Thursday, 30 April 2015

Shareholders can query external auditors at general meetings

The issue if shareholders can ask questions to the external auditors was raised in the (rather heated, but very interesting from a corporate governance point of view) debate in Singapore regarding Noble Group.

Mak Yuen Teen wrote a clear answer to that matter in the Business Times (Singapore). Some snippets:

External auditors are appointed by shareholders, their report is addressed to shareholders, and they have a fiduciary relationship with them. It would be odd if shareholders appoint external auditors who report to them, but cannot ask questions about how they did the work.

.....  there is not much point in having external auditors present at general meetings - and companies being charged for it - just for them to issue boilerplate responses.

For example, shareholders at the Noble AGM could have asked questions about how the external auditors arrived at their audit opinion, the appropriateness of the accounting policies and assumptions used by the company, and how they audited the investments in associate companies such as Yancoal and biological assets.

As a matter of decorum, shareholders should direct their questions about the external audit or about other matters through the chairman of the meeting. The chairman should provide the opportunity for the external auditors, committee chairmen and others to answer these questions as appropriate.

To all readers who visit AGMs/EGMs and have questions regarding accounting matters, please feel free to follow the above advice. I assume the rules are the same in Malaysia.

On a side note: I hope to have time in the future to comment on Noble, which might also be worthwhile in the Malaysian context: although no company on Bursa has yet been targeted by a "shortseller", one day that surely will happen, better to be prepared for it, both for regulators and companies.

Tuesday, 28 April 2015

Maxwell's puzzling acquisition (2)

I wrote before about Maxwell's puzzling acquisition of Lim Ying Ying Ltd.

The story received a new twist today, the company announced that the SPA has been terminated.

And now the good news (at least, for the vendors), they not only get their company back, they can retain the sum of HKD11,700,000.00 previously paid by Maxwell (HK). A case of having your cake and eating it.

No reason is given which is strange, to say the least.

The company states that it "is not expected to have any material effect on the net assets and earnings per share and gearing of the Group for the financial year ending 31 December 2015."

That is possible, several inter-company balances are written off, so may be they all cancel each other out. But I am sure that Maxwell's shareholders would like to see some more detail there.

The share price has performed very badly since its listing.

Bursa limits information to 5 years ONLY?

I noticed the blog posting on Serious Investing:

"While checking out some information, I realised that I am able to search for information on a particular company only for the last 5 years (see below diagram). In the past I was able to obtain information for any particular company since 1999 if not mistaken as long as they were around since then.

Information for more than 5 years is definitely needed as one will need to look at trends or any changes that occurred, or even identify the progress of each of the company.

I am not so sure if this is due to Bursa limiting it temporarily due to some housekeeping reasons or is this permanent. If it is permanent, I will definitely need all readers to lobby to request for it to be reinstated to what was offered before. This is the period where information is more than important and critical for the sake of investor's knowledge. It is also when stock exchanges competes for clients - limiting information is many steps backward.

I thought Bursa was doing something great before."

I can't agree more with this, am absolutely shocked.

When I read the above I was sure that something had gone wrong, but it seems "Serious Investing" is indeed right. All information from before 2010 is gone.

These days hard disk space is almost for free while Bursa is making huge profits, having a monopoly, so money can not be the issue.

Especially in the light of the (terribly slow enforcement), where many cases take 7 years or more before they are even mentioned, how can anyone do serious research on Bursa counters, if one can not even find back what the enforcement was about? I have mentioned many cases in my blog dating back from before 2010, all those announcements are now not available anymore?

I hope all parties involved will pressure Bursa to restore the announcements website back to its old glory. This looks like a move completely in the wrong direction.

Friday, 24 April 2015

To Cliq or not to Cliq? (4)

Cliq Energy announced the result of the fairness opinion by the independent valuation expert, Deloitte.

First of all, "good old" DCF is used. As usual, a long list of assumptions, some of which are very important:

Secondly, the result of the valuation is presented:

While the outcome of a DCF calculation can hugely change according to which parameters one uses, the final range of 113M to 124M falls "exactly" around the purchase consideration of 117M. Too much of a coincidence?

As usual, no details of the DCF are given, so we can't check anything of the actual calculation.

