iCapital: "Ostrich policy" will not solve the issues (4)

City of London has sent the following letter to the Board of Directors of iCapital:


Clients of City of London Investment Management Limited (CLIM) own 21,970,900 ICAP shares (15.7%). There has been no action in response to any of the points that were raised in our letter to you dated 26^th August 2015, which set out our concerns regarding ICAP's poor performance and persistently wide discount to NAV.  CLIM therefore confirms that it intends to continue voting against the re-election of incumbent directors. Accordingly, CLIM intends to vote against the re-election of Madam Leong So Seh at ICAP's 12^th AGM on Saturday, 24^th September 2016.

·     Performance

We reiterate our call for performance comparisons in shareholder communications to be made on a total return basis, which is universally accepted in the investment industry as best practice.

The total return in the five years to end May 2016 for the FTSE Bursa Malaysia Index has been 23.1% cumulative (equivalent to 4.2% pa). In comparison ICAP's NAV return has been 13.0% cumulative (2.5% pa). The share price return over this period has been even worse due to discount widening, at 6.4% cumulative (1.3% pa). These performance figures have been sourced from Bloomberg.

The Chairman stated, in his letter to shareholders, dated 19^th July 2016, that ICAP has 'performed beyond expectations'.  We wish to make clear that ICAP's performance over the past five years has fallen significantly short of our own expectations.

·     Cash Management

We note the continued extraordinarily high cash level, which has persisted at over 50% for 3 years and on which shareholders have been paying fees for fund management and investment research services. Cash at each calendar year end since ICAP was launched (31 December 2005 to 31 December 2015) has averaged 39%. ICAP is clearly operating with surplus cash which, in our opinion should be returned to shareholders.

·     Expense Ratio

ICAP's expense ratio in 2016 was 1.9% (2015: 1.9%) which compares unfavourably with other country specific closed-end funds. The most significant item is the aggregate 1.5% incurred for fund management and investment research. CLIM urges the Board to negotiate competitive fees in order to reduce the expense ratio to an acceptable level.

·     Discount Control

ICAP's prospectus dated 26 September 2005 explained clearly that the return for closed-end fund investors is a product of NAV performance and the discount movement. The Chairman's letter to Shareholders in the 2016 Annual Report refers to a 4% rise in ICAP's NAV for the 12 months ended 31 May 2016. However it does not mention that the share price actually declined over this period, because the discount widened. The discount averaged 22% in 2016 versus 20% in 2015 (source: Bloomberg). Neither the level nor the trend is acceptable and CLIM is disappointed that the Board has again failed to take any action to address this problem.

CLIM notes from the 2016 Annual Report the Board's deliberations on 27^th July 2015 regarding share buy-backs and the accompanying statement that the "Fund's NAV could deteriorate if it uses its available fund to purchase own shares". Repurchasing shares at a discount to NAV will actually increase the NAV per share and in CLIM's opinion this would be a sensible use of ICAP's cash, particularly in view of the Manager's apparent shortage of investment ideas.

ICAP's prospectus included a section (6.7, page 64) on managing discounts, noting that the options available include 'share repurchase, open-ending, takeover, liquidation'. CLIM urges the Board to consider all these options and to formulate a strategy to reduce the discount from its present unacceptable level.

MSWG announced it will raise certain issues at iCapital's AGM, for instance regarding the "other expenses" and the impairment loss. I hope they also support the above issues as described by City of London.

Dual class shares: another really bad idea

Both the SGX and Bursa seem to contemplate allowing companies to list with a dual class share structure. That sounds like a really bad idea.

Luckily quite a few parties have spoken out against it, for instance:

• Business Times
• Mak Yuen Teen
• MSWG ("is Malaysia ready for dual-class shares" in The Edge Malaysia)
• Abderdeen

David Webb wrote about the same issues in the Hong Kong context.

The arguments in favour of a single class of shares are rather obvious: a simple, clear structure, which has been proven in time. With enforcement that is not "that great", a lack of shareholders activism in both countries, at least (in some rare cases), minority shareholders do have a chance.

What are the arguments of the people supporting a dual class share structure? They are often rather "vague", for instance:

• "The envisaged dual-class share structure listing framework is intended to enhance SGX’s attractiveness as a listing venue and to broaden and deepen Singapore’s capital market" (article)
• "This is about SGX and the Singapore authorities realising that tech companies need a space where they are safe and able to grow, at every stage of their development" (article)
• "The approval of the dual-class share structure in Singapore has shown our Garden City to be a progressive financial hub and might help bring in more listings here in the future." (article)
• ".... founders of companies often have a longer term vision in mind compared to investors who tend to be more focused on short-term gains. The structure hence, protects the founders against short-term pressure for returns" (article)

The argument about tech companies is really strange. Most tech companies will raise money from VC (Venture Capital) firms before they list on an exchange. The VCs will invest their money in exchange for shares, not the normal shares, but (rather ironically) preferred shares which will have much more rights attached than the founders, not less.

For instance they are entitled to a "liquidation preference", besides that they often have a veto right over corporate restructuring, sometimes they even have the right to fire the founders and/or push a deal through which they like and the fouders not.

Founders still accept those deals, because the money is good. So much for the "short-term pressure for returns" argument.

The other argument about attracting companies from outside: the regulators should ask themselves how far their enforcement reaches in case of a dispute, especially considering the many "failures" of China based companies on the SGX and Bursa. If you can't enforce, then there is no deterrent, the exchange will attract the wrong kind of people and fraud will happen.

I hope both exchanges will not introduce a dual class share structure. If founders really have a problem with the "one share, one vote" rule, they simply should not take outside money.

SIAS to take legal action (2)

Interesting follow up article in the Business Times (Singapore) by Michelle Quah:

"Are class actions good for investors and Singapore markets?"

My answer on that question is simply "Yes!".

The share markets (both in Singapore and Malaysia) are too much in favour of the majority shareholders, class actions will help to bring more balance to the equation.

