accompanied by effective enforcement by both regulators and investors."


How true, and the above relates to Singapore, which scored 64% on enforcement while Malaysia scored a very disappointing 39%.

Another letter to the editor followed, written by Bobby Jayaraman, it can be found here. A snippet:


Despite their opaque nature, the reason business trusts still have a following among investors is the lure of high yields. Investors seem to forget the simple fact that yields only matter if the initial capital stays intact. In most cases, high yields simply provide cover for a fundamentally weak business.


Malaysia, given its weak enforcement, should really think twice before it wants to embark on business trusts. There is a lot to learn from the Singaporean experience with them. And that experience has, so far, not been that great, to put it mildly.

FABER: 44 Charts That Show Why The World Is Doomed

In a new presentation given in Hong Kong to the London Bullion Market Association, Faber offers a thick stack of 44 charts that makes him very bearish on the global economy (via ZeroHedge). They include overviews of the emerging and evolving trends on debt, trade, stocks and commodities.

Faber points to the explosion of public and private debt and how they have been far outpacing GDP growth for the last 50 years. In this backdrop, the wealth gap between younger and older Americans have been widening.

Overseas, China has seen its economy boom on expansionary monetary policy, which has turned the world's second largest economy into a giant credit bubble.

Considering all this, he offers two investment strategies: "aggressively shifting from one asset class to another" or "achieving safety though diversification."

Here is the (very interesting) presentation.

52 Shades of Greed

An illustrated Dictionary highlighting the key players of the 2008/9 crisis. Some of the more well known ones including their description (which in many cases seems to be much too mild).

Ace of Diamonds: Goldman Sachs
The best managed firm on Wall Street. When it ceased being a partnership in 1999, it turned a well oiled machine towards more aggressive and systematic exploitation of customers

King of Clubs: Hank Paulson

Treasury Secretary,gave away farm to banks in bailouts during crisis and bumrushed Congress to do it- while keeping his buddies in the know

King of Diamonds: Ben Bernanke

Repeatedly asserted that subprime was contained.

Jack of Clubs: Jamie Dimon

Jamie Dimon, the CEO and Chair of JPMorgan Chase, has tried so hard in the past several years to seem the “good banker.” He is so charming and gracious, yet all the while lobbying, cajoling, pushing, and wheedling to eviscerate any semblance of real reform on Wall Street. He shrugged off the cataclysm of 2008 as just something that happened, like the weather—no need for any structural reform. Chase’s balance sheet, a $2 billion loss can be absorbed. But it shows once again the impossibility of trusting the banks in the absence of structural reform and regulation to control their willingness to take almost unmitigated risk. It was Chase’s own lobbying on Capitol Hill and with the Treasury, the Fed, and other agencies that made these bets arguably permissible within the scope of hedging under the Volcker rule. Had they not lobbied and pushed and delayed and made the rule more complicated, these bets would have been illegal.

9 of Diamonds: Dick “Gorilla” Fuld

Richard Fuld was the last Chairman and CEO of Lehman Brothers. He was nicknamed "Gorilla" because of his aggressiveness. His best know quote is, " I am soft, I'm lovable, but what I really want to do is reach in, rip out their hearts and eat them before they die".

Fuld received almost $500 million in compensation from Lehman from 1993 to 2007.  As the sub prime crisis spiraled , Lehman was over-leveraged, which is to say the company had borrowed thirty two dollars for every one dollar it had. This was higher than the leverage at Goldman Sachs and Merill Lynch.

Under Fuld's leadership, Lehman lost 73% of its value in 2008 as the sub prime crisis spun out of control. When Barclay's pulled out of  a deal to purchase Lehman in August 2008, Lehman filed for Chapter 11 bankruptcy.

With $639 billion in assets and $613 billion in liabilities, the Lehman collapse was the biggest bankruptcy in U.S history. The company was party to over 900,000 derivatives contracts when it imploded. Fuld said when called before Congress , "Until the day they put me in the ground, I will wonder why we weren’t saved."

Joker: Alan Greenspan

Argued that corporations, including banks, would act in their own best interest and therefore could be trusted

Olam takes legal action against Muddy Waters

According to this statement, Olam International has taken legal action against Muddy Waters and its founder Carson Block. It looks like things are starting to escalate.

On one hand I am very much in favour for freedom of speech (which is anyhow much too low in Asia) and until now, I haven't read anything serious by Muddy Waters yet. But I don't know what exactly has been said on the Sohn London Investment Conference in London, details of the allegations have not been forthcoming. So I would be interested what exactly the case is about.

Olam's reaction so far looks rather extreme, as pointed out by Muddy Waters. A solid blue chip should just shrug its shoulders and move on, producing steady quarterly profits, it should not be bothered by criticism.

On the other hand, I am also not much of a fan of companies like Muddy Waters: first shorting a certain stock and then releasing negative information about the company.

But first buying a stock and then releasing positive information is basically the same, and that is happening all the time.

Court cases are always good for outsiders to get a glimpse of what is really going on, so I would be quite interested to read further about the on goings of this case. But because of the court case, Muddy Waters might not reveal more information and keep its bullets dry.

Channel News Asia's story about the events.

Muddy Waters response to Olam

Muddy Waters has responded to Olam reactions:


In the two and one-half years Muddy Waters, LLC has been openly criticizing publicly-traded companies, we have not seen a response as defensive as yours – not even from Sino-Forest. On Monday, our Director of Research gave a brief talk on Olam at a well-respected charity event. He presented facts about Olam along with Muddy Waters’s opinion that Olam is at risk of collapsing due multiple factors, including its debt load. As Olam has since said, his comments were not overly substantive. But based on this alone, Olam halted its stock, scheduled two conference calls, discussed buying back shares, and issued statements that included saying it is not a “fly-by-night company”. It has further evidenced a bizarre fixation on baseball caps.