As often described in this blog, I don't like DCF valuations based on a huge amount of assumptions, some of which (for instance the amount of reserves, the price of oil, political/regional conditions, etc.) would alter the result by a huge margin.

Just to detail one aspect, how can one calculate the uncertainty of investing in a country like Kazakhstan? I honestly have no idea how to incorporate country or regional risk in an objective way in a DCF calculation.

On a more positive note, a comparison with similar deals is presented, something that makes much more sense to me:

The average price per boe (barrel of oil equivalent) of the three deals is USD 6.41, while Cliq only pays USD 5.82, that looks good.

But the most recent deal done is by Sumatec Resources (relevant since the price of oil and market conditions were similar to Cliq's) was done at a price of only USD 4.21 per boe. The question is why does Cliq pay 38% more per boe than Sumatec?

Unfortunately, there are no other details regarding the three deals, and how they compare to the proposed deal of Cliq (for instance the existence of assets or liabilities other than the oil reserves in the target companies).

The evaluation of Deloitte is that the deal is "fair and reasonable", which is no surprise because it was more or less announced before by the CEO:

"We know that it will fall within the fair market value, but I'm not saying 100% it will. We have intelligently analysed that the acquisition value is going to be within the fair market value unless oil prices fall to US$ 20".

Thursday, 23 April 2015

Icon Offshore: CEO and COO remanded (2)

Some more information on this matter due to a query from Bursa:

1) The financial and operational impact of the Remand

We do not expect the Remand to have any financial or operational impact to the group as our Deputy Chief Executive Officer, Captain Hassan bin Ali (“Captain Hassan”) continues to be responsible for the day-to-day management of our Company as well as the co-ordination of the administrative and business activities of our group.

2) The steps taken and to be taken to ensure that the operations/business of the Company/group is not adversely affected while the CEO and COO are being remanded

In the absence of the Chief Executive Officer, Captain Hassan, as the Deputy CEO ("Deputy CEO")   has assumed the functions of the CEO with effect from 22 April 2015, in addition to his existing responsibilities. In light of the development, our Company has engaged our stakeholders, namely our customers and lenders to appraise them of the matter and at the same time, provide assurance to our stakeholders that it is business as usual for our group under the stewardship of our Deputy CEO. 

3) Duration of the Remand

We have been informed by the legal counsel representing the CEO and COO that the Remand is for a duration of three (3) days until 24 April 2015.

Unfortunately still no information what it is all about, we need to wait for that.

Wednesday, 22 April 2015

Icon Offshore: CEO and COO remanded

Quite shocking announcement by the company:

"To ensure fair market trading, the Board of Directors wishes to inform that Suruhanjaya Pencegah Rasuah Malaysia (“SPRM”) has remanded our Chief Executive Officer and Chief Operating Officer to facilitate and assist investigations currently being conducted by SPRM. The company has no details of the nature of the investigations or their status."

We have to wait for more news regarding this matter.

Noteworthy is that the CEO has lately been selling shares in the company.

Monday, 20 April 2015

TDC: ESOS and Digi's 3G licence

Article in The Star "TdC rewards CEO" about Time dotCom, some snippets (my comments in blue):

.... last week TdC granted him [Afzal Abdul Rahim, the CEO] a share option to subscribe to up to 17.22 million new TdC shares or 3% stake at an undisclosed price.

Afzal holds a 75% equity stake in Pulau Kapas Ventures Sdn Bhd, which owns the 36.24% stake in TdC, and Gan holds the remaining 25%.

“So if I am able to raise funds to exercise the option, that is an additional 3% over the next five years,’’ Afzal adds.

I am not in favour of share options and the like, I favour normal wages and a bonus based on realizing long term goals. That is more transparent and more fair, since shares can fluctuate wildly in the short term.

However, if share options are given out, then I would suggest to give it to management that has no stake yet in the company, to align their interest in the company. But Afzal has already a 75% stake in a company holding a 36% stake in Time dotCom, valued at RM 1.25 Billion. Surely someone owning such a large stake doesn't need anymore encouragement nor alignment?

“Had we [Time dotCom Bhd ] kept the 3G spectrum, we would have made a colossal mess of trying to roll it out. It was the right decision to transfer it to an operator [Digi] who knew what to do with it.