In my home country (The Netherlands) the VEB ("Association of share holders", a not-for-profit organisation) has won many class action suits on behalf of the minority shareholders against large (mostly) Dutch companies, some of them in the top 500 of the world.

Here are some of the current actions (in Dutch):

• Volkswagen
• Fortis
• Ahold
• BP

And here of the past, succesful examples:

• KPNQWest
• Shell
• Unilever
• Fokker
• Philips

Some of the reasons for the suits:

• Misrepresentation
• Unfair treatment of a certain class of shares versus another class
• Unfair valuation at a merger or acquisition
• Sensitive information was given too late or was leaked
• Mismanagement and/or fraud

To participate one only needs to become member of the VEB, which costs 60 Euro per year and one will receive (beside the possibility to participate in class action suits) a few more benefits, like a monthly magazine, expert advice, etc. It is therefore no surprise that the VEB has 45.000 members (on a population of about 17 million).

SIAS to take legal action

Article in the Business Times (Singapore): "SIAS says it will take errant companies to court if need be".

Some snippets:


SIAS president and chief executive David Gerald told The Business Times: "We will take legal action if the company doesn't want to come to the table, refuses to see reason and continues to do wrong."


.... the SIAS chief said he felt it was important to let SIAS members and retail investors know that they have the option of joining the association in a representative action - similar in vein to class-action suits filed in other jurisdictions - as not many investors are aware that such actions can be pursued here. "Investors must know they are protected," he said. "And I have been advised by our lawyers that SIAS can represent aggrieved shareholders. We can even set up a litigation fund, which minorities contribute to, even if they may not be involved in the legal action, to support the principle."


Mr Gerald took pains to stress, however, that while a representative action is an option for minorities, it should be their last one. "I sincerely hope we do not see the day when we launch a class-action suit against a company. I believe in resolving things in the boardroom, not the courtroom, in the interest of all parties."


Although I don't always agree with the actions of the SIAS, I fully support the above reasoning. It is very hard for minority shareholders to group together, while taking action individually doesn't make sense at all because of the costs involved (unless it involves a relatively large minority shareholder, like a fund).

SIAS and MSWG are ideal platforms to organize legal action for minority investors that have been disadvantaged.

Shell Malaysia: shocker (3)

At the very least the current, faithful minority shareholders of Shell deserved a much better explanation than previously provided by the company.

I think the Board of Directors also came to that conclusion (possibly pressured by some organisations like MSWG), therefore they announced today a media release, which can be found here.

It is much better than the previous information, is not clouded in legal terms and gives a background of the reasoning behind the deal and the price per share.

I am sure that most (if not all) shareholders of Shell will still be disappointed, but at least this gives some consolation.

It is possible that Shell's share price has simply been too high over the last years, not in line with its fundamentals and its future prospects. Time will tell.

MSWG: concerns regarding Multi Sports Holdings

Below article is from MSWG's latest newsletter dated August 21, 2015. The concerns regarding Multi Sports Holdings (MSHL) in the "MSWG's comments" section all sound very valid, nothing to add. It is puzzling why a company which claims to have cash worth RM 360 Million is not using this cash to extract value for its shareholders, through a share buyback program or dividend pay-out scheme.

MSHL had on 20 August 2015 held 2 special general meetings (“SGMs”) for the proposed variation to the utilisation of proceeds raised from the sponsorship of the Taiwan Depository Receipt Programme (“TDRP”) (“Proposed Variation”), proposed par value reduction (“Proposed Par Value Reduction”) and proposed establishment of employee share option scheme (“Proposed ESOS”).

The Proposed Variation was approved by the shareholders voted by a show of hands, whereby the Proposed Par Value Reduction and Proposed ESOS was approved by the shareholders voted by way of poll.

Result on voting by poll is shown below:

[Source: MSHL’s announcement on Bursa Malaysia’s website on 21 August 2015]

MSWG’S COMMENTS:

The venue of the SGMs had been changed (at the same resort but different meeting room) at the eleventh hour without immediate notification to shareholders of MSHL. MSWG’s representative felt that it was not right to have done so without providing prior information. The Board agreed to delay the meeting for 20 minutes and also apologised to shareholders for alteration of the venue, as they were informed that the alteration was made by the management of Putrajaya Marriott & Spa without prior notification to the company. Nevertheless, MSWG felt it was imperative that the change of venue should have been posted at the original venue.

During the meeting, the shareholders raised many queries pertaining to resolutions on the Proposed Par Value Reduction and Proposed ESOS, and eventually the resolutions were not carried by a show of hands. The acting Chairman called for a poll vote for all the resolutions before the announcement of the result which were eventually approved as stated above.

MSWG had voted against the Proposed Par Value Reduction, as the company should not be granted the flexibility to raise more funds given the fact that it could not utilise fully its previous proceeds raised from TDRP. MSWG also voted against the Proposed ESOS, as the exercise allows employees to subscribe up to 15% of the company’s new shares at a 10% discount to the 5-day weighted average market price and this would greatly dilute the interest of existing shareholders. The market price of MSHL was RM0.08 as at 20 August 2015, which was 0.08 times to the book value of the Group (the Group’s net asset value per share was RMB1.73 or approximately RM0.98).

Issues regarding INEDs

From the last newsletter of MSWG:


... the Malaysian Code on Corporate Governance 2012 (the Code) recommends a 9-year term limit for INEDs (Independent Non-executive Directors) and the Listing Requirements makes reference to this recommendation where the companies must either comply or explain.

The Code provides under Recommendation 3.3 that there must be strong justifications for the board of a PLC to retain as an INED a person who has served in that capacity for more than 9 years. Also, the prior approval of shareholders is required to be sought.

Over the last 3 years, since the introduction of the Code in June 2012, we observed that the following have been practised:

• INEDs tenure limit of 9 years have been exceeded sometimes as long as 20 or 30 years.
• INEDs have been re-elected over the limit without strong justifications.
• No resolutions were proposed for re-elections.
• Multiple number of INEDs who have exceeded the limit were being put up for re-election simultaneously.

