"Hibiscus - the story of a succesful SPAC"?

Article in The Star, one snippet:


"Hibiscus should not only be applauded for being the first SPAC, but also a successful one."


I have been rather sceptical in the past about SPACs in general and Hibuscus was no exception.

Below is the share graph since inception, it shows a rather wildly fluctuating price, from initial RM 0.59 to RM 2.68 crashing down to RM 0.16 and up to its current price of RM 0.98. A rather bumpy ride for a stock that was perceived to be rather speculative.

If we dive into the latest quarterly financials then we notice the following:

In other words, despite being listed for almost seven years and having received more than seven hundred million of shareholders capital, the company still has not shown a profit overall. That does not seem to be impressive, simply putting the money in a Fixed Deposit would have yielded something like RM 200 Million in interest payments.

One should also take note that three quarters of its assets consists of intangible assets. An investor should deep dive in the nature of these intangible assets to check if any of them should be revalued.

So is Hibiscus indeed a successful SPAC, as The Star wants us to believe? Looking at the results delivered so far the answer has to be negative.

Sona Petroleum is winding up

Article from The Malaysian Reserve:


Malaysian oil and gas (O&G) special-purpose acquisition company (SPAC) Sona Petroleum Bhd pledged to pay shareholders 97% of the funds held in its trust account by November 2016, weeks after the deadline for it to secure a qualifying asset passed on July 29.

The remaining 3% will be paid within two years from then, after deductions for the liquidation and obtaining tax clearance.


That was to be expected. Regarding its last proposed qualifying acquisition:


Canadian oil company Mitra Energy Inc purchased the Stag oilfield in Australia for US$10 million, just three months after Sona Petroleum asked investors to approve a US$25 million deal for the same asset.

Stag, an ageing field that used to be owned by the Australian oil giant, is currently producing about 4,000 barrels of oil per day.

Sona Petroleum came close to purchasing the asset after it received the go-ahead from the Securities Commission Malaysia this year, but investors wary of declining industry conditions voted resoundingly against the buy.

Mitra Energy only paid 40% of the price Sona proposed to pay for the acquisition.

The deal was deemed to be "not fair", so it seems that assessment was pretty accurate.

Current shareholders get back a decent amount of money, but lots of money has been lost, through the many expenses: wages, rental (a rather plush office in Menara Petronas 3), IPO related, etc..

From its last financial results:

Next to that there are rather high opportunity costs, at the very least the money could have been compounded risk free at 4% interest per year.

Was it all worth it? I doubt it, but then again, I have been skeptical about SPACs from the word "go".

Sona Petroleum: a clear vote

It does not often happen that a proposal by the management of a Bursa listed company gets voted against by 77.4% of the votes, but that is what happened to Sona Petroleum:

With time running out, it seems extremely unlikely that Sona can propose an acquisition which will be approved by the shareholders.

"Yield seekers" seem to be a threat to the promoters of SPACs, it is therefore the duty off the management of these vehicles to:

• Propose a really good deal
• Communicate this clearly to the shareholders

Not an easy task.

With the promoters looking (again?) at a possible large loss of money, SPACs will most likely lose their shine.

To Cliq or not to Cliq? (8)

A new development in this case, according to this announcement:


..... Best Oracle has filed a Judicial Review Application to the High Court of Malaya (“the High Court”) (“the JR Application”) in respect of the request/decision by the Securities Commission (“SC”) via a letter from Maybank Investment Bank Berhad (“Maybank IB”) on 7 January 2016 to CLIQ Energy Berhad (“CLIQ/the Company”) (“the Said Letter”).


In the JR Application, the SC was named as the first respondent and CLIQ was named as the second respondent. Best Oracle is a 20% shareholder of the Company and the shareholders of Best Oracle are the 5 members of the Management Team of CLIQ.


Best Oracle has the most to lose when the company will be liquidated, they put in the initial money. It will be interesting to follow the above JR Application, with CLIQ being the first SPAC being liquidated, we are in unchartered waters.

I have written a lot about SPACs in the past, here is a 2013 article from Investor Central about the IPO of CLIQ.

To Cliq or not to Cliq? (7)

As expected, Cliq Energy Bhd. will close shop.

A report by The Edge:


CLIQ Energy Bhd, the second oil and gas special purpose acquisition company (SPAC) listed on Bursa Malaysia, will be liquidated and returning monies to shareholders after the Securities Commission (SC) declined its request for more time to acquire its qualifying asset (QA).

"The company will soon be resolving the process towards its liquidation and returning monies in the trust account to the entitled shareholders, according to the applicable laws and rules," CLIQ added.


Money, time and effort wasted, pity.

Both in preparing the company towards its IPO and in running the company since the IPO trying to find a QA.

For the warrant holders I assume nothing remains.

The "winners" (in relative terms) are the people who picked up the Cliq shares below the liquidation price, they will receive a decent yield.

