Why did Maybulk not take the "big bath"?

Maybulk released its 2015 annual report.

I have warned many times in this blog about the upcoming loss (for instance in 2014), in regards to the need to impair the valuation of its associate company, POSH (PACC Offshore Service Holdings).

A loss of almost RM 1.2 Billion due to many provisions, impairments, etc., surely Maybulk must have taken the big bath?

But surprisingly, this has not been the case at all. When we dive into the accompanying notes to the accounts, we find the following:

In other words, the valuation used is almost three times as high as the market value, a staggering RM 652 Million difference.

On a side note, one wonders, if the POSH shares are really so much more valuable than the market price suggests, why does Maybulk still purchase new vessels, why not buy additional POSH shares? It can immediately mark up the price in its books by a factor 2.85, for every RM 100 Million invested it can book a cool profit of RM 185 Million!

If however the full impairment was taken into account (I think a lot more realistic), then the loss for 2015 would have been more than RM 1.8 Billion.

The reasons for the relatively low impairment that was used can be found in the following paragraph:

I don't like DCF projections, have warned about its use many times in this blog. Basically, by tuning some parameters financial engineers can come up with about any valuation that they want. And that is often how DCF is used (or rather misused), especially in the Malaysian context.

Some considerations in this particular case:

• The calculation itself is never given (as usual), so we can' t check its reasonableness. This is especially important in this case since DCF was used twice to calculate POSH's value (at the initial RPT and at the IPO), and both times the resulting valuation was hugely optimistic.
• The DCF valuation depends so much on the underlying assumptions, as shown above, one percent change in the discount rate will change the valuation RM 230 Million, a huge impact.
• The only cash that Maybulk gets from its investment in POSH is dividends, and they have been tiny over the last eight years, most of the years they did not receive a single cent, so how is it possible to come up with such a high valuation?
• And lastly, why did Maybulk change its method of valuation, from the unexplained price-to-book ratio in the previous year to DCF, why is no explanation given?

The balance sheet took a hit because of the reported loss, but with a debt equity of 52%, things still look reasonable (left column 2015, right column 2011):

However, if we adjust the numbers for the market value of the POSH shares, then the balance sheet looks like this:

Suddenly the borrowings are larger then the shareholders equity, implying a debt/equity ratio of clearly more than 1.

The financial picture does not look solid:

• Cash of only RM 140 Million
• Borrowings of RM 608 Million (of which RM 225 Million short term)
• Capital commitments of RM 410 Million
• Over 2015 the company booked an operating loss of RM 100 Million
• Its RM 1.1 Billion investment in POSH is hardly paying any dividend

And then taking into account that just 2.5 years ago Maybulk could have sold back its investment in POSH by exercising its put option for a profit of a few hundred million (not the current paper loss of RM 756 Million), generating more than 1 Billion extra cash, and without the need to invest a few hundred million for POSH's IPO shares.

In other words, instead of being a highly leveraged company in a weak financial position, Maybulk would be sitting comfortably on top of a huge cash pile. It could have given out RM 1 dividend per share (more than the current share price!) and would still have more cash and less borrowings than now.

Unbelievably, the minority shareholders did not even get a chance to vote about the put option.

Maybulks profit warning

Maybulk announced a profit warning:


The Company wishes to inform its shareholders and potential investors that the Company expects to record a substantial loss for the fourth quarter of 2015 (4Q2015) and the financial year ended 31 December 2015 (FY2015) mainly attributable to the following:-

(i)    Provision for onerous contracts
The dry bulk market continues to be weak and it is uncertain when the market will recover. The Group has reviewed its non-cancellable operating lease contracts for the chartered-in vessels and based on a preliminary assessment, the charter-in costs are higher than the current and likely market rates. Hence a provision for onerous contracts has to be made.

(ii)    Provision for impairment of investment in associate, PACC Offshore Services Holdings Ltd (POSH)
The current depressed state of crude oil prices has had an adverse impact on the global offshore marine industry in which POSH operates in. The Group carried out a preliminary assessment of its investment in POSH and is of the view that the fair value of the investment in POSH is likely to be lower than the carrying value and an impairment loss provision has to be made. While the amount of the impairment is yet to be determined, it is expected that this will have a significant adverse impact on the financial results of the Group for 4Q2015 and FY2015.


Today Maybulks share price fell by 10 cent (14%). That sounds logical given the above profit warning, but is in fact a bit strange:

• The dry bulk index has fallen to new lows, that is public information, it is not a stretch of the imagination that it would lead to further losses for Maybulk, as it had done already for the first three quarters;
• Maybulks associate POSH is a public traded company, the share price has fallen drastically since its IPO to a new low of SGD 0.29. Maybulk had announced already that it would consider impairing the investment, something that was in my opinion a long time overdue. 

I have been extremely negative about Maybulks investment in POSH since the moment it was announced in 2008. I fought it tooth and nail, to no avail, in the Malaysian context no surprise.

Unfortunately, it looks like I have been proven right in my assessment.

Investing ca. 800 million cold hard cash during the depth of the global recession in a related company with a negative NTA, but "magically" valued at billions of RM, and continuing to pile additional cash in that company just to be able to call it an associate is apparently not such a good idea after all.

Lesson learned for the minority investors of Maybulk, a very expensive lesson.

Apart from it being a bad investment, there is also a long list of corporate governance issues (some of them rather serious) regarding Maybulk and its acquisition of POSH.

Maybulk: large paperlosses on its investment in POSH (4)

I wrote before:

• POSH should write down its intangibles, which will decrease its book value
• Maybulk should impair it's investment in POSH, it should have marked to market it's investment.