Focus Malaysia wrote an article (partially behind paywall) about the same matter: "Firms don’t fully comply with governance code".

My opinion, for what it is worth:

• Asking Board of Directors to give a justification about the independence of a director whose tenure limit exceeds 9 years is akin to asking companies if their Corporate Governance is any good: both will result in useless, self serving statements.
• With 55% of the listed companies on Bursa having INEDs with a tenure of more than 9 years, the obvious conclusion is that voluntary measures don't work. If the regulators want to be serious about this rule then they should simply enforce it. INEDs who are deemed to be useful to a listed company can still stay on, but as an non-independent director.

David Webb wrote "Principles of Responsible Regulation", one snippet:


As a result of the prevalence of controlling shareholders, investors large and small are usually minority shareholders, and if they are to have any real influence in the ordinary decision-making of companies, then they should have proper representation in the form of truly independent directors in the board room. But they don't.

Under HK listing rules, a so-called "Independent Non-Executive Director" is only as independent as the controlling shareholder wants him (or occasionally her) to be, because the controller gets to vote on the elections in general meetings. The result is often a sham system of illusory checks and balances where rubber stamps fill the required 3 seats on the board (or 1/3, whichever is greater) and form the committees that are supposed to monitor the executive management of the company.


And his recommendation:


"Independent directors should be elected by independent shareholders; any shareholder or the board can nominate candidates, but controlling shareholders must abstain from voting."


Webb's other recommendations also appear to be highly relevant in the Malaysian situation, with the exception of the second (Malaysia does have quarterly reporting).


On another matter, not only INEDs have an important role to perform versus minority shareholders, external auditors also.

Michael Dee wrote an open letter to the employees of Noble Group, his third recommendation being:


" ..... speaking of the now extinct Lehman Brothers, change your auditor, E&Y, who have been auditing Noble’s finances for 20 years now.

This is far, far too long. Auditors are guardians for investors and 20 years breeds too cozy a relationship. E&Y were Lehman’s auditor along with other infamous companies now defunct.

Noble says they rotate E&Y partners every five years but this is just substituting players on the same team. Your management have said E&Y doesn’t have to defend your financials, however they should defend their role in singing off on them.

Here it is instructive to review two aspects of E&Y which are relevant to establishing how much trust one should have in their work. First, as Lehman’s auditor they signed off on the earlier mentioned Repo 105.

Since then, it must be noted, E&Y has paid US$109 million in fines and penalties relating to their Lehman auditing work, including $10 million just recently paid to NY State over their role in the Lehman collapse.

“Auditors will be held accountable when they violate the law, just as they are supposed to hold the companies they audit accountable,” said New York Attorney General Eric Schneiderman.

The Public Companies Accounting Oversight Board (PCAOB), an accounting watchdog established by the US Congress has recently issued scathing comments about E&Y.

As reported by the WSJ in 2012 and 2013 the PCAOB found in their review of over 100 audits that they were deficient about 50 percent of the time.

In half of the audits reviewed, “E&Y hadn’t obtained enough evidence to support its audit opinions giving its clients a clean bill of health“ as reported in the WSJ last year.

But this isn’t a recent problem, the WSJ also reported in 2011 that in over half of the E&Y deficient audits it was because “E&Y was deficient in its testing of how clients applied fair value to their hard-to-value securities”.

This is directly relevant to Iceberg’s charges. Also directly relevant is that in 2012 it was reported E&Y had paid a record US$2 million fine with the PCAOB Chairman saying; “These audit partners and E&Y — the company’s outside auditor for more than 20 years — failed to fulfill their bedrock responsibility”. Not a ringing endorsement I would say."


I think it would be a good idea if listed companies are forced to change auditor every say ten years. It would increase the chance that possible irregularities would be noticed, especially in cases where auditors have become "too cozy" to the companies they are auditing, or when their fees for non-audit related services have become too high.

MSWG "puzzled" about Can One deal

From "The Observer" MSWG's newsletter dated May 22, 2015:

Can-One had on 13 June 2014 entered into a conditional share sale agreement with Teh Khoy Gen for the proposed acquisition by Can-One of 3,000,000 ordinary shares of RM1.00 each in F & B Nutrition Sdn Bhd (F&B) representing the remaining 20% of the issued and paid-up share capital of F&B not already owned by Can-One at a purchase consideration of RM112,900,000 to be satisfied entirely via the issuance of 39,753,000 new ordinary shares in Can-One (Can-One Share(s)) representing approximately 20.69% of the enlarged issued and paid-up share capital of Can-One at an issue price of RM2.84 per Can-One Share which represents a premium of approximately 10% over the 5-day volume weighted average market price of can-one share up to and including 12 June 2014 (Proposed Acquisition)


The Board of Can-One further announced that Bursa Malaysia had vide its letter dated 20 April 2015 (which was received on 21 April 2015) approved the listing and quotation of 39,753,000 new Can-One Shares to be issued at an issue price of RM2.84 per Can-One Share as the purchase consideration pursuant to the Proposed Acquisition.

[Source: Can-One’s announcements on Bursa Malaysia’s website on 14 June 2014, 21 April 2015 and 8 May 2015]

MSWG’S COMMENTS:
MSWG was puzzled at this deal as Can-One is acquiring from Mr. Teh Khoy Gen, the remaining 20% equity stake in a subsidiary (F&B), which it already owns 80% stake while the remaining 20% is owned by Mr. Teh and how this could result in Mr. Teh emerging as a new shareholder in Can-One with a 20.69% equity stake (from a 20% equity stake in the subsidiary of Can-One).