Olam’s disproportionate reaction is extraordinary in our experience. Should Olam come to collapse (as we believe it will), its use of much-needed cash to buy back shares at this time should give rise to questions about whether fiduciary responsibilities have been breached – particularly given the possible existence of individual motivations that are not necessarily aligned with those of Olam’s lenders. We also note Olam’s attempts to impugn our credibility.

You and your investors should note that attempting to silence critics is not a plan of corrective action. In no way does it make Olam stronger. The February 2011 CLSA report, which raised far fewer concerns than we have identified internally, and that Olam itself made so controversial, should have caused you to work toward repairing what ails your business and your balance sheet. Instead, Olam has since increased its a) debt load by approximately S$900 million, b) cumulative investment cash burn by approximately S$2 billion, and c) cumulative operating cash burn by approximately S$500 million. In other words, you did the exact opposite of what you should have done. Your actions have been an abject failure of leadership.

Companies that attack criticism the way Olam does fail to understand that raising money from the public is a privilege. Because Olam has received significant investment from the government of Singapore, Olam’s mismanagement of the public trust is that much less forgivable. Know this: You voluntarily came to the market, you subjected yourselves to its forces, and you must bear the consequences of your ineptitude.

We do not work for an investment bank, and cannot be bullied the way other analysts can. Our research into Olam has been exhaustive, and we plan to resolutely stand by it regardless of any attempts you might make to discredit it or us.

We therefore suggest you find better uses of your time than focusing on criticism. For instance, you might want to work on plans to reign in your CapEx and de-leverage. The clock is likely ticking.

Olam's shares suspended after Muddy Water allegations (2)

The Olam issue seems to be very "hot" in Singapore. Many investors have exposure either through their equity or bond holdings. Valuebuddies has the following thread on it. From other sources I received the following information.


The most well publicized Muddy Waters success is Sino Forest where the trees obviously weren't where they were supposed to be. However, he's tried it 3 other times and here's the track record:

Company    MW RPRT     Pre-report  Day-after    Curr. PX
SPRD US    28/6/11     $18         $13          $18
FMCN US    21/11/11    $25         $15          $25  
EDU US     18/7/12     $22         $9.5         $19

Outside of Sino Forest, the last 3 target stocks are higher or at similar levels within months of MW reports. Just stating a fact here.


The OLAM 4.07% Senior Bond maturing on 12-Feb-2013 is yielding 18.72% to maturity!  Current Offer price at 97...

OLAM 6% 2018 now offer at 90.  Yield to maturity is 8.22%.  

The million dollar question is, will OLAM default in the next 2.5 months?


The primary issue is their recognition of biological gains (Olam has booked SGD191m of these gains in the past 2-years; 24% of report PAT). Biological gains are the yearly changes in net present value of future income flows on the group’s upstream crop and livestock investments. These valuations use assumptions on commodities prices, productive life of assets, yields, inflation and discount rates. According to Muddy Waters, if Olam does not deliver on their investments, the profits recognized as biological gains will amount to nothing. Muddy Waters also claims the valuations assumptions are aggressive.

Biological gains are a requirement under IFRS for Singapore-listed companies and have been in place for the past 4-years. The aim of this standard is to make a fair-representation of a company’s biological investments as these typically have long gestation periods before revenue delivery while costs are incurred from the start.

All palm oil plantation companies listed on SGX follow this. In our view, whether the assumptions used are aggressive or whether biological gains are recognized as earnings is a moot point. These gains (and losses) are stripped out by a majority of the Street in arriving at core-earnings for Olam as well as all other SGX listed plantations. Further, in their annual report (p142 in 2012), Olam discloses all the assumptions that go in to coming up with their valuations – which are signed off by the auditors (Ernst & Young) and also in the case of livestock by independent valuers.

Biological gains come in two forms: (a) operational – changes in yields assumptions etc and (b) non-operational – changes in pricing assumptions, discount rates. Olam is the only company in our coverage that actually discloses these separately. We will comment further once we have a look at the Muddy Waters report which is scheduled to be released Tuesday morning US time.

Olam's shares suspended after Muddy Water allegations

Muddy Waters has targeted Olam (listed in Singapore) for "short selling". Temasek is a 15% shareholder of Olam, which makes this case even more interesting. At the moment the share is suspended, pending clarifications.

Muddy Waters has had some succes in some cases (Sino Forest comes to mind), but other cases were not clear cut at all (to say the least).

"Buyer beware", but also "Seller beware".


By Jesse Westbrook and Shruti Date Singh

    Nov. 20 (Bloomberg) -- Olam International Ltd., the commodities trader part owned by Singapore’s state-owned investment company, plunged the most in four years after short seller Carson Block said he’s betting against the shares because he questions the company’s accounting methods.

    The supplier of 20 agricultural goods from cocoa to rubber fell 21 percent in over-the-counter trading in New York yesterday, according to data compiled by Bloomberg, after Block said the company is booking profits on transactions before it’s clear how the deals will work out over time. Singapore-based Olam is “heavily” indebted and aggressive in how it reports what the company calls biological gains on investments, he told the Ira Sohn Investment Conference in London.

    Olam is “dismayed at the nature and lack of substance” of Block’s comments and wasn’t contacted before by him or his Muddy Waters LLC research firm, Chief Executive Officer Sunny Verghese said in an e-mailed statement. He’s waiting for a report from Muddy Waters and “will strongly defend Olam’s excellent reputation for transparency and good governance,” he said.

    Block, 36, has successfully bet against Chinese companies that trade in North America after questioning their accounting methods. One target, tree-plantation operator Sino-Forest Corp., slumped 74 percent before eventually filing for bankruptcy protection in March last year.

                        ‘Leap of Faith’

    Olam will fail and recoveries for investors will be “negligible,” Block said. “It’s a leap of faith to think the company is being honest with its valuation” gains, he said.

