Malakoff associate gets penalty of RM 157M

MMC Corporation announced regarding legal proceedings against an associate company of Malakoff  in connection with sea water desalination plant in the district of Tlemcen, Algeria:


"...that MCB [Malakoff Corporation Bhd] had been informed by AAS [Almiyah Attilemcania Spa] solicitors on 30 December 2014 that the lower court of Ghazouet (“Court”) in the district of Tlemcen has imposed a penalty of DZD3,929,038,151.36 (approximately US$44.6 million at the exchange rate of US$1=DZD88) on AAS in respect of the Legal Proceedings (“Penalty”).

AAS has been advised by its solicitors that the Penalty would not be enforced until the exhaustion of all rights to appeal by AAS in respect of the Legal Proceedings. AAS had filed an appeal against the decision of the Court to the Algerian Court of Appeal."


That is quite a high penalty, it is not often that one sees a penalty of more than RM 100 million.

The Malaysian press has been rather silent about the case. Some more details can be found in this announcement:


3. During the financial year 2009, it was discovered that there was a considerable gap between the value of the delivered equipment and the value of the payment made by AAS to the supplier cum contractor (“Invoice Gap”). AAS wrote to the supplier cum contractor requesting for clarifications as they are responsible to resolve tax and customs issues. The invoice gap however was not resolved by the supplier cum contractor and the Algerian Customs then initiated investigations and thereafter the charge was brought against AAS.

4. Due to the Invoice Gap, it is alleged that AAS has failed to repatriate a sum of USD26,900,000. No interest is imposed in the Legal Proceedings but the Court can impose penalty as it deems fit.


Malakoff is planning a relisting exercise, after having been listed and subsequently delisted before. The kind of "games" that are often played by Malaysian tycoons on Bursa. The valuation at relisting is often very much higher than the valuation when the company was delisted. Unfortunately, there is not much that minority investors can do against this practice.

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.

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



The first Article about this matter:

 

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

 

I highly recommend all articles from Where is Ze Moolah about MMC: http://whereiszemoola.blogspot.com/search/label/MMC

 

An article from The Star about this deal:

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

 

This Related Party Transaction (RPT) was controversial from the start. The amount of money (all in cash) makes it one of the largest ever, RM 1,700,000,000. But the timing is also important: the brochure is dated March 6, 2009, in the midst of the worst global recession of the last 50 years. To put things in perspective, cash was very hard to come by, AAA corporate bonds were yielding 10-15%, most shares were going for below NAV (some below cash, meaning the company came for free) and/or for single digit Price Earnings Ratio’s (sometimes as low as 5) with very juicy dividend yields.

I had another look at this proposal (the circular alone is already more than 220 pages), and found the following items.

[1] The Senai Airport had been making steady losses for a long time, it was also predicted it would lose money in 2009, but the change would come in 2010.

In other words, the “profits” would come from deferred tax assets. But since the company has been making steady losses over the years, it isn’t sure if there would be sufficient profits in the future to set-off. I find this type of accounting highly aggressive and not suitable at all in this kind of situation.

In 2010 they did indeed use the deferred tax to be able to book a “profit” of RM 63.2 million, the profit was RM 30 million less than they forecasted:. If they booked the same amount of tax deferred (RM 113 million) as planned, then the Profit Before Tax was actually a loss of RM 50 million.

[2] The Senai airport was valued at RM 420 million to 620 million:

But as recently as in 2008, it was revalued:

The shareholders Funds were actually negative; thanks to the revaluation it turned into RM 185 million. And only one year later (in which the airport again lost money), it is suddenly worth a few hundred million more? In 2003 it was bought from Malaysia Airport Holdings Bhd for only RM 80 million in an arm's length transaction.

[3] For valuation purposes the valuers used the aggressive DCF (Discounted Cash Flow) method: 

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

I have seen many instances where this method can lead to incredible high results. Basically it assumes all will go well in the future (number of passengers will grow, amount of cargo will grow, land will be developed into residential and commercial buildings which all will be sold at a nice price, etc). In reality, there are often many problems, growth rates have been overstated, financing is not easy to get, the economy is in a recession and buildings are not sold, plans are delayed leading to cost overruns, etc, etc, etc. 