Thus we need further clarification as it does not appear to add up. This is on account of the following:
(ii)        This subsidiary, F&B, makes up only about 56% of Can-One Group’s EBITDA.
(iii)       There are other subsidiaries and associates such as Kian Joo which contributed the remaining 44% of Can-One Group’s EBITDA.
(iii)       Can-One is valuing its shares at a 17% discount to its net assets, whereby F&B is valuing it at 4.86 times its book value.
(iv)       Can-One’s issue price for its shares only represents 6.21 times of price-to-earnings ratio (PER), whereas the PER of F&B is 15 times. F&B is an unlisted entity and yet it is accorded a PER which is much higher.

Based on the above, we, thus, require further explanations at the coming EGM.


I agree, and I like to add the following illustration from page 28 of the circular:

Can One will acquire 20% of F&B, so the PAT of Can One will increase (the blue box), that is good.

However, existing shareholders of Can One will get diluted (the red box), that is bad.

Unfortunately, the dilution is much larger than the added earnings, and thus existing shareholders will receive 12% less profit than before the deal.

The deal thus looks clearly bad for existing shareholders, and it is indeed puzzling why the board of directors of Can One supports the current deal.

Three reasons are given:

• the increased earnings, but on a per share basis that doesn't work, as explained above; also the PE of (unlisted) F&B is compared to the PE of listed company, which is really not fair, unlisted companies trade at much lower valuations than listed companies
• about the outlook for F&B (but Can One owns already 80%)
• lastly a rather curious statement:

First of all, that is three times the word "may", so rather speculative.

Secondly, assuming that there is a genuine buyer, in most contracts (or according to the articles of association) the seller has to offer the shares first to the current shareholders (Can One) under the "Right of First Refusal" rule, so Can One can still decide to buy the shares when that moment arrives.

Thirdly, assuming indeed an outside party buys the 20%, requests and gets a board seat and starts to expose the "secrets". Well, that is plainly against the rules, a director has to act in the best interest of the company, so time to call in the cops.

In other words, all arguments given are rather weak.

Qualified opinions on 6 listed companies

From MSWG's weekly newsletter of May 8, 2015:

AUDITORS ISSUED QUALIFIED OPINIONS ON 6 COMPANIES LISTED ON BURSA MALAYSIA
 

No	Name of Listed Company	Date of Announcement	Auditor	Basis of Opinion (Salient Points)
1	NPC Resources Berhad	30 April 2015	Ernst & Young	Insufficient time to perform sufficient audit procedures as the audited financial statements of three foreign subsidiaries were only available close to the date of the financial statements of the Group were approved by the Board.
2	Silver Ridge Holdings Bhd	30 April 2015	Baker Tilly Monteiro Heng	Unable to obtain sufficient and appropriate audit evidence on the recoverability of receivable.
3	Stemlife Berhad	30 April 2015	Ernst & Young	i)  Non-compliance with the requirements of MFRS 4 (Insurance Contracts) for the assessment of insurance liabilities and revenue associated with insurance contracts; and ii) insufficient access to the financial information and management of an associate.
4	Wintoni Group Berhad	5 May 2015	SJ Grant Thornton	Unable to physically sight the Group’s computer equipment.
5	China Ouhua Winery Holdings Limited	30 April 2015 & 5 May 2015	Helmi Talib & Co.	Unable to ascertain whether the net recoverable amount of an asset acquired in China will exceed the total purchase consideration.
6	Ire-Tex Corporation Berhad	5 May 2015	UHY	Unable to validate the existence of sales of RM5 million to 2 related parties which were subsequently impaired.

MSWG’S COMMENTS:

It is a bit out of the norm though not totally surprising that within a short period of time there were 6 public listed companies where their independent auditors had qualified their opinions on their audited financial statements highlighting issues of concern for investors to take note.

 

It may also serve as a ‘red flag’ or early warning signal to audited financial statement readers particularly shareholders, investors and potential investors who may need to make more informed investment decisions.

Weekly roundup

Regarding Cliq: The Edge wrote an article "Potential adjustment to price of Cliq’s QA". Some snippets and comments:


Ahmad Ziyad said that if a disparity between the oil price and the purchase price still exits in March, the assets’ price tag may be adjusted by 5% of the current amount, or no less than US$218.5 million.


Five percent adjustment is not that much, the impact of the lower oil price on the price should be much higher, in my opinion.


When asked why Phystech was willing to sell its assets, Ahmad Ziyad said: “They think that all this while they have not realised the full potential of the field.”


That is not what I hoped to read, better something like: "there is enormous potential, but the company has not enough funds to explore, so Cliq will purchase new shares in the new SPV with which new exploration wells will be drilled, old machinery will be replaced by new, efficient ones".


I have been very critical of SPACs from the start, I am afraid I have not yet seen any reason to change my mind in this matter.


MSWG wrote in their newsletter of March 27, 2015:

That is indeed good news. However, I like to note that Amin is a large shareholder of Integrax. For small shareholder (in the absence of large shareholders fighting to get a better deal) there should also be enough venues to participate in shareholders activism. In some countries I have noted class action suits, taken up by an organisation similar to MSWG, with large amounts of minority investors chipping in. That scenario still appears far away in the Malaysian context.


Kinibiz wrote: "At SP Setia, a conflicted ex-chief judge", a snippet:


Can the chairman of a public-listed company rightly hold shares in another public-listed company — a direct rival at that?

Common sense says no. In fact the law also says this should not be. But this scenario is exactly what has unfolded with regards to SP Setia chairman Zaki Azmi.

Zaki, a former chief justice, holds 19.12 million shares in Eco World Development Group as of Jan 22, according to the latter’s latest annual report. On that date this corresponded to 3.77% of Eco World’s outstanding shares base, making him the third largest shareholder, and was worth RM37.2 million at Friday’s closing price of RM1.95 per share.

And it was not just Zaki. Eco World’s latest annual report also reveals that SP Setia’s two foremost management executive — acting CEO Khor Chap Jen and acting COO Wong Tuck Wai — holding 2.29 million and 1.53 million shares respectively as of Jan 22 this year. The shareholdings come to 0.45% and 0.3% respectively of the outstanding shares base at that point.