    It fell 0.9 percent in Singapore yesterday to S$1.74 before the 29 cent plunge to $1.10 in New York. It has fallen 18 percent in Singapore this year compared with a 12 percent gain in the benchmark Straits Times Index.

    Hong Kong- and Mississauga, Ontario-based Sino-Forest Corp. plunged before being suspended in August last year after a June 2011 report from Muddy Waters accused it of fraud.

    Block took a short position in Sino-Forest by borrowing and selling the stock, aiming to profit by repaying the borrowed shares at a lower price. Sino-Forest filed for bankruptcy protection in March. The Ontario Securities Commission accused several executives including the former CEO Allen Chan of involvement in a “complex fraudulent scheme” to inflate assets and revenue.

                         Block Targets

    Other companies targeted by Muddy Waters include New Oriental Education & Technology Group Inc. Block said last month he’s “more convinced than ever” that the Beijing-based company is misleading investors. In February, Muddy Waters issued its fifth report on Focus Media Holding Ltd., claiming the Chinese advertising company overstated its network.

    “As it pertains to Sino-Forest, he was able to unearth something others weren’t,” said John Goldsmith, deputy head of equities at Montrusco Bolton Investments Inc. in Toronto, who sold his Sino-Forest shares for a loss in June 2011, seven days after Muddy Waters published its report on the company. “He, ultimately, was proven correct. You have to at least listen.”

    Olam was founded in 1989 in Nigeria by the Kewalram Chanrai Group as an export company to secure foreign currency, according to Olam’s website. Today, Olam is the fifth-largest publicly traded global wholesaler of agricultural products ranked by revenue, after Bunge Ltd., Archer-Daniels-Midland Co., Noble Group Ltd. and Glencore International Plc., according to data compiled by Bloomberg.

                       Biological Assets

    The company supplies food to 12,300 customers in 65 countries and employs more than 18,000 people, the website says. Temasek Holdings Pte, Singapore’s state-owned investment company, holds 16 percent of Olam, according to data compiled by Bloomberg.

    The company’s first-quarter net income of S$43.2 million ($35.3 million) included an operation gain of S$10.1 million on account of “fair valuation of biological assets,” Olam said in a Nov. 14 statement. It said then that it started making such valuations in the third quarter of fiscal 2012 and “hence there was no operational gain/loss booked in the corresponding period” a year earlier.

    Overall, Olam said its quarterly profit rose 26 percent while sales gained 45 percent to S$4.69 billion. Net debt was $5.7 billion as of Sept. 30, according to data compiled by Bloomberg.

Did Astro employees buy shares on margin? (2)

Received an excellent comment on the previous posting from MH Fong:

Agree with your assessment, specifically on the moral hazard element of it. There is no good reason for Astro to bail out its staff who, in this case, must be treated as ordinary shareholders.

If they do want to compensate them for the decline in share price, they must do the same for all shareholders, e.g. capital repayment, special dividend, etc. (And no, I swear I'm not an Astro shareholder).

Furthermore, I personally have issues with companies allotting IPO shares to employees; if you really want your staff to benefit, give them options instead, which at least gives them some protection from the swing in the market.

I don't think there should be a witch-hunt about who's selling down though. I disagree with positions that suggest that market volatility is a bad thing especially in a market like Bursa that is often criticised for its poor velocity.

Two things come to mine about Astro: It was overvalued and investors suspect that much and two, Astro decided against a Greenshoe, which is fairly common for IPOs of this size. I think it was a bad decision (a bad bet, if you will) rather than anything conspiratorial to forego the Greenshoe.

Finally, one last comment on the giant IPOs pushed through this year. I suspect that the decline in Astro's share price is indicative of a a new element of uncertainty creeping into share trends post-IPO, even for blue chips. And here's where I'll throw in a shameless plug for Nate Silver's brilliant book, The Signal and The Noise. Great stuff about predictability.

The book can be found on Amazon's website. I am afraid I have not yet read the book, although it is very much in my alley, making predictions and putting my money where my money is, is basically what I do.

Nate Silver's blog FiveThirtyEight became rather famous when it predicted the latest US elections accurately.

Where is the "Malaysian Nate Silver" predicting the coming elections, both overall and per state .....?

Economy grew 5.2%, some critical comments

Malaysia's GDP grew 5.2% yoy in Q3

Malaysia's economy grew at an annualised pace of 5.2 per cent in the third quarter, the central bank said on Friday, as strong domestic demand compensated for a weak export sector.

The third-quarter growth beat economists' expectations of a 4.8 percent expansion.

"Both private and public sector investment was strongly robust during the quarter. We would envisage that this will continue," Bank Negara Governor Zeti Akhtar Aziz told a news conference.

With exports faltering, much of Malaysia's growth has been driven by strong domestic demand and government spending on infrastructure projects, such as a new mass transit system for the capital Kuala Lumpur, and Iskandar, a big industrial zone near Singapore.

Prime Minister Najib Razak must call an election by April next year and is expected to stress Malaysia's robust growth as a key part of his campaign.


Above news is from Reuters on TodayOnline's website. It can't get much better, especially with the elections around the corner, or not?

However, I would like to make some critical comments:

• GDP is corrected for inflation, if inflation is understated (which, I think, is indeed the case like most countries in the world), then GDP is overstated.
• The GDP number is for the whole country, since Malaysia's population is growing fast, per capita the effect is much less.
• Malaysia has a bad GINI score, meaning that the income is very unevenly spread. It is therefore likely that lots of people do not benefit from the growth of the economy to the same degree.
• Malaysia recently went from being an oil exporter to an oil importer, this will have a clear effect in the future since oil production will further slowdown and consumption will rise.
• Huge acreage of jungle has been logged and converted to plantation land. This will give a boost to the economy, but can only be done one-time, after that the economic output of the land fluctuates with the prices of the commodity.
• And finally the country has piled up about RM 500 billion in debt (RM 100,000 for each family of 6) in an attempt to break the world record of budget deficits in a row. Surely that must have benefitted the economy, but again, this is highly unsustainable in the future. 