There are some indications that the above might (finally) happen, at least to some degree.

From POSH's latest announcement:

From Maybulk's latest quarterly announcement:

That will not give any consolation to current shareholders in any of these two companies, especially since the normal operations of both companies will be rather bad, due to the current economic environment in both the shipping and oil & gas industry. For the shareholders it will be a case of "when it rains, it pours".

But after the impairments the balance sheet of both companies will give at least a somewhat more realistic picture, something that was overdue for quite some time.

Maybulk: large paperlosses on its investment in POSH (3)

Maybulk published its 2014 year report. Two excerpts, the first from the Chairman:

And from the CEO:

"Yielded satisfactory returns", "continues to contribute positively", that sounds all very good.

This is in rather stark contrast to what I wrote before (here and here) about the hundreds of millions of paper losses that Maybulk should book on its investments.

Was I wrong? Unfortunately, I was not.

"Hidden" deep in the report, somewhere in the notes on page 66 we find the following:

So Maybulk is indeed sitting on a huge paper loss of about RM 780 Million, according to market value!

However, while Buffett marks to market the Berkshire Hathaway accounts for 50 years, Maybulk decided not to write the investment down. Apparently they think they know things better than Buffett.

The reasoning can be found here:

Based on price-to-book ratio?

Firstly, they haven't bothered to substantiate the reasoning by numbers, what is the price-to-book, how are other companies in the same industry valued to their book value? Disappointing, since we are talking about a RM 780 Million difference, not exactly peanuts.

Secondly, POSH is indeed trading at a discount to it's book value, but only a discount of 30%. If we correct for that factor, then the valuation still doesn't even come close to the RM 1.3 Billion for which it is valued in the books.

Thirdly, POSH has USD 295 Million of intangibles on its balance sheet, due to take overs it made in the "goldilocks" period before the global financial crisis.

I think it is questionable that those intangibles should still remain on the books, branding wise (under the POSH name), asset wise (some ships have been sold, new ships have been bought) or employee wise (some will have moved on, new ones have been hired). I think the intangibles should have been written down to zero by now.

If POSH is indeed overstating its balance sheet (by not writing down its intangibles), then that will result in low ratio's of profitability (earnings compared to assets and equity), and that seems indeed to be the case:

Although 2014 was a difficult year for the industry, 2011 until 2013 were fine, and the ratio's should have been clearly higher. These are really low indicators, they might even be lower than the cost to borrow funds, which doesn't make sense. Why borrow money to buy assets that yield less than the interest rate to be paid?

In other words:

• POSH should write down its intangibles, which will decrease its book value
• Maybulk should impair it's investment in POSH, it should have marked to market it's investment.

Maybulk's year report is very disappointing in that is does not want to face reality, although it was expected:

"Will the 2014 year report give more information on this subject? I doubt it, but hope to stand corrected."

It is the first year report after the IPO of POSH, the first time an objective (market) value is available for it's huge investment.

Nowhere in the report is the decline in price of POSH quantified (for the benefit of the readers of this blog: it is 59% down compared to its IPO price). Nowhere in the management discussion it is mentioned that the market value of it's investment has occurred huge paper losses.

This is important, since the investment is for a large part held for 6.5 years, that is rather long.

But also, Maybulk could have sold the shares in POSH for a profit a bit more than one year ago, but it decided not to do that and even to add further to the position at the IPO price, which looks like a very expensive mistake.

What was started in 2008 through a RPT has led to a huge destruction of capital, at a moment when there was in fact a huge opportunity. Not many companies had the luxury to sit on top of RM 1 Billion cash in the middle of the global crisis. Now the company is sitting on a large paper loss while having a net debt position, and has cut it's dividend to a measly 1ct.

The AGM will be held on May 27, 2015.

Maybulk: large paperlosses on its investment in POSH (2)

In my previous post on this matter, I wrote:


"... if Maybulk decided to mark its investment in POSH against the market price (which sounds pretty reasonable to me), then it has to account for a one-off loss of RM 540 Million."


Maybulk announced its quarterly results and, as expected, the company did not mark its investment in POSH down against the market price. Although POSH's share price keeps on going down (at the moment it is SGD 0.52, 55% below the IPO price), Maybulk in actual fact managed to book a paper profit on its investment.

That does sound rather puzzling, how can one book a profit on an asset that only goes down in value?

The "trick" is that the SGD is going up compared to the RM. Maybulk is taking that into consideration, but not the (much larger) decrease in price of POSH's share.

The value of POSH in Maybulk's account is now a whopping RM 1,334 Million. However, the market value is only about RM 533M, a difference of about RM 800 Million.

In other words: although Maybulk's investment in POSH has been most disappointing, the share price of POSH has tumbled, the dividends received by Maybulk have been peanuts, "the share of results of an associate" (due to POSH's profit) has been small (and anyhow a non-cash item) and there is no clear exit down the road, Maybulk still continues to book paper profits on it.

According to Maybulk its own shareholders equity is close to RM 2.0 Billion. If we subtract the above RM 800 Million from it, then the adjusted net asset value is close to RM 1.2 Billion, about 40% less.

Maybulk's current market cap is RM 1.28 Billion, much closer to the adjusted net asset value than Maybulk's value. It seems the market values Maybulk according to its adjusted NAV, not the NAV in its books. That says something.

I am pretty sure that Maybulk's accounting is all according to the international accounting standards, and that the auditors will sign off on them.