This raises pressing questions of conflict. Foremost is why Zaki and company are apparently turning their backs on the obligation for company directors to actively avoid positions of conflicting interests under Section 132 of the Companies Act, which stipulates that directors must use “reasonable diligence” in the discharge of his duties.

Worse, this rubs salt onto SP Setia’s festering wounds after a massive talent drain to Eco World, which is now counting a legion of former SP Setia men — all the way up to the top — as among its directors, top executives and most of its workforce.


It is indeed rather strange and worrisome, the investments in Eco World of the persons mentioned above are substantial. Will that have an impact in their acting in the best interest of SP Setia?

XOX: from bad to worse ..... (2)

I wrote before about XOX's proposals, one snippet:


"In other words, current shareholders (who might include loyal shareholders who bought shares of XOX at its IPO price of RM 0.80), who inject further money to subscribe to the rights issue, and who inject even more money to exercise their warrants, will in total only receive 36% of the enlarged shares in the maximum scenario.

And almost all of the dilution due to the restricted issue and SIS will be done at a price that is only a small fraction of the RM 0.80 that shareholders paid at the IPO.

Is this the way the company wants to reward its loyal shareholders?"


The official circular is out. It is a rather long document (108 pages), but what I completely miss is a proper discussion about the huge dilution that normal shareholders will endure if the proposal is approved. In my opinion, it should have been included in the following paragraph:

I find it dubious to mention enhancing of shareholders value without discussing the dilution that they will face.

If one follows all the numbers that are given in the document, then one should be able to work out the dilution. But why is this not transparently presented, accompanied by a proper discussion about the reasoning behind it all?

I have no problem with the rights issue (in which all shareholders can participate), but very much with the huge Restricted Issue (Private Placement) and the massive SIS (Share Issue Scheme).

The Directors will participate in the SIS, and are thus very much conflicted in this exercise (at least that is admitted in the brochure).

I hope that MSWG will be present at the EGM and will grill the Board of Directors about the huge dilution for the minority shareholders.

Bursa Malaysia and the Securities Commission should revisit the rules regarding Private Placements and ESOS/SIS schemes, and limit them to a decent maximum (like 5% or 10% of the outstanding shares of a company).

The perils of Private Placements

This blog has warned many times about the perils of Private Placements (PPs).

Rita Benoy Bushon, CEO of MSWG, wrote an excellent article about this matter in Focus Malaysia:

In short:

• Why the need for PPs?
• Why not consider a rights issue in which all parties can participate?
• No transparency regarding the placees of PPs.
• The discount widens if the share price rises (and the PP can be aborted if the share price decreases).
• The urge for a limit on the size of a PP, say 10% of the shareholding through regulatory approval.

I like to add that minority shareholders in unlisted companies are often protected through the "right of first refusal", any new shares have to be offered first to the existing shareholders, who can take it up pro rata to their shareholding.

Masterskill: another deal aborted

I have written many times about Masterskill, I am afraid not often in a positive way.

The company recently aborted its proposed sale of its properties. Below information is from MSWG's newsletter, December 18, 2014:


According to the announcement released by MEGB on 16 December 2014, the independent valuer namely Cheston International (KL) Sdn Bhd, had ascribed an indicative market value of RM110.4 million for Masterskill (M) Sdn Bhd’s operating property assets in Cheras, Kota Kinabalu, Kuching and Pasir Gudang (“Properties 1”), which is significantly higher than the initial indicative sale consideration of RM75 million offered by Mr. Siva Kumar A/L M. Jeyapalan.

Following the above, the parties were unable to mutually agree on a revised sale consideration for the Properties 1. As such, the Board of MEGB had resolved to abort the proposed disposals and proposed ESOS and will consider other alternatives to implement its asset light strategy and raise funds for the company. The Board will make the relevant announcements in due course.

MSWG’S COMMENTS:
Again another corporate exercise of restructuring to revive the business of MEGB fell off eventually with a significantly higher indicative market value by the independent valuer. Shareholders are growing impatient and disappointed to go through multiple corporate proposals and more so they were also astounded by significant fluctuations in the market value of their shares upon the abortion of multiple proposals. The negotiation price of RM75 million, representing a deep discount of 32% to the indicative market valuation would raise the question on how it was possible that the Company could initially have considered such a low indicative sale consideration of RM75 million which was so much below the indicative market valuation although the offer was subjected to independent valuation and shareholders’ approval.


It is even weirder if we go back to the 3rd quarter result of 2013, the company posted a loss of RM 104 Million, and the (rather short) reason it gave was (emphasis mine):


The higher loss before tax was largely due to provision for impairment loss on goodwill and certain of the Group’s property, plant and equipment totaling RM88.2 million.


In other words, it had just written down its property by a large amount. And Siva Kumar offered to buy the property assets at this low valuation, "willing buyer, willing seller". The independent valuer, Cheston International, seems to think the deal is not that great for the other shareholders.

iCapital: questions regarding adjourned AGM and expenses (3)

I guessed that the letter from the City of London would have settled the matter, but I was wrong.

According this article on the website of The Sun, Tan Teng Boo has reacted to the letter, some snippets (emphasis is mine):


"Share owners are still not able to make an informed decision as the reasons given by City of London are inadequate, baseless and utterly weak," he said.

He said the fact that the letter was not addressed to the share owners shows that the foreign fund had no intention to clarify their position to all share owners of the fund and called upon City of London to revise and substantially improve its standards of corporate governance.

"The letter by City of London is a clear testament of the foreign fund's lack of integrity. By giving such superficial reasons for the opposition of Resolution 4, the foreign fund makes a mockery out of the other 3,400 share owners."


I am really speechless. Mr. Tan is not even a member of the Board of Directors of iCapital, he is an interested party in this all, being the fund manager who received more than RM 6 Million in fees over the past one year alone.