In the case of the Senai Airport, the valuer was able to plan all the way up to year 2053! I have 30 years experience in making mathematical models and I can assure the reader that it is very hard to plan ahead for 2 years, let alone 44 years. But needless to say, with so much uncertainty so far ahead in the future, you can end up with about any valuation that you want. Can anybody tell me if we still need airports in 2053, how an airplane will look like, how passengers and cargo are transported? Cargo is for instance predicted to grow from 5,800 tonnes to 400,916 tonnes. Just a small change in growth rate would give completely different results. Also, would all the other Malaysian airports and Singapore’s Changi airport sit still and let Senai take a much larger piece of the pie, without putting up a decent fight?

Here are some assumptions:

“economic conditions have changed since the dates of valuation ….. which might impact the assumptions adopted in the respective DCF method of valuation”. 

Why did they not simply redo their valuation to incorporate the changes? The deal was done in the middle of a severe global recession, that sounds highly relevant.

[4] Another issue is that the last audited accounts are from June 2008, nine months old. But the Guidelines write:

In other words, the accounts should have been audited. Even if this rule did not exist, it should have been done in my opinion. Since 2001 we are in Full Disclosure Based Regulation with high standards of disclosure, due diligence and corporate governance. A huge RPT of 1.7 Billion certainly deserves accounts that have been audited just a short while ago. It doesn’t cost much effort or money.

[5] The independent advisor, Hwang-DBS (which we also met at the RPT between MUIB and PMCorp: http://cgmalaysia.blogspot.com/2011/09/muib-and-pmcorp-horrible-deal-from-past.html), made the following recommendation:

“fair and reasonable”, “in the long-term interest of MMC” and “we recommend that the non-interested shareholders of MMC vote in favour”. It can’t get clearer than that.

But on another place they wrote:

“Has not independently verified any information …. for its reasonableness, reliability, accuracy, correctness and/or completeness”?

How can they on one side make a very clear recommendation, and on the other side admit they haven’t checked anything at all?

The Securities Commission writes this in their Prospectus guideline:

And this in their Due Diligence guideline:

This looks like a contradiction with what Hwang-DBS wrote, "proactive role", "substantiate ... information", "more detailed verification and investigation".

[6] What I completely miss in the prospectus is a simple, above the board valuation, based on cost:

1.  What was paid for the assets?

2.  How much was invested additionally?

3.  How much money was taken out (by dividends)?

As far as I can find in the prospectus:

1. 2m (land in 1996), 80m (Senai in 2003), 332m (land in 2007), 4m (land in 2008)

2. 158m

3. Not disclosed, let’s assume conservatively: zero

In other words, RM 576 million is invested in total, 86% of which in the last 2 years, during good economic conditions. My question is: why are these assets worth RM 1,124 million more during the largest global recession of the last 50 years?

[7] On pages 64 and 65 a comparison is made between NAV and price for this RPT versus NAV and price of several listed companies. Hwang-DBS however does not mention that the NAV of the MMC deal is a RNAV, revalued based on all sorts of assumptions while all the NAV’s of the listed companies are not revalued. They could be based on land that they bought 50 years ago and still is in their books at the same price. I have seen dozens of revaluations of listed Malaysian property players and the RNAV always was substantially higher (never lower) than the NAV, sometimes twice as high, sometimes four times as high (in extreme cases even more). By using RNAV for the MMC deal versus NAV for the listed companies, Hwang-DBS is really comparing apples with oranges.

[8] Another item that I miss is: what would the alternative be? What could MMC otherwise do with the 1.7 Billion RM? The answer would have been: “a lot”. If they had bought a basket of assets (shares, bonds, commodities), all trading at very low prices, then that basket would now easily have doubled. But is their SATS acquisition now worth RM 3.4 Billion?

And another option of course would have been to simply return (a good part of) the money to the shareholders in the form of a bumper dividend, leaving it up to the shareholders what to do with the money.