Those standards are definitely not mine, I think they are pretty ridiculous. I think that if an asset is valued in a normal functioning market then that value gives a much better reflection than some paper value derived from the amount invested corrected for the share of results and currency fluctuations.

At the very minimum, Maybulk should inform its shareholders about the huge gap between the valuation in its books versus the valuation according to the market. Unfortunately, Maybulk's transparency has "not exactly" been great, and this rather obvious comparison is not made.

Will the 2014 year report give more information on this subject? I doubt it, but hope to stand corrected.

To add to the rather bleak situation, things don't look rosy in the near future either: "The Board expects 2015 to be a testing year for the group."

Maybulk announced a dividend of only 1 cent. It has 151M cash versus RM 347 M borrowings due to its continued investments in POSH.

Maybulk: large paperlosses on its investment in POSH

I have written many times about Maybulk and its investment (RPT) in POSH. Half a year ago POSH was (finally) listed on the SGX. Time to evaluate how things have worked out for Maybulk and POSH.

Each year Maybulk had booked profits on the acquisition, given that POSH is a 21% owned associate and POSH was making profits.

In Maybulk's last year report it is written:

Several analysts mentioned in 2013 that POSH's IPO would unlock the value for Maybulk's investment.

Given the above, what possibly could go wrong?

Actually quite a bit.

POSH's share has come down a lot, from its IPO price of S$ 1.15 to S$ 0.70, a 39% decrease in price.

On one side, the price of oil has come down, hitting all players in the oil & gas industry, either upstream or downstream. The more so, since many players in this industry have just recently invested in expansion.

On the other side, there are specific, negative, reasons for POSH, for instance:

• The problems in Mexico;
• The CFO has resigned, "to pursue other opportunities";
• The utilisation rates of its fleet seems to be dropping;
• A POSH vessel sunk, a tragic accident in which three employees died; Investor Central questioned the lack of transparency surrounding the event.

The current market cap for POSH is S$ 1.26 Billion, giving Maybulk's 21% holding a valuation of S$ 265 Million or RM 685M.

That is a far cry from the valuation in Maybulk's book of RM 1,225 Million, a difference of about RM 540 Million.

In other words, if Maybulk decided to mark its investment in POSH against the market price (which sounds pretty reasonable to me), then it has to account for a one-off loss of RM 540 Million.

Suddenly, the investment in POSH doesn't seem so "strategic" or "prudent" anymore. It simply sits on top of a huge paper loss, and that after six years.

Unfortunately for Maybulk's minority shareholders, it didn't have to be that way. Maybulk had an option to sell its shares in POSH for a 25% profit. An option it could have exercised less than one year ago. I wrote before about this issue and the disappointing way it was handled.

The current valuation of POSH also puts severe question marks towards Maybulk's acquisition itself and the price it paid for it, almost six years ago. An acquisition made in the midst of the worst global recession of the last 50 years. To make an investment in that climate, where basically everything was dirt cheap, and then to sit on a significant paper loss six years down the road sounds pretty bad.

On top of that, Maybulk has even increased its investment, by subscribing to additional shares at POSH's IPO, for which Maybulk went into debt. The huge cash position that it had six years ago being depleted due to the investment in its associate, a cash layout of more than RM 1 Billion.

The above might be a partial explanation (its existing business has also done quite disappointingly) why Maybulk's share has performed so poorly, both in the long term and over the last half year. Between 2007 and 2011 the share was often trading around RM 3, now it is only about half of that:

Focus Malaysia vs Icon Offshore

Focus Malaysia published a rather negative article about Icon Offshore, a company going for IPO very soon:


"A threat to one’s life, a police report, alleged irregularities and a cover-up all seem the ideal ingredients for an interesting movie script. Only in this case, they are believed to be actual events in the run-up to the listing of Icon Offshore Bhd, an Ekuiti Nasional Bhd-controlled (Ekuinas) company. According to sources, the company, which is scheduled to list its shares on June 25, has had to address these issues in recent months. Its prospectus was launched on May 30.While these issues are not expected to derail or delay the offshore support vessel OSV) provider’s listing debut, it does raise questions that all was not well in the company and whether these issues have since been addressed. Based on documents obtained by FocusM, a police report was lodged on Jan 15 by a Petronas Carigali Sdn Bhd senior official over threats to his life following his alleged discovery of several irregularities in Icon Offshore."


Icon Offshore announced today:

We have to wait how this story will evolve.

Regarding the IPO, I don't have much of an opinion, it looks rather pricey to me both versus the historic PE and its NTA. The "hot" story of Oil & Gas (and PETRONAS' future plans) seems to me to be overdone. All industry players keep on increasing their fleet (Bumi Armada just announced a huge rights issue), surely that can't go on for ever, and at one day might lead to increased competition and margin depression. The numbers from POSH (in the same industry as Icon Offshore) showed that its utilisation rates are dropping, that seems quite worrisome to me for the whole industry.

POSH, GOSH and the Mexican Mess

I have written several articles about POSH and its IPO, but not much about its problems in Mexico.

In short, POSH invested in a Joint Venture GOSH, which chartered eight vessels to a company named Oceanografia. This last company appears to be involved in a massive fraud.

A recent article by DealBook: "Citi Fires 11 More in Mexico Over Fraud"

"The fraud involving loans to Oceanografía — which depended on the government-owned oil company for nearly all of its business and has a well-known history of questionable finances — point to a potential weakness in controls. Whether Citigroup willfully ignored possible warning signs is the subject of an investigation by the F.B.I. and prosecutors from the United States attorney’s office in Manhattan.