According to Tan, his views were supported by the Minority Shareholder Watchdog Group, whose CEO Rita Benoy Bushon said that best practices encourage shareholders, especially institutional shareholders, to explain their reasons for opposing a director's re-appointments, especially independent directors.


Well, City of London did explain their reasoning, my guess would be that the MSWG is ok with that. And I strongly doubt that MSWG agrees with the aggressive tone of the first paragraphs, especially the underlined parts.

Tomorrow the adjourned AGM will be held, MSWG is usually present (and vocal) on those meetings, I am very interested what their opinion is in the above matter.

I think Mr. Tan went way too far in this matter, and that the Board of Directors of iCapital should significantly step up their game.

I have written before about the persistent discount to the NAV of iCapital's share price which has lasted already for about six years, which did coincide with the underperformance of the fund over the same years.

In the IPO documents (mostly here and here) detailed ways are described to deal with the discount. I am puzzled why the Board of Directors of iCapital has not taken any active measures regarding this matter (except for a one-off dividend). Some snippets of the IPO document from 2005 (CEF is Closed-End Fund):

 

 

 

ACGA: CG in Malaysia improving

I have written before about the highly regarded country reports by ACGA-CLSA:

• "Asean: Virtue and Vice"
• "Malaysia’s perennial problem: enforcement".

The new report "CG Watch 2014" has been published, I have not yet read the full report, but this is what MSWG wrote about it in their weekly newsletter:


Malaysia is on the 4th position out of 10 in the ACGA-CLSA CG Watch 2014.  The Report mentioned that Malaysia was the only country that had consistently edged up in the score from 49% in 2007 to 58% in 2014. The improvements were largely through a mix of government-driven reforms in the corporate sector such as the implementation of CG Blueprint 2011, a state-grandfathered push to require domestic institutional investors to take up CG seriously through the Malaysia Code of Institutional Investors and the creation of one of the region’s better independent Audit Oversight Board (AOB). The Report also recognised the emergence of some aspect of culture emanating through the development of the Institutional Investors Code, and elements of voluntary poll voting with improved communications by PLCs.

The Report highlighted that the Asian region as a whole often gets caught up in politics making legislative changes tough and thus would depend upon strong government support which normally is not forthcoming.  Securities commissions are beginning to take enforcement seriously, but the disclosure of these efforts can be improved.  The Report also highlighted the conflicts of interest in the role of stock exchanges. Shareholder rights in the different markets were said to be weak, especially relating to takeover and major or related-party transactions.

The CG Watch 2014 reported that our country began promoting corporate social responsibility (CSR) well ahead of many other Asian markets, however, the implementation stopped at the aspect of CG financial reporting.

The Report had suggested that PLCs in Malaysia should disclose more details in the AGM agendas and should provide commentary on services covered by non- audit fees.

Lastly, the Report also highlighted several sure ways to be downgraded in the next rating. One; is the continuation of voting by show of hand at AGMs/EGMs and two; if the implementation of the Malaysian Code of Institutional Investors is weak.


While I do agree that in general CG seems to have improved over the last years, there is still the lingering fear that "corporate governance [is] lacking substance".

The real test would be the next recession, "Only when the tide goes out do you discover who's been swimming naked" (a quote from Warren Buffett).

In the meantime, I am looking forward to the detailed report regarding Malaysia and Singapore.

Delloyd's hidden gems to be revalued?

On May 16, 2014 Delloyd Ventures announced a proposed selective capital reduction and repayment exercise in which minority shareholders will receive RM 4.80 per share.

The share price, which had "miraculously" increased in price and volume since the beginning of April (six weeks before the announcement), jumped further to around RM 4.50, its current price:

Regarding the reasons behind the proposed privatisation, the company mentioned the following (emphasis mine):

If one reads the red underlined parts, then a pretty bleak picture emerges. But, as a knight in shining armour, the controlling shareholders appear, and propose a premium opportunity for the minority shareholders to realize their investments.

I have to admit to the readers that at this moment tears started to form in my eyes. I have written many stories about controlling shareholders "forcing" minority shareholders out at much too low prices under the threat of delisting and mandatory acquisition. Was I too harsh?

At that moment a short beep announced the arrival of an email from a friendly party in my inbox, it read:


"Delloyd announced the privatization via selective capital reduction at RM4.80 per share. The NTA is RM4.37. Delloyd's jewel is a large oil palm estate Sungai Rambai Estate which is about 20km from KL. It has an area of 1,448ha. The proposed WCE will run right through the middle of this estate. The market value of this estate is about RM1.55bil at RM10psf. This represents RM15.5/share. Delloyd's market cap at the last done price of RM4.35 is RM435mil. Delloyd owns an established auto parts manufacturing business and matured oil palm plantations in Indonesia (on a lovely island with resort development potential). These are valued at RM250-350mil."


Immediately my tears had dried, this is rather different from the official announcement. Value is in the eye of the beholder, but even if the valuation of RM 1.55 Billion is somewhat too rich, then the offer price of RM 4.80 seems to undervalue the company quite a bit.

MSWG wrote the following in their weekly newsletter:


DELLOYD VENTURES BERHAD (“DELLOYD”)
Delloyd had on 16 May 2014 received a privatisation offer from its major owner. The privatization plan at MYR4.80 is via a selective capital reduction and repayment exercise. Major shareholder Chung & Tee Ventures Sdn Bhd, and parties acting in concert with them, own a total of 61.41 million shares or 63.58% stake in Delloyd.

Chung & Tee have pointed out that Delloyd’s automotive segment is becoming increasingly competitive as the group’s revenue, operating profit and operating profit margins have been declining in recent years.

Meanwhile, its plantations segment continued to face challenges given prevailing fluctuations in foreign rates of the rupiah and increasing cost of production. It also reasoned that the group’s shares had been relatively illiquid.