Enthusiasm for future IPOs of SPACs will diminish. I can't shed a tear for that.

Sona: proposing a deal that is not fair?

From The Star: "How will shareholders vote for Sona?", some snippets:


"Now that Sona Petroleum Bhd has gotten the green light from the Securities Commission (SC) to proceed with its maiden acquisition, will its shareholders vote the deal through?

Two issues complicate the matter: one that the deal has been deemed not a fair one by the independent advisor. And secondly, the profile of many of the current investors of Sona who are believed to be yield investors banking on the cash back option that Sona offers."


The first issue is really disappointing, there is a lot of blood on the street in the Oil & Gas industry, one would have expected the SPACs to profit from that, by coming up with deals that would have been ridiculously cheap just a year ago. The fall in the price of these kind of assets easily outweighs the decline of the RM versus the USD.

But Sona comes with a deal that is deemed to be not fair, Hibiscus is running in all kinds of legal problems while not showing a single year of operational profits and Cliq's proposed acquisition seems to be in dire straits (I expect it to be pulled).

Regarding Sona's proposed acquisition, readers should also take note of the comment made by Kinibiz:


" .... the management team’s primary focus is to secure a deal so long as it allows them to graduate, while shareholders will be torn between the promise of eventual gains post-QA (possibly quite far in the future) versus a tidy risk-free gain at the end of three years."

In other words, the interest of the management team and the shareholders is not aligned.

Hopefully Sona is able to renegotiate the price of its proposed acquisition down a lot. They probably have to, if they want to have a decent chance that the shareholders will vote in favor of it.

To Cliq or not to Cliq? (6)

The company announced:


The Board wishes to announce that the Company had on 30 January 2016 received a letter from Maybank IB (“Letter”) serving notice to the Board of its resignation as Principal Adviser to the Company for the Proposed Acquisition and Proposed Rights Issue with Warrants with effect from 6 February 2016, being seven (7) days from the date of the Letter pursuant to the terms of its appointment letter.


Ouch ...... that is a very clear red flag, another one.

Is it time for the Board of Directors to call off the proposed acquisition? I definitely think so.

To Cliq or not to Cliq? (5)

I have been rather sceptical about Cliq's qualifying proposal.

The company announced on Bursa the following (some snippets, emphasis mine):


.... the SC had vide its letter dated 29 January 2016 addressed to Maybank IB, returned the Application as the SC is unable to proceed with its review due to required information and documents that have yet to be submitted to the SC relating to several fundamental matters in relation to the Application that have yet to be addressed, in particular:

(i)         Supporting data used in the assessment of the volume of oil reserves by the independent technical expert that has yet to be provided to the SC. Without this, the SC is unable to determine if disclosures to shareholders of CLIQ are appropriate;

(ii)         An independent expert was appointed to provide a fairness opinion as required under item 4, Part F of Appendix 10B of the Main Market Listing Requirements issued by Bursa Securities (“Fairness Opinion”). However, the independent expert has relied on the asset valuation report prepared by the asset valuation expert, despite not taking a view on the reasonableness of the report and its contents, in arriving at its fairness opinion. This qualification has been specifically stated in its Fairness Opinion. As a result, shareholders of CLIQ would not have the benefit of a fairness opinion that encompasses all aspects that they need to consider to make an informed decision; and

(iii)        The technical reports prepared by the independent technical expert and the Fairness Opinion have not been updated to reflect the current oil prices trends. This is not in compliance with paragraph 3.34 of the SC’s Guidelines on Due Diligence Conduct for Corporate Proposals.

The Company has taken all reasonable efforts to address the above required information and documents in relation to the Application. However, the Company had also encountered certain unanticipated external factors beyond its control namely:

(i)         substantial drop in oil price since the signing of the SPA on 24 March 2015; and

(ii)         substantial depreciation of RM against USD which resulted in the shortfall of cash available to satisfy the purchase consideration for the Proposed Acquisition.

In addition, the Company was unable to obtain certain information from third parties to support the assessment of the volume of oil reserves and consequently, the relevant updated reports which were all required for the Application.

The Board will deliberate on the next course of action to be taken and an announcement will be made by the Company in due course.


I would like to add that the economy of Kazakhstan and its currency also have been hit severely by the sharp decline of commodities. I am pretty sure that therefore the sellers would like the deal to continue (all foreign money is probably welcome at the moment).

But is this deal at the agreed price, given the current situation in the oil and gas industry, in the best interest of the shareholders of Cliq? Time will tell.

When will Hibiscus bloom? (2)

I wrote before about this subject, and in general about Hibiscus in a rather sceptical way.

I don't know if Hibiscus will ever bloom again, and if so when, but definitely not today.