The question at the heart of this case is why Citigroup ever did business with a company like Oceanografía. The company, which supplies marine engineering services to Pemex, Mexico’s government-owned oil monopoly, is known among Mexican investors as politically connected but financially troubled. Credit rating firms in the United States, corporate bond investors and Mexican lawmakers have raised concerns about Oceanografía.

In 2009, United States ratings firm Fitch warned about Oceanografía’s high leverage and poor cash flow generation. Fitch eventually withdrew its ratings because the company was not supplying enough information. In 2008, Standard & Poor’s noted that Mexico’s congress had investigated accusations of improper deals between Oceanografía and Pemex, though no wrongdoing was proved."


The same question can be asked to POSH, why did its joint venture GOSH do business with a company like Oceanografia? In SouthEast Asia POSH is playing a "home game", but in Mexico an "away game", is it possible that POSH went outside its comfort zone?

More information can be found in an article by Investor Central:

"Can POSH recover US$109.8m from its Mexican partner?"

Some important questions are asked:

1. Did GOSH make any other investment in the joint venture?

2. If Mexican bankers were not willing to lend money to GOSH, then why did POSH take the risk of lending?

3. What due diligence did it perform before extending the loan to GOSH? As security for the loan, it has share pledge agreements with the two Mexican shareholders of GOSH (representing 50 per cent interests in GOSH) and mortgages over the six vessels owned by GOSH.

4. What is the interest charged to GOSH for the remaining US$109.8 million?

5. Can it recover US$109.8 million from GOSH?


Another interesting article can be found on the site of a blogger who calls himself "Rolf Suey" and who seems to be very knowledgeable about the industry:

"IPO of POSH (Pacc Offshore Services Holdings)"


Yesterday POSH made an announcement to SGX that it has to write off a further USD 4.6 million, and about the legal proceedings.

On the Malaysian side, Maybulk has not yet announced how many shares of POSH it actually has bought at the IPO of POSH. The amount of money involved is large (around RM 200 million), and it is a Related Party Transaction, so one would have expected the company to keep its shareholders up to date.

Maybulk: IPO of POSH (6)

First of all a correction. On April 2, 2014 Maybulk issued its prospectus to acquire more shares in POSH. In it were the financial numbers of POSH for the year 2013.

On April 8, 2014 Maybulk announced a deviation in its audited accounts for 2013 due to a lower profit of POSH. I assumed therefore that the profit as given in the documents on April 2 had to be adjusted downwards, but it turned out that those were already adjusted. I have amended the relevant blog postings.

Remains the question why Maybulk waited until April 8 with announcing the profit deviation when they knew about the difference already at least on April 2.


The prospectus for POSH IPO has been issued and can be found here.

A (very) good review can be found here.

A few additional issues I like to mention:

[1] Maybulk was not the only company that subscribed to POSH shares in 2008, there was one other company named Singa Star Pte Ltd.

It turns out that the company did exercise the Put Option, contrary to Maybulk (USD 8.125 is exactly the original paid price of USD 6.50 + 25%):

Who will be right and who will be wrong? I guess we have to wait to see how things unfold.

[2] From the financial statements we can see the amount of Fixed Assets of POSH:

And the Depreciation:

The question is, why has the Fixed Assets in 2013 increased by 35% compared to 2012 while the depreciation has (slightly) decreased?

[3] POSH is aggressively increasing its fleet, but utilisation rates seem to be dropping since 2012, for every category:

[4] Another issue is the Joint Ventures:

The Joint Ventures have total assets of USD 720 million, but are still booking a loss for the year? Revenue as percentage of Total Assets looks rather low.


[5] The Related Party Transactions of POSH are huge (in USD '000):

[6] The Other Operating Income, detailed:

How recurring are these? Given the PAT for POSH over these years (respectively 26M, 54M and 73M), these amounts seem to be very meaningful.

Friday April 25, 2014 POSH will start trading.

Maybulk: EGM on April 17, 2014 (2)

Yesterday the EGM of Maybulk was held to acquire even more shares in POSH with the purpose of holding a minimum equity of at least 20%. The resolution was carried by an overwhelming majority:

I hope the minority investors did have the opportunity to voice any concerns they might have had, I haven't read any newspaper articles describing the EGM as of now.

In the mean time, the details of the POSH IPO at the SGX are revealed:

• Price per share S$ 1.15, near the bottom of the pricing range of S$ 1.13 to S$ 1.24;
• Amount to be raised: S$ 383 Million;
• Listing date: April 25, 2014.

To compare these prices with those paid by Maybulk, a few conversions have to be made:

• Maybulk is a Malaysian company accounting in RM;
• POSH is a Singaporean company accounting in S$, 1 S$ = RM 2.59;
• The deal between Maybulk and POSH was done in USD, 1 USD = RM 3.24 or S$ 1.25;
• Next to that, shares of POSH have just been split, 7.5 new shares for 1 old share.

In other words, for each share Maybulk bought in 2008 for USD 6.50, it will now own 7.5 shares bought at USD 0.87, or S$ 1.083. That means that the POSH shares that Maybulk bought in 2008 have appreciated by only 5.8% (one measly per cent per year), using the IPO price as benchmark.

However, things are worse when counted in RM: in 2008 1 USD was equal to RM 3.52, in other words the USD (and thus the investment in USD) is devalued by 8.0%. So actually Maybulk is sitting on a small loss for it shares it bought in 2008.

The shares it bought at the Rights Issue are faring better, they were bought at a price of USD 4.00. But that offer was open to all shareholders of POSH. The question is if that was indeed correct (from a legal point if view), given the irrevocable undertaking by PCL towards Maybulk. I think that offer could not have been made, and a legal expert (who I asked for advice in this matter) agreed with me. A rather strange affair.