MSWG’S COMMENTS:
Prior to the offer the stock closed at its 52-week high at RM4.35 on the day it was suspended (15 May 2014). The stock is currently trading at a high P/E ratio of 19.2x, while its P/BV is trading at 1.0x. The gearing level is low with Debt/Equity ratio at 11.2%. Nevertheless we are of the view that revalued assets of Delloyd could fetch higher value than its current book value due to its plantation segment which consists of bio-assets with an average 3-year oil palm trees and going to contribute significantly to the group.


I really hope that the company will do a proper revaluation of all its assets based on the current prospects and present this to the shareholders. If not, I hope the authorities will take action.

Maybulk: EGM on April 17, 2014

One person asked me if I would attend the EGM of Maybulk to be held tomorrw. The answer is negative, I don't own any shares of Maybulk anymore, sold my shares after the EGM in December 2008 when shareholders approved the investment in POSH.

The shareholding of Maybulk looks like this:

PCL is not allowed to vote, if PPB Group also abstains (I think that should be the case) then Bank Pembangunan Malaysia Bhd. (BPMB; 100% owned by the Ministry of Finance) is kingmaker.

BPMB has one non-executive non-independent director on the Board of Maybulk, he has not voiced any concern about the resolution, so it is extremely likely that BPMB will vote in favour and thus that the proposal will be voted through.

However, those shareholders of Maybulk who share concerns regarding some of the issues I brought up can still take action by:

• Voicing their concern at the EGM and ask questions (which the Board of Directors is obliged to answer)
• Contacting the Securities Commission at aduan@seccom.com.my
• Contacting Bursa Malaysia at aduan@bursamalaysia.com
• Contacting MSWG at watchdog@mswg.org.my
• Contacting BPMB at http://www.bpmb.com.my/contactUs/enquiry.asp

I hope that the vote at the EGM will be done by poll (one share one vote), and that the detailed voting result will be announced.

I also hope that the press is allowed to attend the meeting, although I doubt that will happen.

I have fought tooth and nail in 2008 to try to prevent the deal going through, only The Edge Daily published my letter. I did lodge a complaint with the Securities Commission before the EGM, unfortunately it was handled in the most disappointing way possible.

I have lodged a new complaint, mostly regarding the lapsing of the Put Option, the Rights Issue in 2012 and certain transparency issues. Hopefully it will be handled better and faster.

The authorities simply have to improve its enforcement compared to say ten years ago (when enforcement was close to zero), and luckily there have been some signs that it is indeed happening, even against some VIPs.

Bernas: are all minority shareholders really treated fair and equal?

Bernas (Padiberas National Berhad) has been in the news lately. The first attempt by companies linked to Syed Mokhtar AlBukhari to takeover and thus delist the company failed, but a second attempt succeeded (at least regarding the latter part). Rather surprisingly, since the offer was exactly the same.

Regarding the offer price, it seems to be rather low for such a cash cow, an opinion that MSWG agrees with, according to this article in The Ant Daily:


According to the Minority Shareholder Watchdog Group (MSWG), a prudent estimate of Bernas’ intrinsic value is RM3.2 bil or RM6.13 per share. At a conservative 8.5-11.5% discount with at least a 2% perpetual growth rate, the indicative value of Bernas is estimated at between RM4.18 and RM6.13.


Then why did some of the minority shareholders change their mind and accept the low offer? Is it possible that some received a better offer than others?

Comments made by Agriculture and Agro-Based Industries Minister Ismail Sabri Yaakob clearly seem to indicate that. In an article "Bernas delisting ‘good’ for farmers, fishermen" at KiniBiz website, the Minister allegedly said (emphasis mine):


.... Bernas has agreed to his request to pay Nafas and Nekmat RM2 million each annually even though they are no longer shareholders and are not entitled to a dividend.

“(This is so) that Nafas and Nekmat will still have consistent financial (support) … So it’s a good deal for them. They are well taken care of,” he said.

Ismail Sabri said he had received a “personal undertaking” from Syed Mokhtar that Nafas and Nekmat will be offered 5% each of the shares, should the company be re-listed in the future.


Similar articles can be found here and here reinforcing that the Minister really said this.

That is all very nice for Nafas and Nekmat, I have zero problems with them being treated generously and receiving more than the low one-off payment of RM 3.70 per share.

But there are many other minority shareholders of Bernas, and according to the rules, they should be treated the same, they should receive the same offer. Thus they also deserve a yearly payment and an offer a percentage of shares when Bernas is relisted again.

The Capital Markets and Services Act, paragraph 217, clearly states this:

Lee Won Chen of Shearn Delamore & Co writes it in a very clear manner:

So why have the other minority shareholder not received a similar offer?

Nafas and Nekmat have in the mean time accepted the offer, according to the same article:


The National Farmers Organisation (Nafas) and National Fishermen’s Association (Nekmat) had respectively held 3.7 and 3.2 percent of Bernas shares previously.

However, Bernas, now owned by companies related to tycoon Syed Mokhtar AlBukhari, has since bought the shares.

Because of this the public shareholding has fallen below 10% and the shares of Bernas have been suspended since March 21, 2014.


This of course will put even more pressure on the remaining shareholders, holding shares in an unlisted company is not a very attractive proposition for many.

In an interesting twist, Bursa Malaysia asked the company to clarify an article in The Edge Malaysia dated February 10, 2014, and Bernas answered:


In response to your query, after due enquiry with our Directors and major shareholders, the Board of Directors of Padiberas Nasional Berhad (“Company”), wishes to inform that as at today, the Company is not aware of any written arrangement on the following:

(i) any corporate restructuring that includes an impending relisting plan; and
(ii) where the National Farmers Association (“Nafas”) and the National Fishermen’s Association (“Nekmat”) will eventually hold a 5% stake each in the newly listed entity.


The statements of the Minister on one side and Bernas on the other side seem to contradict each other. The behaviour of Nafas and Nekmat (accepting the same offer offer that they refused earlier) seems to put more weight on the statement of the Minister.