It would be interesting to know how much the last three factors have contributed to the GDP growth in the last 10 and what the negative effect will be in the coming 10 years.

For those people who have a problem visualizing 1 Trillion (1,000 Billion) in RM 100 notes:

 

The national debt is not yet there, but Malaysia is about half way through and if nothing changes surely 1 Trillion will be reached in the not so far future.

AirAsia X: IPO poses many questions

AirAsia X has registered its preliminary prospectus which can be found here on the website of the SC.

"Serious Investing" has written about it on his blog.

Prospectus
The total document has 492 pages in PDF-format, a huge amount that is very hard to digest but which is (unfortunately) quite common in Malaysia. It makes it hard to find the really important data.

Adviser
Principal adviser is CIMB Investment Bank, which seems to have a virtual monopoly on large Malaysian IPO's. It has also borrowed money to AirAsia X, part of the proceeds will be used to pay back some of it.

Offer
AirAsia X is offering 790 million shares, rumoured to be priced around RM 1 per share. Almost 200 million of these shares are from existing shareholders, which seems strange, AirAsia X's balance sheet is weak and this company needs money, lots of it, so why not just issue new shares?

Strange start
"Our Company was incorporated on 19 May 2006 as a private limited company in Malaysia under the Companies Act under the name of Eden Hub Sdn Bhd. Our name was subsequently changed to Fly Asian Xpress Sdn Bhd on 1 June 2006. Our principal activities then were the operation of air services in the rural areas of Sabah and Sarawak (East Malaysia) until 30 September 2007. We changed our name to AirAsia X Sdn Bhd on 21 September 2007 …. We have been principally engaged in the business of providing low-cost, Long-haul air transportation services since November 2007".

The history of Fly Asian Xpress was rather controversial, its start (taking operations over from MAS), its operations and its sudden stop. Rather puzzling that no other information is given about this episode of AirAsia X. Some information regarding this issue on WikiPedia.

Also, the reason for starting AirAsia X is rather peculiar, why not operate this by a company fully owned by AirAsia?

And lastly, Tony Fernandes and Kamarudin were large shareholders and executive directors of AirAsia, so why would they want to start a new airline? Tony Fernandes and Kamarudin are now executive directors and relatively small shareholders of AirAsia and non-executive directors and relatively large shareholders of AirAsia X, a strange situation. Besides AirAsia and AirAsia X they hold each about 60 other directorships.

RPT's
I have blogged before about the huge amount of Related Party Transactions (RPTs) between AirAsia and AirAsia X. Also the strange situation that the amount of money that AirAsia X pays to AirAsia is decreasing while its turnover is increasing. In Chapter 11 (PDF pages 214 to 236) dozens of these transactions are given.

From a CG point of view, this is (highly) undesirable. It would have made much more sense if AirAsia X was formed as a 100% subsidiary of AirAsia. It is still not too late to rectify that situation, AirAsia X shares could be swapped for new AirAsia shares and subsequently AirAsia could offer a right issue to strengthen its balance sheet.

The huge dependence of AirAsia X is described in sentences like:
 
"Our success also depends, in part, on our continued ability to use the AirAsia trade name and related trademarks in order to increase our brand awareness. If for any reason the "AirAsia X" trade name and related trademarks are withdrawn by AirAsia Berhad or become unavailable to us or we are required to pay a higher licence fee for the use of the AirAsia trade name and related trademarks, or should there be any other material changes to the Brand Licence Amendment and Renewal Agreement, whether as a result of a breach or otherwise, or in the event we are unable to extend the term of the Brand Licence Amendment and Renewal Agreement, our business operations and financial results would be adversely affected."

Profit/Loss:
The Profit Before Tax (PBT) of AirAsiaX was:

2009:  -60m
2010:   98m (due to a foreign exchange gain of 144m)
2011: -131m
2012:  -36m (first 6 months)

That does not look impressive, to say the least, and that for a six year old company.

The only reason AirAsiaX still could book profits after tax was that it made us of aggressive accounting techniques (similar to AirAsia) claiming "deferred tax assets" of 247m. I don't like this accounting technique since it is not clear to me if AirAsia X is able to generate enough taxable income in the future.

This huge amount of deferred tax assets was just enough to claim retained earnings of 35m. Still a very low amount, given the fact that 480m has been invested in the company over a six year period. Quite amazing that a company with such a poor track record would be allowed to be listed on Bursa Malaysia.

Balance sheet:
The balance sheet has 2,389m assets and 1,872 liabilities, but again, this includes the 247m in deferred tax assets. Borrowings are 464m short term and 918m long term, and given the projected acquisition of airplanes (RM 13 Billion) it looks worrisome.

Current assets are only 224m versus current liabilities of 954m, meaning the current ratio is only 0.2, much too low. With the cash injection of the IPO the company might indeed survive, but without it things look rather bleak. The recent sale and leaseback of 2 AirAsia X airplanes might also give an indication of financial stress.

Valuation:
A company in this state, urgently needing money should not strive for a sky-high valuation. The total number of shares currently is close to 1.8 Billion, in other word pre-IPO the company is valued at about RM 1.8 Billion. Shareholders equity is 518m, which includes 247m deferred tax assets. The offer therefore looks very stretched, both from an earnings point of view (operational losses, even after six years) and a balance sheet point of view (excl. deferred tax assets).

It must also be noted that Virgin Group (Richard Branson) invested in AirAsia X in 2007, but did not participate in the subsequent rights issue in 2010, according to The Edge. Also, he sold his 10% of the company alledegledly for more than USD 21M, valuing the whole company at more than RM 650m.

AirAsia had an option to increase its current shareholding in AirAsia X, but strangely enough it decided not to execute that option. Its shareholding of AirAsia X will therefore drop to only 12%, hardly meaningful and below the 20% needed to call AirAsia X its associate.