Returning back to the issue of the EGM, the real issue at hand was if the Put Option (giving Maybulk a return of 25% on its investment of 2008) should have been exercised, that at least would have given some profit on its investment, even given the depreciation of the USD vs the RM.

That money could then have been used for a massive dividend to all of its shareholders, who could then decide what to do with the money. One option would be to buy POSH shares (either by subscribing to the IPO or by buying in the open market), not only at a lower price than was received  through the Put Option, but also with each shareholder directly in control (receiving dividends straight in their wallet, and the avoidance of the holding group discount, typically 30-40%).

But that Put Option was never decided on in the EGM, despite the huge size of it (close to RM 1 Billion) and it being a RPT. Another rather strange affair.

For the sake of the minority investors in Maybulk, I hope that in the long run the investment of POSH does work out, and that either there will be some profitable exit down the round, or that POSH does start paying substantial dividends to Maybulk (until now the amounts have been tiny).

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.

Maybulk: IPO of POSH (5)

Tying up some loose ends in this posting.

[1] Deals should be "good", not "fair"

First a general issue, that is often overlooked in corporate exercises. If company A buys into another company B, and the price is roughly what is estimated to be fair, should company A proceed?

In my opinion the answer is a clear no, because of the following reasons (which partly overlap):

1. The seller always knows (much) more about what he sells than the buyer, there is a clear information bias;
2. Companies like Berkshire Hathaway have not grown hugely by buying companies (or shares) at fair value, Warren Buffett always insist on a "margin of safety";
3. If an Independent advisor gives a valuation of a company which is roughly equal to the cash offered, then the advisor will rate the proposed deal  as "fair and reasonable", but that is not correct. The valuation depends on a long list of assumptions, and cash not, so cash should prevail;
4. Holding companies often suffer from "holding company discount", that is the valuation of the holding company will be less than the sum of the parts it invested in; a typical discount is roughly 30-40%.

All the above reasons do apply to the Maybulk/POSH case.


[2] Why was no purpose given?

In Maybulk/POSH: What happened to the Cash? I suggested that the cash (close to RM 700,000,000) that Maybulk injected into POSH was almost immediately transferred to PCL, it's parent company, to settle loans.

Also, I wrote that the purpose should have been included in the circular, simply because of common sense and transparency requirements, but also because it is described in the regulations.

I have received confirmation that the money was indeed transferred to PCL.

Maybulk seemed to defend itself, that there was a mentioning what would happen with the money. It referred to the following paragraph in the Independent Report by KPMG:

I am sorry to say, the above describes a repayment of the proceeds of issuing a (relatively small) amount of shares to POSH employees which would take place before Maybulk would buy POSH's shares.

It does not describe what would happen with Maybulk's cash injection.

But even if it would, the paragraph is a description of the DCF approach inside a summary of the evaluation of the Subscription Price. That does not exactly look like the right place to describe the purpose of an injection of money. Both in the general part (by AMinvestment Bank) and the Independent Advice (by KPMG) there were suitable places to describe the purpose, and also to give a lengthy opinion about it.

Repaying back interest free loans is not exactly helping the company to grow, POSH could have for instance bought distressed assets at a huge discount.

Describing the purpose of a capital injection is clearly defined in the rules, so it appears that the rules have been breached.


[3] Why no alternatives?

Unfortunately, it is quite normal in corporate deals that shareholders do not to receive alternatives. For instance, shareholders of Maybulk could only decide to buy into POSH or not.

But there was a very clear and good alternative: distribute the same amount (almost RM 800,000,000 in total; RM 0.80 per Maybulk share) in dividends and let all shareholders decide themselves where to invest the money in. That would have been a nice alternative, and I guess most investors of Maybulk would have been very happy receiving such a bumper dividend, especially since share prices of all companies were very depressed.

If they had reinvested it in Bursa Malaysia listed companies, they would have been sitting on a capital gain of (on average) 111%:

I strongly doubt that POSH has increased 111% in value, but for sure Maybulk itself massively underperformed the KLSE index.

Despite the recent run-up, the share price is still below the price in December 2008.


[4] Resolution and advice are not in sink

KPMG advised the following in their report:

That does seem like a good advice, limiting the price to be subscribed to. If the price is too high, may be Maybulk should even consider selling some shares at the IPO.

But the problem with KPMG's advice is, the proposed resolution does not indicate a price, it just asks shareholders to authorise the Directors to subscribe to shares at an IPO price "to be determined", up to a maximum total amount of USD 70M:

I think that the resolution should have mentioned the maximum price per share that Maybulk is prepared to pay for, and that price should have been tested by KPMG if it is "fair" and "reasonable", and if they recommend shareholders to vote in favour.


[5] Where is the Exit?

Maybulk received a Put option in 2008 which enabled them to sell the POSH shares. The good thing about that was that is was a clear exit, Maybulk would receive the cash and could for instance pay out (a part) as dividends to its shareholders.

But the company hasn't exercised that option and it even wants to maintain a 20% shareholding in POSH by buying more shares. That even has implications for the future, for instance if POSH has another rights issue, or if POSH wants to start an ESOS (Executive Share Option Scheme), in both cases Maybulk might have to buy even more shares to maintain the 20% threshold.

But that bags the question, which has not been answered so far: where is the exit? Maybulk will only receive dividends from POSH, which might not be that large. If it wants to sell shares in the market, that might be a tall order (liquidity is not guaranteed), apart from the fact that it doesn't look that great on the other shareholders if the second largest shareholder starts to sell its shares.