Bursa Malaysia and the Securities Commission should urgently investigate this matter and show that they really practice what they preach:

"to promote and maintain fair, efficient, secure and transparent securities and futures markets and to facilitate the overall development of an innovative and competitive capital market."


On a side note, regular readers of this blog will know that I don't like these "listing-delisting-relisting games" at all, they are "played" mostly by the tycoons, at the expense of the minority investors, who hardly stand a chance. I have yet to read a good and proper reason why a company needs to be delisted and relisted, arguments given are often vague along the lines of "the need to restructure the company". The authorities really should do something about this abuse of the rules and the continued disadvantaging of minority investors.

And the exchanges responded ....

In reference to the last two postings, it is good to notice that both exchanges (Bursa and SGX) have responded in a timely fashion.

SGX is rectifying its web-page issues

MAS takes a serious view of market misconduct


"Since 2008, criminal prosecutions have successfully led to convictions in 33 market misconduct cases. In the same period, MAS [Monetary Authority Singapore] has successfully obtained civil penalty judgments in 4 cases before the Singapore Courts, as well as entered into 14 civil penalty settlements. Importantly, all these settlement agreements include an admission of liability by the offender."


That sounds indeed not bad, and I like especially the last part, on Bursa too many parties are allowed to "escape" without admission of liability in cases of possible insider trading.

However, "since 2008" is quite a long time, six plus years, how many cases were investigated in total, and in how many cases complaints were filed of possible misconduct? That would give an indication of the success rate of the enforcement.

Also, how many cases ended in a jail sentence (the only punishment that really counts, in my humble opinion)?


Bursa to go on public engagement sessions

"Bursa Malaysia Bhd plans to embark on a series of public engagement sessions with retail investors to further address certain issues that were raised at its AGM."

That sounds good and proactive.

I still can remember years ago that I complained to Bursa about the RM 40 minimum brokerage fee. Quite a few counters that I was interested in had rather low trading volumes, and a large spread between the highest buyer and lowest seller price. I usually put in a buy order of a decent size at the middle between those two prices, but sometimes was rudely surprised finding out that only 100 shares were bought (once at a price around RM 0.50), and that the brokerage in percentage of the order was much too high for comfort.

I also gave two pretty simple solutions:

• either raise the minimum board lot size for shares trading at lower prices (in Hong Kong for instance penny stocks go in lots of 10,000 shares)
• or lower the minimum brokerage for these small orders.

Bursa answered that I should just buy at the sellers price and sell at the buyers price, if I had a problem with the brokerage fee.

Needless to say, this advice equates to a one way ticket to the poor house and I was pretty disappointed about the answer, also about the tone of it.

I also approached MSWG who came with a better solution: if say half an hour before the closing a small amount of a trade is done, then one could try to buy at a somewhat higher price, since the brokerage will count for both orders.

In itself good advice, but not always practical, for instance, I don't always have time to monitor my trades.

The situation is the more surprising, since low (or no) volume is a real problem on Bursa, even today, despite the fact that the market has had a very nice run-up since 2009 and many people must have made money, at least on paper.

On a day like today, 146 out of 992 main board counters (15%!) are not traded at all (and many other counters only for small amounts). The percentage of untraded counters for the ACE market is higher, at 20%, and for structured warrants it is a whopping 76%.

Hopefully Bursa Malaysia will look seriously into this problem of the high minimum brokerage, and come with a proper solution.

Heated questioning at Bursa's AGM

Article on The Edge website:

Bursa AGM: Shareholders question Bursa’s efficiency at long heated meeting

Some snippets:

Bursa Malaysia Bhd’s annual general meeting (AGM) today was longer than expected, with shareholders incessantly raising questions on the operational efficiency of the stock exchange and voicing dissatisfaction on various issues. The meeting, punctuated by some heated questionings, began at 10 am and ended at 1.20 pm today. During the three-hour long AGM, Bursa Chairman and Non-Executive Director Tun Mohamed Dzaiddin bin Haji Abdullah was said to have cut short some issues raised by shareholders, which prompted some infuriated shareholders to storm out. “How can the chairman deny us the opportunity to raise important issues?” a shareholder complained, while talking to theedgemalaysia.com.


The Board of Directors has to answer questions of the shareholders during an AGM, the only time they can ask questions.

From the above it looks like the journalist of The Edge Malaysia was not allowed in the AGM, why not? I think it should be a completely common practice to allow journalists in, a healthy dose of transparency should do no harm, I would think.

One way to solve this problem is that an organisation like MSWG buys small amounts of shares in all listed companies under several different subsidiaries, and let some journalists (beside their own representative(s) of course) be a proxy for those subsidiaries.


The management of the stock exchange – including CEO Datuk Tajuddin Atan – declined to talk to reporters after the annual general meeting (AGM). But a shareholder told theedgemalaysia.com that many shareholders had raised pointed questions and made sharp comments at the AGM. One was that ‘Bursa is not quick enough in response to unusual market activity (UMA)’. “For instance, we see some shares surging all of a sudden without any apparent reason. Is there insider trading involved?” the shareholder said. “We also want to know what Bursa will do and how to curb such activity,” the shareholder added, noting Bursa’s response was that it would investigate any ‘unhealthy activity’. Another shareholder piped in: “The trading practices are not fair to investors. We want it to be simpler and fairer for all investors.” Shareholders were also unhappy over ‘high brokerage fee’ to buy, sell and transfer shares. The minimum brokerage fee to buy or sell shares is RM40, while to transfer shares it cost RM10. “It is painful for retail investors like us when we trade in small volume,” a shareholder said.


I agree that RM 40 minimum brokerage fee is very high when the amount of shares traded is small. The minimum brokerage should be much lower, otherwise the whole idea behind having trading lots of only 100 shares does not make sense.

The above questions do again put the spotlight on Bursa being a monopoly, an exchange, a regulator and a listed company. Too many hats, if one would ask me.