This is a rather stunning comment from somebody in the know and reflects badly on the controversial way the 3G licenses were given out in Malaysia in 2006. For some historical perspective, please read this article in The Star:

The government is not against foreigners investing in Malaysia, but "3G spectrum is a scare national resource,'' Lim said, according to the newspaper.

While admitting that the decision was controversial, Lim rejected criticism from analysts that the government had been unfair to DiGi.

"If I had given it to an unqualified company, then it is not fair,'' he was quoted as saying. The companies were evaluated based on their technical capability, financial management and business plans, he said. The Communications Ministry could not be reached Sunday to comment on the report. The two 3G licenses were awarded to fiber-optic operator TIME DotCom and unlisted pay-TV operator MiTV Corp. 

Monday, 13 April 2015

CIMB selling part of PE business?

Article in Focus Malaysia (partially behind paywall): "CIMB’s ex-CFO to buy its PE biz".

Please note that the article is based on rumours: "It is learnt", "A banker says", etc., no official announcement has been made, so we need to wait for official confirmation.

The deal would be noteworthy since there would be a large conflict of interest the stake being takeover by the people who manage it:

"... former chief financial officer Kenny Kim and senior executives mulling a takeover of the banking group’s private equity business.Under the deal, Kim and his associates are expected to acquire a 70% stake in the CIMB private equity unit, with the balance to be retained by the banking group."

The reasoning behind the possible move seems to be:

" .....a move by CIMB to detach the private equity unit’s financials from the group’s consolidated accounts. This is part of the implementation of Target 2018 or T18, announced in February, that includes the bank’s aim of a return on equity (RoE) of more than 15% by 2018.In FY13, the latest financial year for which its results are available, the CIMB private equity business went into the red with a RM4.68 mil loss after four years of profit. The sale of CIMB’s private equity business may improve some of the T18 financial benchmarks."

That would be kind of reasoning (dressing up of the accounts) of which I am not exactly a fan.

Managers of PE funds normally work under a 2/20 rule, meaning they would get 2% a year (in this case a cool RM 120 Million) and subsequently 20% of the profit after returning the original amount to the investors (since the amount under management is RM 6 Billion, this could be very substantial).

The PE industry in the US is quite controversial, here is a collection of articles from one of my favourite bloggers on this subject.

Sunday, 12 April 2015

Proven Oil Asia on SC list of unauthorised websites

I have written several times about "Proven Oil Asia", most notably here and here.

The Securities Commission of Malaysia has included "Proven Oil Asia" on its "List of unauthorised websites / investment products / companies / individuals" (updated as at 9 April 2015):

The website that is mentioned ( now links through to the website of Conserve Oil:

Certainly an interesting development. The "Proven Oil Asia" scheme is also sold under other names, but the mechanics seem to be the same.

Thursday, 9 April 2015

Investment panels need contrarian thinkers

Article from The Edge Markets, some snippets:

The Ministry of Finance has tabled an amendment to the Retirement Fund Act 2007 that will see the removal of Bank Negara Malaysia (BNM)'s sole representative from the Investment Panel set up under the law.

A new section was also added to penalise any person who sits in any meeting of the fund’s Board, Investment Panel or any of its committees who discloses any information which is not published.

Malaysia is the country with the highest Power Distance Index in the world.

One of the many implications of that is that from time to time things seem to go well, and then "something" will blow up in a massive way. Toeing the line, not wanting to rock the boat are common treats in a country with a high PDI score. Because of that, scandals seem to be larger than in other countries, where they tend to bust more early.

To counter this, a few methods can be recommended:

  • Lots of transparency, in the form of regular, detailed reporting
  • Encouraging whistle-blowers to come forward and dealing with the information gathered in an appropriate way
  • Encouraging contrarian minded people to participate in meetings to counter group thinking

BNM is the institution that I have the highest in Malaysia, they seem to be able to hold the line and stay (relatively) independent.

Because of this they could be an ideal partner in investment panels, to give their take on decisions.

The new amendment seems to counter this. The worry is that instead people are chosen who seem to be credible on paper, but who will simply toe the line.

Penalizing persons who disclose information might be a another step in the wrong direction, this time regarding transparency and whistle-blowers.