Maybulk: IPO of POSH (4)

The prospectus for the coming EGM of Maybulk contains an independent advice of KPMG Malaysia.

This is the same adviser who wrote the independent advice in 2008, about which I wrote before, in rather harsh terms.

The current advice is much better. Cynics will say that it would have been very hard to do a worse job than the one in 2008. It is also in line with a (belated) general improvement of independent advice across the board for Bursa listed companies.

There are some interesting parallels with 2008, although unfortunately KPMG doesn't revisit the 2008 report.

Regarding the PAT of POSH, the following graph is presented:

Looks rather convincingly, doesn't it?

But there is an eerie similarity with the picture presented in 2008:

The last column is based on only 9 months, the full 12 month result would be USD 81M, while the company made a PAT of USD 88M in 2009.

The rather strange fact (which isn't mentioned at all in the 2014 report) is that POSH made a higher profit in 2008 and 2009 than each year after that, despite:

• Receiving a huge capital injection by Maybulk in December 2008;
• A rights issue in 2012;
• The retained earnings over all those years.

This was what KPMG wrote in 2008:

The results of 2008 were more or less known in December 2008, so let's compare those with the results of 2011 and 2012, the timeline that KPMG indicated in the above paragraph.

It turns out those profits were only USD 26M (2011) and USD 54M (2012), a whopping 68% and 33% lower than the profit in 2008, while KPMG forecasted "substantial growth over the next three to four years".

So much for the rather poor forecasting capabilities of KPMG. And they can't blame the global recession for that, the acquisition of POSH by Maybulk in 2008 was right smack in the middle of it.

For the benefit of the reader, the full earnings picture of POSH, all amounts in USD:

2006:  0M (company just started)
2007:  9M (first acquisitions, paid-up still very low)
2008: 81M (injection 160M from PCL, 221M from Maybulk)
2009: 88M
2010: 28M
2011: 26M
2012: 54M (rights issue of 150M)
2013: 73M
 
Is this indeed a "track record of strong financial performance", as is claimed in the 2014 prospectus by the Chairman? Based on the last three years results, may be. Based on the last six years not really, I think.

Return on Equity in the last three years was 4.6%, 9.0% and 11.1% despite being rather leveraged, not impressive.

There doesn't seem to be growth in revenue over the last three years. Most of the growth in profit comes from "Other operating income", not sure how recurring those are (below numbers have not yet been adjusted downwards):

Another interesting topic is the valuation by KPMG, this is the current one:

This is the valuation of 2008 based on adjusted NA:

And their valuation of 2008 based on DCF:

What is remarkable is that the valuations of 2008 and 2014 are almost identical, while:

• A large capital injection was made in 2008, 58% of which was from Maybulk;
• There was a rights issue in 2012 bringing in even more capital, USD 150M;
• POSH has accumulated earnings over 5.5 years between the valuation in  2008 and 2013, close to USD 300M;
• In 2008 there was a huge global recession going on, with all valuations very cheap, while in 2014 valuations appear to be on the high side;

Admittedly, the rights issue in 2012 brought done the cost price for Maybulk somewhat, from USD 6.50 to USD 6.03, but that still only explains a small part of the above.

The only way to explain the peculiar valuations is to assume that KPMG's valuation of POSH in 2008 was simply much too high, unrealistically so.

For one part (the DCF valuation), KPMG should fully take the blame.

For the Asset valuation, that was partly based on the valuation of Clarkson, about which I wrote under the title: "Clarkson, the valuer who didn’t believe his own valuation".

That title was indeed deemed to be correct (the authorities have confirmed that), the valuation of Clarkson was made on September 15, 2008 and was not valid on the day the prospectus was issued, November 25, 2008. In only a bit more than two months time values of vessels had collapsed, like almost all other asset values, making the valuation much too high.

The important question is: why did nobody question the valuation of Clarkson?

There are many maritime experts in the board of directors of Maybulk, POSH and PCL who should have known about the problems in this industry.

But even the non-maritime experts of those boards of directors,  the writers of the prospectus AmInvestment Bank and the independent adviser KPMG, they should have guessed that the valuation might not be correct anymore, and should have actively sought clarification.

Why did no one contact Clarkson at the end of November or early December 2008? They were just one single phone call or email away.

A new, updated valuation by Clarkson would have had a huge impact on the adjusted net assets, the more since POSH was highly geared.

And that would have enabled the non-interested directors of Maybulk to renegotiate a much fairer deal for the shareholders of Maybulk.

Maybulk's shareholders deserved a much larger chunk of POSH in exchange for its large injection in POSH, in my opinion roughly 50% of the shares instead of the 21% it would receive. Profit contributions in the subsequent years would then have made a much higher impact, and at the coming IPO of POSH Maybulk would not need to buy additional shares to keep a minimum shareholding of 20%, it could even consider selling some shares, if the price is right.

Maybulk: IPO of POSH (3)

Maybulk issued a prospectus related to the proposal to subscribe to even more shares in POSH, maintaining more than 20% of its shareholding. It had to ask permission through an EGM since it is a Related Party Transaction.

The following text is rather cryptical:

If there are any related parties, why do they not simply mention them?

The following is presented in the prospectus:

But one party seems to be conspicuously missing: PPB Group also owns 14% of Maybulk.

Both PCL and PPB Group are widely believed to be linked to Robert Kuok, but this link is not established lately anymore, why not?