MMC, RPT's and its Major Shareholder

Ze Moola looking back at one of the largest (and in my opinion worst) Related Party Transactions, MMC taking over Senai Airport in the depth of the worst global recession of the last 50 years for RM 1,700,000,000 cold hard cash:

http://whereiszemoola.blogspot.com/2011/09/look-back-again-on-mmc-purchase-of.html

"the MMC chairman had invoked his discretion to have a poll instead of a vote by hands and, in the end, 97 per cent voted in favour of the deal."

Let me guess who voted in favour:

MSWG did fight this case, they tried their best. What do we read at the MSWG's website?

http://www.mswg.org.my/project/mswg/media/2009/03/02/165112-629.pdf

We are talking about an acquisition for RM 1,700,000,000 and they have "some other work commitment".

Funds like EPF, PNB, ValueCap, etc, etc, etc, I have hardly ever seen them oppose a bad corporate exercise. They had the power, they had the votes to block these horrible RPT's, but almost always they did chose to toe the line. My impression is that they were pressured to do so, or they perceived they were pressured. By doing so, they have done an unbelievable disservice, to their own accountholders, to the other Minority Investors and to Malaysia in general. They had the chance, they could have been vocal, they could have rallied the Minority Investors, they chose not to do so, they chose to toe the line, again and again and again.

My recommendation: they should simply not vote anymore, let the small shareholders vote plus the normal unit trust fund managers (the first put their money where their mouth is, the latter want to have a good long term track record). I am sure that this deal would then not have gone through.

About the Majority Investor of MMC, Tan Sri Syed Mokhtar Albukhary, the following article from The Star, dated Dec 13, 2008, is still very relevant:

"How to become very rich in Malaysia"

Connections and the ability to flip assets can get you going places

If you have ever wondered how to get rich in Malaysia – fabulously rich and very quickly at that – here’s a model that you might want to look at very closely. Not easy to do but if you do have a couple of projects in the bag, it will set you up for several lifetimes.

First you need connections – strong ones, the higher the better and if it goes right up to the top all the better. You need this because you need to convince the powers that be that your projects are good.

But you might ask if your projects are so good, why do you need connections? Why don’t you just go out and execute? Good questions, those. Here’s the answer - you need the state to give you something to do the deal that will help the nation.

Still can’t figure it out? See, it’s like this. You want to help the country, right? The country needs say a port. But you can’t build a port just like that. You need land to build a port. You tell the state or federal government you need land – cheap land, preferably free to build the port.

Or to take another example, you want to help the country by building a power plant. But look, you need land too and not only that you need the power to be sold. So you want an agreement – an iron-clad one to sell the power to Tenaga Nasional and to pass through all costs.

You see, that’s your reward as an entrepreneur – you get someone else to build the power plant, they guarantee the performance of the plant and someone else guarantees to buy your power and pay for all your costs. Nice deal? You bet. Billionaires have been made that way.

Or you may want to start an air hub. If you are persuasive enough, you can even convince the government to compulsorily acquire the land and sell it to you cheap. Once you have cheap land, lucrative contracts and concession agreements, the sky’s the limit.

Let’s take it a step further. If you want to realise the value of all of these things that you have and still keep control of them, it’s nice to have a listed company into which you can inject them. Inject one asset for shares and you gain control of the company.

And then inject others over the years for cash, taking the money out of the company. Who says you can’t have your cake and eat it too?

Do it right and get a flow of assets to inject in (you can do anything with discounted cash flow valuations – just change the discount rate, and presto, the value changes!), and you get a tidy flow of profits and cash into your personal accounts over the years. I mean a really tidy flow.

Just how much can you make this way, you ask? Why don’t you take a guess first? Did you say RM500mil? Guess again. RM1bil? How about five times that and you may be getting into the right order of magnitude.
One Tan Sri Syed Mokhtar Albukhary actually made some RM4.5bil that way - actually more because he still controls the listed company. (MMC’s latest RM1.7bil deal irks investors7) We are not saying he is the only one, which makes your chances of joining the ranks better – if you are connected to high places that is.

But then again, if things change – and that’s still a big ‘if’ – you might not find it so easy anymore.