Malaysia has the highest Power Distance Index in the world

At the blog of Marina Mahathir Rantings byMM I stumbled on this posting, which was completely censored by The Star: Power and the media...cut again...

Some time last year a friend gave me a very interesting book, Cultures and Organisations: Intercultural Cooperation and Its Importance for Survival by Geert Hofstede, Gert Jan Hofstede and Michael Minkov. Professor Geert Hofstede is a Dutch sociologist who studies the ways in which companies can incorporate intercultural factors in the countries they work in so that they may function better.

One of the five intercultural dimensions that Hofstede developed in this research is the Power Distance Index that looks at how much a culture does or does not value hierarchical relationships and respect for authority. The PDI measures the distribution of power and wealth between people in a nation, business and culture, and seeks to demonstrate the extent to which subordinates or ordinary citizens submit to authority. The index figure is lower in countries or organisations in which authority figures work closely with people, and higher in countries or organisations with a more authoritarian hierarchy.

Examples of countries with high PDIs are the Arab countries, Russia, India and China while those with low scores include Japan, Australia and Canada.

How does a high PDI culture manifest itself? In these countries or organisations, we would normally observe that those in authority openly demonstrate their rank and their subordinates are not given important work and expect clear guidance from above. If anything should go wrong however, those subordinates are expected to take the blame. The relationship between the boss and his subordinates are rarely close or personal.

When it comes to politics, high PDI countries are ‘prone to totalitarianism’ and class divisions within society ‘are accepted’.

On the other hand, in low PDI countries, superiors treat subordinates with respect and do not pull rank. Hence you find the phenomenon in some countries where bosses and subordinates call each other by their first names. In these countries, subordinates are also entrusted with important assignments. If something goes wrong, the blame is either shared or accepted by the boss as it is his responsibility to manage. This is why we often find company bosses in Japan or Korea resigning or even committing suicide if there is some scandal in the company. Managers also often socialize with their subordinates.

In terms of politics, low PDI countries tend to be liberal democracies and their societies tend to lean towards egalitarianism. Hence you find Dutch royalty for instance cycling around town just like everyone else.

The PDI’s measurement of inequality is defined from below, that is, it is about how the lower ranks of a society or organization accepts and expects the unequal distribution of power. This suggests that both the followers and the leaders accept a society’s level of inequality.

As an example, Germany has a 35 on the PDI scale. This means that compared to Arab countries, which rank around 80, and Austria which has a rank of 11, Germany is somewhere in the middle. German society does not have a large gap between the rich and poor but has a strong belief in equality for every citizen. This means that every German has an opportunity to rise in society.

On the other hand, the US has a PDI of 40. Although still in the middle of the scale, there is a more unequal distribution of wealth compared to German society, a gap that seems to be widening as the years go by. This explains the recent explosion of the Occupy Movement, because the distribution of wealth between the top 1% and other 99% seems to have become extremely unequal.

When you look at the PDI measurements of many countries, a pattern seems to emerge. Those at the top end seem to be less developed than others. They also seem to be undemocratic or at the very least very imperfect democracies. They are the type of countries where you are likely to see leaders who are kept both physically and psychologically distant from the masses. Apart from orchestrated events, you are unlikely to see political leaders in anything except limousines and VIP rooms.

So after reading all of this, and sensing something familiar, where do you think Malaysia stands in the PDI rankings? Do we have our leaders ‘openly demonstrating their rank’? Despite constant exhortations to ‘go down to the grassroots’, our leaders rarely are addressed in anything but the most respectful titles and terms. Some of their subordinates may take on important jobs but they will shoulder 100% of the blame should anything go wrong, even when it’s not really their fault. Our people do tend to wait for instructions from above and feel somewhat lost if we don’t get clear ones. Our mindset remains largely feudal.

Thus it should come as no surprise that Malaysia, with an index of 104, tops the PDI rankings.


And indeed, that is (according to this link) very much so since Malaysia is the only country in the dark red zone of 100-120 points.

Another article about this index can be found here.

An article implying a link between corruption and a high PDI ranking can be found here:

The association between corruption and power distance is not imaginary. Ratings of power distance index and corruption index of countries show a high correlation (Corruption Conundrum, Penguin, 2010). Typically, the countries that have high power distance are also more corrupt and vice versa. So we do need to fight against the power distance index.

The other face of power distance index is our blatant, in your face, 'VIP' culture. As a people, we do not seem to be sufficiently embarrassed that in a so-called democracy, we regularly accept and expect two distinct treatments meted out to two sets of people - the 'VIPs' and the lesser mortals.

 

Implications for good Corporate Governance (CG) are also clear, the word "equity" refers to "freedom from bias or favoritism", and each share has the same rights: "one share one vote". We need whistleblowers and not the "shoot the messenger" mentality.

The extremely high value of the PDI in Malaysia might therefore (partially) explain the lack of CG and shareholder activism in Malaysia.

How Zara Grew Into the World’s Largest Fashion Retailer

Inspiring business success story in The New York Times about Zara (Inditex) and its founder Amancio Ortega Gaona, who is now the world’s third-richest man.

I recommend to read the whole story, but here are some snippets:


Inditex is a pioneer among “fast fashion” companies, which essentially imitate the latest fashions and speed their cheaper versions into stores. Every one of Inditex’s brands — Zara, Zara Home, Bershka, Massimo Dutti, Oysho, Stradivarius, Pull & Bear and Uterqüe — follow the Zara template: trendy and decently made but inexpensive products sold in beautiful, high-end-looking stores.

Inditex now makes 840 million garments a year and has around 5,900 stores in 85 countries, though that number is always changing because Inditex has in recent years opened more than a store a day, or about 500 stores a year.

The roots of Inditex go back to 1963, when Ortega, the son of a railway worker, started a business making housecoats and robes in La Coruña. In 1975, he opened his own store in town.