The IPO document of Maybulk in 2003 was very clear about this matter:

The issue if PPB Group is still controlled by the same person as PCL (KSL) is important in all CG matters, especially in dealing with POSH:

• What are the RPT's between PPB Group on one side and Maybulk and POSH on the other side (including their directors)?
• Was the PPB Group allowed to vote on matters regarding POSH at the EGM in 2008 and will it be allowed to vote on the EGM to be held April 17, 2014?

The announcement that the proposal to invest in POSH at Maybulk's EGM in 2008 was duly passed does not give any additional information, disappointing..

The correct way, in my opinion, would have been to vote per poll (one share one vote), and to announce the detailed voting results.

Maybulk: IPO of POSH (2)

There are two new developments regarding Maybulk which were announced today:

Maybulk announced a deviation in its profit over 2013 reducing its profit over 2013 by 11.5%:

Deviations in profits are quite rare, and this is definitely a red flag.


Secondly Maybulk announced its audited accounts. Of interest is the statement regarding the options, which includes the important Put Option:

This text is rather remarkable, "to initiate an IPO" is surely different from "to undertake an IPO"?

The text is also distinctively different from the text in the proposed subscription to POSH shares, as I wrote before:

I have written a lot about the deal in 2008, I find that the valuation of POSH was much too high, in other words Maybulk received much too little shares for its investment in POSH.

However, the news was not all bad, there were two important safeguards:

1. The above Put option, the treatment of which I posed many questions;
2. The following irrevocable undertaking:

 

But November 2012 the following was announced:

So why were these instruments issued in 2012 at USD 4.00 per RCPS to all shareholders of POSH, a 38.5% discount to the USD 6.50 per share that Maybulk paid for them in 2008?

Is a RCPS not also a share, but then a special kind, having even more rights than a normal share, and at any time being convertible to an ordinary share?

The above irrevocable undertaking has been stated in 2008 for a clear reason, it was meant to protect Maybulk in that other parties would not be allowed to buy shares at a lower valuation than what Maybulk paid for the shares in 2008. In 2012 Maybulk was more or less "forced" to participate in the rights issue and invest even more money in POSH, otherwise it would be diluted at a low price. But that was exactly what the undertaking supposedly was meant to prevent.

Only one year later, the RCPS would indeed be converted to shares, one RCPS for one ordinary share.

[to be continued]

Maybulk: IPO of POSH (1)

Finally, after 5.5 years waiting, POSH will go for an IPO at the SGX.

I have written many times about the Related Party Transaction whereby Maybulk bought 21% of POSH in 2008, especially:

Maybulk/POSH: What happened to the Cash?
Clarkson, the valuer who didn’t believe his own valuation
Maybulk/POSH: KPMG's "independent" advice
Maybulk: before and after POSH


To recap, Maybulk bought in December 2008 34M shares in POSH at a valuation of USD 6.50 per share, for a total of USD 221M, or RM 778M. POSH was valued pre-deal at USD 780M.

My take on this deal is that the valuation of POSH was much too high, the exact reasoning behind that can be found in the above links, but in a nutshell:

• POSH's Net Tangible Assets were minus USD 107M (in other words it had more debt than hard assets);
• POSH's Net Assets were USD 188M (including goodwill);
• POSH only existed a few years, with most of its purchases done a short while ago, when the economy was still booming;
• At the moment of the RPT, the severe global recession was raging, banks cut credit lines, asset prices were falling from the sky, companies were going bankrupt.

But the deal itself was not the only worrisome element, also the low quality of the prospectus.


Fast forward four years, November 2012 Maybulk invested even more money in POSH by subscribing to a rights issue of RCPS (Redeemable Convertible Preference Shares) at USD 4.00 per share.


Fast forward to April 2014. Maybulk finally announced that POSH will go for an IPO on the SGX, estimated to be at the end of this month.

Three announcements were made to Bursa Malaysia.

The IPO of POSH was supposed to happen within five years after Maybulk's acquisition, a rather long time frame. Why could that not be achieved? No reason whatsoever was given.

In 2008, Maybulk received a put option, if POSH was not able to go for an IPO within five years then Maybulk could exercise its put option and would receive USD 8.125 back per share, 25% more than they paid for in 2008.

This option is not exactly peanuts, the amount of money involved is USD 276M or RM 914M (Maybulk would still own the POSH shares converted from the RCPS).

I had hoped that the minority shareholders of Maybulk would be allowed to vote on this important issue, after being given a clear picture of the two alternatives, exercising the option or keeping the POSH shares. That was not to be the case:

It was just the three Independent Directors who "deliberated" over an issue close to RM one Billion hard cash? Is this actually correct from a legal point of view, do independent directors yield so much power that they can solely propose how to settle issues of such magnitude? I think it should have been decided in an EGM, after all shareholders have received proper information, enabling them to make an informed decision.

It is not even mentioned when the decision not to exercise the option was taken or why the shareholders of Maybulk were not immediately informed. 

More importantly, no reason whatsoever is given for the decision, not even a single line, why?

From a Corporate Governance point of view, I find this completely unbelievable.

Also, it is not clear why the decision has been taken. At this moment it is still not yet sure at what price POSH will go for an IPO. At a high price (say USD 10 per share, clearly higher than the USD 8.125 Maybulk would receive if it exercised the option) it might indeed be wise not to exercise the option.

But at a low price (say USD 6.50 per share), why not exercise the put option and hand the money back to the shareholders of Maybulk in the form of a dividend? They can then decide for themselves where to invest the money in, they could even chose to buy POSH shares in the open market if they wish to do so.


