Saturday, 22 July 2017

FGV's lack of transparency

Good article in The Star: Why FGV should handle whistle blowers with care

Some snippets and some comments by me:

In fact, one of the reasons why the Employees Provident Fund (EPF), a stickler for corporate governance, disposed of its interest in FGV is because there was no separation of powers between the board and the major shareholders.

The provident fund, for instance, felt that the total remuneration package for the chairman, which was stated at RM2.67mil in the 2016 annual report, was seen as too high.

The powerful provident fund expressed its dissatisfaction on the way FGV was managed by disposing its shares. In fact EPF’s chief executive officer Datuk Shahril Ridza Ridzuan hardly completed a year as a board member of FGV.

I am sorry to say but I find this very disappointing from the EPF. By selling they even drove down the share price giving them an even lower price for the last shares they sold.

Could they not have done more? If they were unhappy about the Corporate Governance inside FGV then they could have voiced out their concerns, first internally, and when no adequate response has been issued, they can simply call for a press conference. Surely journalists from all major media outlets would show up and report on the issues. That would have forced the company to issue replies to some thorny issues and would have given some much needed transparency. Who knows, some M&As might have been prevented that way, for the benefit of almost all parties involved.

Only now, after Isa has been moved out of FGV does the board admit that the company lacked governance.

The problem with all the initiatives from Bursa and SC is that it looked like CG was good inside FGV. But FGV was simply ticking all the boxes.

"Real" CG is not about ticking boxes, but how the company handles itself for instance in cases of conflict of interest (rather common in Malaysia), transparency towards shareholders, major strategic decisions like M&A activities, etc.

The question is if FGV actually has improved its CG? From the announcements that have been made on the Bursa website I doubt it, I find hardly any relevant information on what has been going on the last few months, for instance nothing about:

  • The work done by Idris Jala, let alone the contents of his report (probably only the major shareholder is privy to this information).
  • The serious allegations by Zakaria (and others) regarding expensive, non-core acquisitions in the past
  • The real reasons for the resignation of the previous Chairman and who the new chairman is (the last might have been an honest oversight though)
  • The Edge Malaysia wrote a very good series of articles with lots of useful information (including interviews of the main persons involved), most of which was never revealed

He [Zakaria] should not be penalised for speaking out. Because this would render redundant all the governance structures and whistle blowing channels that are in place in FGV.

Exactly. Whistle blowing in Western countries is already difficult enough (many regret later on that they blew the whistle), doing the same in Malaysia (a country with the highest Power Distance Index in the world) is so much more difficult. We need to respect people who speak out based on conviction and proper information.

I hope to see a healthy dose of transparency in the near future, what was really going on the last few months, and a proper, honest evaluation of the controversial M&As FGV has done in the past. Several companies in Singapore (most notably SingPost and Singtel) have done so in similar situations (by an independent advisor under the guidance of the independent directors) and an extract of the final report has been forwarded to the SGX website. Will the same happen with FGV? We will wait and see.

MACC nabs two ex-real estate execs over Felda's UK hotel buy

Article on MalaysiaKini's website, some snippets:

"The Malaysian Anti-Corruption Commission (MACC) has arrested two former real estate executives as part of its investigation into Felda investment Corporation's (FIC) purchase of the four-star Kensington Hotel in London.

MACC in a statement today said the duo were arrested at 1pm when they presented themselves at the MACC headquarters to give their statement.

"Based on the investigation, the two were suspected of manipulating the hotel price (valuation) resulting in FIC overpaying tens of millions," it said.

MACC said when the purchase of the hotel was underway between 2013 and 2015, the two served as chief corporate adviser and director respectively at the real estate agency Raine and Home."

Most likely the writer means Raine and Horne (not Home), a valuer that has also done many valuations regarding property owned by Bursa listed companies, so I assume that Bursa and the SC will follow this case with interest. If the allegations of the above deal are true, then other valuations done by the same people might have to be reviewed as well.

If FIC overpaid tens of millions, then the logical question will be who benefitted from this transaction, hopefully MACC will answer that question soon.

Tuesday, 11 July 2017

"Lotte's Chemical Reaction"

A rather negative story about Lotte Chemical Titan from Bloomberg.

Some snippets:

Lotte Group seemed to be getting back to business after a rough year of court battles, family feuds and strained relations with China. 

Not so fast.

Believers in South Korea's fifth-largest conglomerate were hoping for a much-needed win with Lotte Chemical Titan Holding Bhd., the petrochemical unit that began trading in Malaysia Tuesday. Revival of the long-delayed 3.77 billion ringgit ($877 million) initial public offering, Malaysia's biggest since 2012, caps a period that has seen the group also take steps to settle family disputes and boost corporate debt sales.

But in the opposite of a typical IPO bump, shares of Lotte Chemical Titan fell below the opening price pretty much immediately -- and that was after the company cut the bottom of its price range to 6.50 ringgit a share, from 7.60 ringgit. By midday in Kuala Lumpur, the shares were down 2 percent.

Investors are right to bet against the newly listed company. The reason the Malaysian chemical maker cut its IPO price and trimmed the number of institutional shares has little to do with macro issues like equity demand and more to do with how Lotte missed a fundamental shift in the petrochemicals market.

While Lotte was hell-bent on getting the flotation done after taking the company private more than six years ago, it miscalculated in betting that the market would be willing to overlook the business's problems just because of a dearth of IPOs for large investors.

Back when Lotte took the unit private, the global economic recovery was driving strong demand for the raw materials used to make plastic and synthetic fibers used in everything from appliances to automobiles.

But as the years went on, Lotte Chemical did almost nothing to expand capacity -- unlike its global competitors -- despite having ample cash,  according to Smartkarma analyst Toh Zhen Zhou.

In the absence of investment, revenue growth slowed. Lower prices for inputs such as oil have helped prop up profit but as the sales outlook for products like cars weakens, demand for Lotte's offerings has waned. Meanwhile, raw material prices have declined and overcapacity in China is further pressuring the industry.

Is this really the best Bursa can do, as alleged by Bloomberg, the largest IPO since 2012?

A foreign company, again going through the "listed-delisted-relisted scenario", and with the above history?

Where are the homegrown Malaysian companies with increasing (international) revenues, juicy margins, high ROE, making unique products protected by IP (intellectual Property)?

Monday, 3 July 2017

Seth Klarman: "Margin of Safety"

Seth Klarman is a well known hedgefund manager behind the Baupost Group.

He wrote a book "Margin of Safety" that is long time out of print, and has quite a following, second hand books are sold for a small fortune on Amazon.

A discussion about the book can be found here, at an otherwise good forum about value investing.

The book is a bit outdated here and there, and mostly focussed on the US market, but other than that highely readable, and many topics and principles are timeless.

A download (from MediaFire) of Margin of Safety can be found here, at the second last comment.