Every day, store managers report this information to headquarters, where it is then transmitted to a vast team of in-house designers, who quickly develop new designs and send them to factories to be turned into clothes.

The trendiest items are made closest to home, however, so that the production process, from start to finish, takes only two to three weeks. Inditex’s higher labor costs are offset by greater flexibility — no extra inventory lying around — and on faster turnaround speed.

Inditex owes none of its success to advertising. That’s because Inditex doesn’t advertise. It hardly even has a marketing department, and it doesn’t engage in flashy campaigns, as its competitors do ...

The marketing Inditex does do is all about real estate. The company invests heavily in the beauty, historical appeal and location of its shops.

“They have done process innovation very well,” says Nelson Fraiman, a professor at Columbia Business School who has studied the Inditex model. “Product innovation? No. But tell me one Chinese company that has done product innovation very well. They are brilliant at process. I think you should give a cheer for process innovation.”

Syed Mokhtar "old habit that has to change"

In The Star of today an article about the new book: "Syed Mokhtar Albukhary, A Biography"

One snippet:

He also answered the issue of the shareholding structure of his companies that could not be traced to him, acknowledging “it is an old habit that has to change.”

The question is, why hasn't he changed this "old habit"? It has been many times criticised and is so easy to cure. Just start reporting all the holding companies, problem solved, it can't take much more than a few hours to do so.

And why are the authorities not taking any action in this matter? They can easily put pressure on Tan Sri Syed Mokhtar Albukhary to start reporting the structure of his holdings. Knowing the shareholding structure of companies is essential for good corporate governance.


But the media is still biting on Syed Mokhtar and, in some ways, he is to be blamed as he has never made himself available to journalists, preferring to let his aides do the talking. In fact, bankers also complain that he never meets them!

Syed Mokhtar never meets his bankers? That is rather surprising, given the amount of money that they have lend his companies. MMC alone had per June 30 2012 loans exceeding RM 21 Billion.


Although the book is, no doubt, a public relations exercise

The publisher PVM Corporations is a pure Public Relations company. Everybody can hire one to write a nice, friendly story. But what Malaysia really needs is investigative reporters who dig deep and report the information in an unbiased way based on facts.

Several companies of Syed Mokhtar have had clear CG issues in the past, two previous blogs I wrote about MMC are here (which ironically contains a very sharp article about Syed Mokhtar by the same The Star "How to become very rich in Malaysia") and here.

Much more, well written blogs from Ze Moola can be found here.

Did Astro employees buy shares on margin?

The article "What can Astro do for its employees?" on the website of The Star suggests that employees of Astro might have bought shares on margin:

"Last week Astro had a town hall meeting with their staff to talk about the share price fall and it is really up to the company to handle the situation because no organisation will like to have a group of disgruntled employees. There may be the pressure of margin calls for those who had taken financing to buy their allotment of shares. There might be employees who might not have the ability to hold on to their shares."

The share of Astro has indeed performed quite badly:

On the other hand, a decline of 12% is not exactly shocking. If employees did indeed buy shares with borrowed money during the IPO and can't even stand a loss of this magnitude, then something is very wrong.

The writer offers a piece of advice:


Astro perhaps needs to figure out what it can do to assist their employees. A bonus or ex-gratia payment or even a one-off payment based on a pre-determined price below the IPO price to employees will do a lot to help those in need. That show of goodwill will certainly cure any grouses employees will have and it will automatically lower their holding cost of Astro's shares. It's a goodwill gesture but it's one for Astro to make.


I disagree very much with this advice. First of all, there is no free lunch here, money that will be used to bail out employees will come out of the pockets of others, in this case other shareholders of Astro.

Secondly, from the point of view of "moral hazard" this is really, really bad advice.

If indeed employees have bought shares on margin, then first of all there should be a transparent investigation, based on what information and assumptions they did that.

The Malaysian authorities are proud of the 3 large IPO's this year, but cracks have started to appear. I hope there will be an evaluation say one year in the future how this all panned out, with transparency which "cornerstone" investors held on to those shares, which sold their shares for a quick buck.

iCapital.biz fund manager threatens to quit

Article from The Star:

iCapital.biz fund manager threatens to quit if hostile party members win board seat

“I will resign.” This is the ultimatum Tan Teng Boo has given to shareholders of iCapital.biz Bhd if even one of the three people he considers as part of a hostile party gets elected to the board. Capital Dynamics had on Monday couriered a letter to shareholders stating that the asset house would quit as the fund manager and investment advisor to iCapital.biz should either Andrew Pegge, Lo Kok Kee or Low Nyap Heng obtain a board seat at its AGM on Saturday.

iCapital is the only holding in Malaysia that I still have, and the above is not good news. Minority shareholders in iCapital should not be pressured in this way to vote regarding directors. The shares of iCapital trade at a persistent discount to NAV, and it is good for the minority shareholders if there is an opportunity to vote a director in, who can give advice to reduce the discount. This could for instance happen through a share buyback plan, in which shares are bought back and held in treasury, as long as they trade at a certain discount (say 10% or worse). He can possibly also bring insights why the shares are trading at a discount, why the public doesn't value them correctly. It might just be a case of needing more Public Relations, since the fund has actually done quite well since inception, relative to the KLCI.

"Serious investing" wrote good articles about this issue here and here and Salvatore Dali (Malaysia Finance) here.

The remainder of the article in The Star:


They would only require a simple majority to be voted through, Tan told a briefing.

Two weeks ago, a shareholder by the name of Evelyn Ho Lai Ming with 50,000 shares nominated the three people for board positions, triggering talk of a hostile takeover at Malaysia's only listed closed-end fund and driving up its shares to RM2.56 yesterday from a low of RM2.29 last Wednesday, with trading volumes rising in tandem.

Lo and Low were aligned to Pegge, who is the founder and a director of Isle of Man-incorporated hedge fund Laxey Partners, StarBiz reported yesterday.