The three Independent Directors who made the decision have been a very long time with Maybulk, one director almost 18 years, the other two more than 10 years. That is longer than the recommended maximum term of 9 years. According to the Guidelines of EPF, "their independency could be impaired by their long term participation". The EPF will vote against renewal of independent directors who are with a company for longer than nine years.

If these directors are important for Maybulk then they should be converted to non-independent directors, giving new independent directors a chance to have a fresh look at the issues at hand.

One independent director (Dato' Capt Ahmad Sufian) was actually a non-independent director of Maybulk before and is now also a director of the PPB Group, the third largest shareholder of Maybulk and also linked to the Kuok Group.

Another independent director of Maybulk (Tay Beng Chai) is MD of a law firm (Tay & Partners) that has Maybulk and Wilmar as clients, the Kuok Group even appears to be a significant client. Tay is also a Kuok Foundation scholar.

The question is, will this all have an influence on their independence? And, should the information regarding Tay be disclosed to the shareholders of Maybulk?


Maybulk is asked to pour even more money into POSH, after the first purchase in 2008 and the subsequent rights issue of RCPS. The money invested is already close to RM 1 Billion, clearly more than half of Maybulks shareholders equity which stands at roughly RM 1.7 Billion.

The reason given is that Maybulk will be able to equity account the profit of POSH.

There is nothing magically about equity accounting, it is not that if a company A owns 20.01% of company B that is actually receives 20.01% of the profit, and nothing if it owns only 19.99%. In both cases company A receives only the dividend that company B pays, pro rata to the shareholding. It is a bookkeeping manner with no impact to the actual cash flow.

Berkshire Hathaway has created enormous value for its shareholders by investing in listed companies, almost always below the 20% required for equity accounting. Buffet invented the "look-through earnings" to give a better picture of the earnings generated in a year. I can not recall any shareholder of Berkshire Hathaway ever insisting on Buffett to buy minimum holdings of 20% in listed companies so that the reported earnings look better.

[to be continued]

Maybulk, Maxbiz, PMI, AirAsia

Maybulk's share price has risen fast in the last month, in high volume:

Bursa Malaysia issued a "Unusual Market Activity" (UMA) alert, on which Maybulk responded:

"We refer to Bursa Malaysia’s query today in respect of the recent interest in Maybulk shares and wish to announce that the Company is not aware of any reasons or any corporate exercise that may have contributed to the increase in share price and high trading volume of Maybulk shares."

What definitely has changed lately is that the relentless selling by EPF has finally stopped. Up to December 30th 2011 the EPF routinely sold 2 million shares a day at a price around RM 1.50. Many of these shares were bought at double the price in 2009. Hopefully somebody can explain the logic behind this trading.

I have written a lot about Maybulk in the past regarding the controversial Related Party Transaction that took place in 2008, buying POSH shares at a very high price (more than four times the Net Asset Value) in the midst of the global recession:

http://cgmalaysia.blogspot.com/search/label/Maybulk

I have withdrawn my complaint with the authorities (SC & BM) out of protest against the highly unsatisfactory and even unethical way they have handled it. The only thing they have done really well in this case was dragging their feet.

Even up to today, minority investors have not been informed properly about important issues regarding the Related Party Transactions, either the POSH acquisition in 2008 or the (relatively less important) purchase of a vessel in 2009. In its latest year report less than one page (out of 81 pages) is dedicated to POSH, while about half of Maybulks shareholders equity is invested in it.


Maxbiz announced it is expecting profit margins of between 5% and 15% from its fiber network connection project.

http://www.theedgemalaysia.com/business-news/200086-maxbiz-expects-5-to-15-profit-margin-from-fibre-network-connection-project.html

It also made some clarifications in an announcement to Bursa Malaysia about some other projects.

The share price has lately retreated, from a high of RM 0.195 to RM 0.11.

A previous write-up of this blog stated "It is hard to find a company with more red flags than Maxbiz". It would be an immense effort if Maxbix can even stay afloat.

http://cgmalaysia.blogspot.com/search/label/Maxbiz


Pan Malaysian Industries (PMI) is forced to comply with the following: "compensate entitled shareholders of PMI who had sold their PMI Shares between 9.00 a.m. on 24 August 2011 and 5.00 p.m. on 25 August 2011 (“Compensation Period”) for the differential amount between the offer price of RM0.045 per Offer Share and the price at which their PMI Shares were sold during the Compensation Period"

http://announcements.bursamalaysia.com/EDMS/edmsweb.nsf/LsvAllByID/06D37FCB8672B1BC4825799200390931?OpenDocument

Apparently there was a timing difference between the moment the General Offer was announced and the moment is should have been announced. Good for shareholders who sold their shares below RM 0.045 during those days, although it will be only a small amount of money, I think, and most of the shareholders will be selling their shares anyhow at huge losses. 

Frankly, this ruling by the SC should be the least worry to PMI. I think there are many, much more serious Corporate Governance issues at stake here:

http://cgmalaysia.blogspot.com/search/label/PMI


The Edge Malaysia reported that AirAsia's airfare issue with the Australian Consumer watchdog (ACCC) has been resolved.

http://www.theedgemalaysia.com/business-news/199990-airasias-airfare-issue-with-australia-consumer-watchdog-resolved.html

"The problem could have been due to an IT issue, and it has been corrected."

However, the website of the ACCC has not yet issued a statement that the issue has been resolved:

http://www.accc.gov.au/content/index.phtml/itemId/2332 

I hope that AirAsia will treat Malaysian consumers as if they were protected by a powerful consumer watchdog similar to the ACCC.