I am a big fan of the book "Antifragile" from Nassim Taleb, which deals with:

"an investigation of opacity, luck, uncertainty, probability, human error, risk, and decision-making in a world we don’t understand".

That looks highly relevant to the decision making process in Malaysia.

CMS and Corporate Governance (2)

I wrote before:

"I would recommend shareholders (major or small) of CMS to forward their questions regarding this deal to Bursa Malaysia, who can then (possibly including own questions they might have) issue an official query to CMS. 

Those queries have to be answered within one working day, not until the sale and purchase is concluded. Let's see if CMS still will not make any further comment."

Bursa did indeed query CMS and CMS needed not one, not two, but three announcements to answer the queries (here, here and here).

The answer on the eighth question:

On behalf of the Board of Directors of CMSB, Kenanga Investment Bank Berhad wishes to provide clarification on the following statement in the press release:

"While CMSB understands that our major stakeholders will have many questions about this acquisition, we have no further comment to make until the sale and purchase is concluded, at which time we will make a further statement."

The above statement is meant to inform CMSB stakeholders that CMSB will make further necessary announcements once CMSB has completed the due diligence exercise and firmed up CMSB’s plans for Sacofa.

I would like to add: "except when the query comes from Bursa, then CMSB will respond in one working day".

Kinibiz also wrote about the above issue, but also from another dimension: that the deal might be good for CMS shareholders, and thus bad for the state government of Sarawak, the seller of the shares. Not only should CMS be more transparent, but also "It is imperative that the state government clear the air on whether Sacofa is being sold on the cheap or not before the deal is done.".

Friday, 3 April 2015

To Cliq or not to Cliq? (3)

Focus Malaysia (FM) wrote an article "Oil price slump not all sweet for SPACs".

FM revealed that Hong Kong listed Willie International Holdings Ltd (273) has tried to acquire the same assets in Kazakhstan about six years ago. Two relevant announcements can be found here and here.

Unfortunately no reason was given why Willie terminated the deal, other than that the deposit was returned, which often means that the potential buyer (Willie) was not at fault.

[On a side note, Willie International is mentioned by David Webb as being in the "Chung Nam" network, not a complement by any means.]

The above episode does indicate that for a long time already the owners of Phystech are on the lookout for a buyer. There might be some cause for concern there, why was no one interested and why do they so "desperately" want to sell their assets if they are so profitable?

A rather interesting comment is made by Ziyad, MD/CEO of Cliq:

"We know that it will fall within the fair market value, but I'm not saying 100% it will. We have intelligently analysed that the acquisition value is going to be within the fair market value unless oil prices fall to US$ 20".

That is a bold statement, so even if the price of oil falls to US$ 21 per barrel, the deal will go through as the acquisition price will be within the fair market value range? I think at the moment there is a lot of stress already in the oil & gas industry, I can't even imagine what would happen when the price falls significantly further. Players that are (highly) leveraged or have high extraction costs will face severe problems or even bankruptcy.

On another matter, the article in FM continues:

"A local analyst tells FocusM the success of the SPACs' listing is due mainly to the good governance, rules and regulations by the Securities Commission (SC)."

While I do admit that the SC has done a good job in safeguarding investors interests, that doesn't mean to me that SPACs suddenly make sense, from a business point of view.

Also, the analyst mentions "success", I wonder which "success" the analyst is pointing at. There is no SPAC yet that has produced any operational profit whatsoever (although I admit it is still early days), while all of them have incurred expenses so far.

The fact that several SPACs have been able to list is not a measure of success, at least to me.

CMS and Corporate Governance

CMS announced a proposed acquisition of 50% of the shares of Sacofa for RM 187 Million.

An interesting comment was made by the managing director:

“While CMSB understands that our major stakeholders will have many questions about this acquisition, we have no further comment to make until the sale and purchase is concluded, at which time we will make a further statement.’’

That is a rather remarkable statement, from a corporate governance point of view. Even if investors have genuine questions regarding this deal, they will not be answered for the time being?

I would recommend shareholders (major or small) of CMS to forward their questions regarding this deal to Bursa Malaysia, who can then (possibly including own questions they might have) issue an official query to CMS. 

Those queries have to be answered within one working day, not until the sale and purchase is concluded. Let's see if CMS still will not make any further comment.