Pegge has been embroiled in bitter shareholder disputes in the past. He has been described as a shareholder activist and manages funds that look to take advantage of “discount volatility” in investment trusts.

Laxey has a track record of targeting listed funds that trade below their net asset values (NAV).

Together with Lo, Pegge had embarked on a similar move in Singapore last year, taking a position in Singapore Exchange-listed closed-end fund United International Securities and seeking board representation on the basis of championing a narrowing of the gap between the latter's market price and its NAV.

Laxey has been a shareholder in iCapital.biz since 2010 but recently upped its stake to under 6.9%, making it the company's single-largest shareholder.

Another substantial shareholder with a 6.5% interest is City of London Investment Group, a fund that specialises in investing in closed-end funds which offer exposure to emerging markets.

Combined, they own 13% of iCapital.biz, but it is not known if Laxey and City of London Investment are acting in concert.

However, these events could trip up plans by Tan, a seasoned and respected investor, to launch the world's first dual-listed closed-end fund, a project he has been developing for the past three years.

“Our shareholders asked us in 2009 to work on something that would allow them to invest globally. We have since then been working to structure a global fund. It has cost us RM1.5mil so far, not a sen of which we have charged to the fund,” he said.

Tan added that Capital Dynamics had received the approval of the Securities Commission to submit an application for the fund, which would be listed on Bursa Malaysia and another stock exchange in the region. He declined to reveal more details as the process is not complete.

“Pegge does not realise he has found gold. We welcome him as a shareholder but not as a director.

“Should you focus on the discount to NAV? Yes. As a value investor, you should always buy undervalued stocks. But don't focus on it negatively, you should see it as an opportunity. Why buy during a sale? Because it is undervalued,” he pointed out.

In a document dated June 26, Laxey had sent iCapital.biz a requisition notice seeking the appointment of Pegge as a non-independent and non-executive director and also to bring forward proposals “designed to substantially narrow or eliminate the discount” the shares of the company were trading at a relative to its NAV.

“Since Sept 21, 2008, the shares of the company have been trading at a substantial discount to their NAV,” it read, adding that the discount rose to 24.8% on May 30 this year.

Laxey had also sent yesterday a strongly-worded letter to the shareholders of iCapital.biz saying it had “lost confidence” in the ability of the present board to close the NAV-share price gap.

Among others, the firm urged shareholders to vote against the reappointment of all the directors save for Pegge, Lo and Low.

According to its calculations, the comparative total return of iCapital.biz shares for the latest financial year was a negative 4.5%, underperforming the benchmark FTSE Bursa Malaysia KL Composite Index by 10.1% after adjusting for dividend yield.

“Laxey has spoken to the company to take action on the discount to no apparent effect. Laxey had earlier proposed a resolution to be tabled at this AGM requesting the board to address the persistent discount problem, but this was rejected by them.

“In our view, one of the main reasons for the discount in iCapital.biz to exist at such an unreasonable level is the lack of a defined policy to deal with the persistent and widening discount.

“The global closed-end fund industry has over the past decade realised that a substantial discount is not in the interest of its owners the shareholders. Incumbent boards globally have addressed the issue by instigating a series of measures which have collectively reduced both the absolute discount and discount volatility,” it said in the letter. 

Business Model Generation

One of my favourite books is "Business Model Generation" by authors Alexander Osterwalder and Yves Pigneur.

It is often used in the start-up world to analyze business models, but can as easily be used to analyse large, existing, mature (listed) companies.

A nice description of the book can be found on the website of "StartupAddict":


The word Business Model gets tossed around often in the startup community but few people truly take the time to understand the term and analyze it like a system. The Business Model Canvas as seen below is derived from the Business Model Generation Book by authors Alexander Osterwalder and Yves Pigneur (which is awesome by the way).

When I’m evaluating a company for investment or analyzing one of my own startups, I find myself constantly using the one-sheet canvas. Click the link to download your PDF copy. It’s a simple but invaluable tool.

The Business Model Canvas provides a visual look at the 9 building blocks of an effective business plan mapped out in a restructured canvas. Understanding each component is crucial in building your canvas model.

■Key Partnerships – Determine who your key partners are as well as suppliers. In addition look at what resources you will need from them and what resources they in turn will need from you. One of the most important things to keep in mind with your key partners is making it clear what activities you will expect them to perform.

■Key Activities – Key activities play a role in most of the 9 building blocks. Deciphering what key activities are required for each of these building blocks will get you one step closer to a successful business model.

■Key Resources – Your Key resources like your Key Activities need to be identified within each segment. Some questions to ask yourself are: What Key resources will your value propositions require in order to be successful. What Key resources are needed for your distribution channels, customer relationships, as well as your revenue streams.

■Value Propositions – Your customers will be looking for the value you can provide them. They have issues and needs that they are looking for you to solve. Your value proposition is necessary if you want to be set apart from competitors.

■Customer Relationships – Integrating your customers into your business model is critical. Look at what relationships you have established and how those relationships are benefiting both you and your customer. You will also be able to determine what is working, what is not, and where you need to improve with regards to building stronger rapport with new and existing customers.

■Channels – Channels are important in determining how you will reach your customer segment. What channels will you utilize? What are you currently using to reach them? How are you integrating your channels and which ones work best and are most cost-effective?

■Customer Segments – Without customers your business will not thrive. Research different customer segments, niches, and markets and decide who will receive the most value.

■Cost Structure – Determine what the most crucial costs inherent to your business model will be. Look at what key resources and activities are most expensive.

■Revenue Streams – Where is your current revenue stream coming from? Your target market is currently paying for something so determine what that something is. You also need to look at how they are paying and whether they are happy with the method they are currently paying. Lastly, ask yourself how much each Revenue stream is contributing to your overall revenues.

You will see each segment provides some kind of value proposition; whether for you the entrepreneur, your partners, your customers, or all persons’ involved. When building your Business Model Canvas you need to be concise, focused on each point, and keep it simple.