Hibiscus' share price dropped steeply, way below its IPO price:

In an answer to an "UMA" (Unusual Market Activity) query by Bursa, the company replied:

".... the Company believes that there may be some shareholders who have been subject to margin calls on shares that have been collateralised and are being asked to regularise their margin positions."

Added to that, the short term outlook for Oil & Gas does not look good, the RM has depreciated against the USD and the company has never made an operational profit in its existence.

Cliq: messy annual report

Cliq announced on August 3rd its annual report, on August 5th its amended annual report and on August 7th another amendment on the same report. The last amendment consists of seventeen pages, quite shocking.

I do understand that Cliq's Board of Directors is getting all excited about its possible acquisition, but it really should put more care in writing its annual report.

Kinibiz wrote a good article, clarifying the different motives for management and shareholders of a Spac:

"Misaligned management and shareholder goals: Spacs".

Some snippets:


For the management teams of Spacs, it is about getting a qualifying asset or acquisition at all costs, so the company can graduate to become a full-fledged company like any other on the bourse. Shareholders, on the other hand, want to get a nice return on their investments and this might come even if the Spac does not graduate.

Cliq has identified and signed a sales and purchase agreement to acquire a 51% stake in two producing Kazakhstan oil blocks for US$117 million (RM429.53 million as at the announcement date) from a local Kazakh company, Phystech Firm LLP. It is currently in the process of gaining regulatory approvals before being able to take it to its shareholders. Sona, meanwhile, has said that its management team is in advanced discussions over several assets and is confident they will meet their deadline.They had better be confident, because the alternative is losing their entire investment.

It comes down to this: the management team’s primary focus is to secure a deal so long as it allows them to graduate, while shareholders will be torn between the promise of eventual gains post-QA (possibly quite far in the future) versus a tidy risk-free gain at the end of three years.

Management and shareholders, two different agendas – only in the curious world of Spacs.

To Cliq or not to Cliq? (3)

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

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

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

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

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

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


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


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

On another matter, the article in FM continues:


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


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

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

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

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?

To Cliq or not to Cliq? (2)

Regarding my previous posting about this matter, it seems I wasn't the only person who had questions regarding Cliq's announcement.

Bursa queried the company with 8 highly relevant questions, which Cliq answered, some in a convincing way, some less so.


5. Justification in using the URALS oil prices forecast in the economic modelling, given that the price of oil has dropped substantially in the recent months

The oil price estimates included in the economic modelling was based on URALS oil price and the typical spread of Brent oil price to URALS oil price is about USD2 per barrel. In the middle of  January 2015, there has been a reduction in Brent oil price to around USD47 per barrel and the Brent oil price has since recovered to around USD56 to USD59 per barrel in March 2015.

As a result from the current low global oil prices, AGR believes that the demand for energy resources from the industries will increase, and hence, in the opinion of AGR, this is expected to further spur oil prices for the next 5 to 6 years. In addition, political instability in the Middle East may also result in a reduction in global oil supply and this is expected to further support the recovery of global oil prices.


The price of Brent Oil over the last six months:

It shows quite a difference, the current price (USD 56.41) is about 20% lower than the one used in the first announcement (USD 70.90). Since there are fixed expenses the gross margin must therefore be much lower.

AGR believes that the oil price will rise in the next 5 to 6 years. That might happen, but still, the base price is 20% lower, which should have quite a large impact on the near future projections, and thus the DCF valuation.


7. The financial information as required under Paragraph 19(d)(ii) and (iii) of Part A and Paragraph 1 of Part H, Appendix 10A of the Main Market Listing Requirements of Bursa Securities 

The financial information set out in Section 3 of the Announcement is for information purpose only and may not reflect the future financial performance of the SPV as the BTA entails the transfer of the Vendor’s assets (excluding liabilities, payables, cash and receivables) including Subsoil Use Contract, contractual obligations and certain existing employees to the SPV. As such, the SPV does not assume any prior liabilities arising from the Proposed Acquisition. In addition, the SPV has yet to be incorporated as at to date.

The disclosure of financial information of Karazhanbas Northern Field based on the financial statements of Phystech pursuant to Paragraph 19(d)(ii) and (iii) of Part A and Paragraph 1 of Part H, Appendix 10A of the Main Market Listing Requirements of Bursa Securities (i.e. profit before tax, profit after tax and minority interest, shareholders’ funds and total borrowings) may not be applicable in view that the Company is only acquiring the asset of Phystech.


That might be strictly speaking correct, but is still disappointing. The assets are generating financial numbers in the Profit & Loss and are valued in the Balance Sheet, and one would thus be interested in the full picture, not in some "selected financial information".

For instance:

• How much tax is the company currently paying?
• What is the current depreciation?
• At what value are the assets in the books?
• For how much money have they been acquired, and when?
• What is the current paid-up capital of the company?
• How much cash does it have?