Once you master and understand the Business Model Canvas I recommend looking at integrating The Value Proposition Canvas. This plug-in for the Business Model Canvas was developed by Alexander Osterwalder. It is meant to be used in conjunction with the Business Model Canvas not to replace it.

While the Business Model Canvas encompasses your overall company’s plan, the Value Proposition Canvas aims to look at the Value Proposition and the Customer Segment and the relationship between the two analyzing how they work together. By analyzing these two building blocks you are able to achieve a more detailed powerful structure. This will allow you to test both building blocks and how they can fit together to meet your customer’s needs. We will touch on the Value Proposition in another post.

Hopefully you find the business Model Canvas as useful as I do in quickly vetting the strengths, weaknesses and viability of a business model.

KFC: disposal and capital repayment (2)

I wrote earlier about the privatisation of KFC, after receiving an anonymous comment. On the website from The Malaysian Insider an article from Reuters indicating that there is a lot of discontent, both about the slow progress of the corporate exercise and the quality of the prospectus (for instance using data from last year in comparisons).

It is good to see that there is some shareholder activism going on, it has been much too rare in Malaysia. However, in privatisations and related party transactions, minority shareholders rarely win, they hardly stand a chance.

One reason was highlighted here in the CG Watch 2012 report:

12. Are institutional investors actively voting against resolutions with which they disagree? 

Malaysia's score on this item: “marginally” (0.25).

In the long run, this attitude is doing serious damage to minority investors and to Malaysia's reputation.

Investors cry foul over privatising KFC franchisees in Malaysia

A US$1.7 billion (RM5.19 billion) bid for Malaysia’s two main KFC fast food franchisees faces a growing chorus of opposition from investors challenging the terms of the offer that is nearly a year old and now looks to them badly undervalued.

A showdown is looming on November 5 and 6, when shareholders vote on the deal. Some investors contacted by Reuters said they planned to vote against the bid but it was not clear if they had enough firepower to do so.

The bid for KFC Holdings (Malaysia) Bhd and QSR Brands Bhd was made last December by the investment arm of Malaysia’s Johor state and CVC Capital Partners. The Employee Provident Fund joined the consortium in May.

But it was only in October that the companies called extraordinary general meetings. They have not explained the delay.

It is a long enough period, opposing shareholders argue, to mean that the bid price no longer represents the true value of the companies after what has been a prolonged retail sector boom, with prospects for it to continue.

What is not clear is whether those minority shareholders can muster enough support to prevent its backers winning the 75 per cent of the votes they need to pass the acquisition.

But they may be helped by the fact that Johor Corp, top shareholder of both KFC and QSR, is not eligible to vote on the deal because it made the offer. Johor Corp and related parties own nearly half of KFC and about 60 per cent of QSR.

Share prices in the two firms have hovered around last December’s bid price.

In the same period, shares in other Malaysian consumer companies have soared as much as 70 per cent as household spending has jumped, helped by generous government handouts ahead of a hotly contested national election.

“Comparing the companies with their peers based on last year’s multiples is not relevant,” said Jonathan Foster, Singapore-based director of global special situations at Religare Capital Markets. Religare does not own shares in either of the companies.

“If it is based on current multiples, KFC and QSR are quite undervalued.”

Independent advisers for both KFC and QSR have recommended shareholders accept the offer.

Also, shares of the two companies trade at a discount of just about 3 per cent to the offer prices. That suggests the market expects the deal to go through. A discount of 15 per cent or more, known as a merger arbitrage spread, signals investors expect a deal to fail.

Unhappy shareholders
Reuters contacted eight shareholders representing around 38 per cent of the total shares outstanding of KFC and 16 per cent in QSR.

Two said they intended to vote against the proposal and one planned to vote in favour for the lack of a better alternative. The rest declined to comment.

The two holders intending to vote against the deal are based outside Malaysia and represent about 5 per cent of KFC shares and 3 per cent of QSR.

They said both companies had stopped paying dividends since receiving the offer last December, the negotiations had dragged on too long and too little information was shared with minority shareholders.

QSR and Johor did not respond to requests for comment. CVC declined to comment. A KFC official said shareholders will have the opportunity to voice their concerns at the meetings, scheduled for November 5 and 6.

Malaysian consumer stocks have enjoyed a strong run this year as pre-election government giveaways boosted domestic spending.

Nestle (Malaysia) Bhd has risen about 23 per cent to date, while Berjaya Food Bhd and Oldtown Bhd , have risen between 60 per cent and 70 per cent this year, benefitting from strong domestic consumption and solid economic growth.

Shares of KFC and QSR’s sector peers are up an average of 28 per cent this year, compared with a 9 per cent rise in the broader index, according to Thomson Reuters data. By contrast, KFC’s shares are up 2 per cent and QSR’s 1 per cent.

Both companies lag on a current price-to-earnings ratio basis. Berjaya Food and Oldtown trade at 23.50 times and 14.68 times, respectively, more than double where they were last December when the KFC franchisees received their takeover bids.

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• Stressed workers say they just aim to show up to work
• Indian artists hope images of gods will save trees

• Jodie Foster to get lifetime achievement award at Golden Globes
• Judge allows R&B singer Chris Brown to do European tour
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• Bram Stoker’s restored ‘Dracula’ desk up for auction

• Nets’ home opener against Knicks rescheduled
• Negredo puts Sevilla in charge in King’s Cup
• Murray pole-axed in Paris
• Wenger calls on fans to respect Van Persie

• Malaysian employers practise racial bigotry, study shows
• Woman dies after being robbed
• First group of Malaysian haj pilgrims arrives home
• Police hunt for Gua Musang cop shooter

• Writing the obituary for the death penalty
• Spoiler alert: 007 wins in the end
• A bag-ful of reasons for rising crime
• Heard of the ‘Kanthi’ protocol?