Some of these will help in evaluating the assets to be acquired in the SPV, others are meant to form an opinion about the company that CLIQ will work together with (for instance its ability to keep its side of the bargain).

As mentioned before, a proper snapshot (past and current, balance sheet, profit & loss, description) of a company should not take more than a single page.


8. Financial information of Karazhanbas Northern Field based on the latest unaudited accounts for 2014

The financial information of Karazhanbas Northern Field based on the latest unaudited financial statements of Phystech for the FYE 31 December 2014 is not available at this juncture as the management of Phystech is in the midst of finalising the same.


That is disappointing, negotiations started in December 2014, that should give the company ample time to have the books ready by now.

Please note that The Edge wrote that "In 2013, Phystech recognised earnings before interest, taxation, depreciation and amortisation (Ebitda) of US$22.61 million.".

That is incorrect, it is unfortunately only RM 22.61 million.

To Cliq or not to Cliq?

Cliq Energy has finally announced its qualifying acquisition, an investment in an oil and gas company based in Kazakhstan.

Regular readers know I am not "exactly" a fan of DCF valuations. Unfortunately, it has been used in this case:

The price of oil that is used in the DCF model is the prevailing price in December 2014.

However, the price of oil has since drastically fallen:

I certainly hope that a new DCF will be calculated, based on the recent price of oil. It will give a much lower outcome, is my estimate. Hopefully the details of the DCF will be published, although I doubt that.

Cliq had a long time to come up with its proposal, so we can expect lots of financial numbers.

Unfortunately, it is very disappointing:

Some comments:

• Not a single balance sheet number of Phystech;
• Some profit & loss numbers, however no PBT or PAT but the dreaded EBITDA (whenever they are presented, the earnings are much lower than the EBITDA number, we have to wait and see if that is also the case here);
• EBITDA for 2013 only RM 23 Million, does not really look exciting;
• Numbers are only up to December 2013 (15 months old), even tiny ACE-listed companies have already announced their (unaudited) December 2014 numbers a month ago, why can't Phystech give their unaudited numbers?

I have seen excellent formats provided by research houses where lots and lots of relevant data regarding a company is packed in one single page. Although the announcement of Cliq counts 26 full pages, relevant numbers are very scarce, lots of important (financial) information is left out.

We must hope that the official brochure to Cliq's shareholders will be of a much higher quality.

Opportunities in 3 SPACs? (2)

I have received very helpful comments from "Malaysia Stock Talk", who pointed at the following paragraph from the IPO brochure of CLIQ:

So for people who plan to vote against any qualifying acquisition, they will indeed get their cash pro rata to their shares.

I guess there are three categories of investors:

• Category A who invests now, to gain an almost risk-free return, voting against any acquisition;
• Category B who supports the management, who believes in the company and who will vote in favour of acquisitions; this could include investors who bought their shares at a higher price and might incur a loss if they vote against the acquisition;
• Category C of people who haven't yet made up their mind.

An acquisition will go through:

 

 

Approval might be an issue if Category A becomes larger and larger. And that chance increases if the price stays low, and investors buy shares to profit from the arbitrage.

 

It also makes planning by the management difficult, not knowing how many people might vote against the acquisition(s).

 



If there is no acquisition within the approved time period, then the SPAC will dissolve and return the remaining money. In that case a lot of work has been done for nothing, and quite a few expenses have been incurred.

And warrant holders might be the proud owners of a worthless piece of paper.

Opportunities in 3 SPACs?

Regular readers of this blog will know that I am not exactly a fan of SPACs, especially in the Malaysian context (previous postings here, here and here).

To me it just doesn't make sense to list an empty company, it is already difficult enough for investors to make sense of companies that IPO with a real track record (as a rule of thumb, I insist that companies are listed for at least two years to become "investable", at least to me).

I saw the interest in especially energy SPACs as a sign of a market that has become much too speculative.

The Star published today an article on its website: "HLIB: Opportunities for investors to lock in long-term returns in three SPACs". Some snippets:


The three listed special-purpose acquisition companies (SPACs) that have yet to make their qualifying acquisition (QA) are trading below their “intrinsic cash values” and hence offer a unique opportunity to investors, according to Hong Leong Investment Bank Research.

“Reach Energy Bhd, Sona Petroleum Bhd and CLIQ Energy Bhd are currently trading at a 13% to 16% discount to their respective intrinsic cash values,” said analyst Jason Tan in a note.

He added that the current discount provides a “unique opportunity” to lock in long-term returns.


First of all, the word "unique" sounds overdone for me. There are many companies trading at a discount to its NAV, sometimes even to its cash holding, in other cases having assets that can be disposed of in a short period.

Secondly, the fact that these companies have not yet made an acquisition is most likely a blessing in disguise, with the price of oil having fallen so much lately.


In a worst-case scenario, investors holding to maturity could get an attractive return of 17% to 29%, he said.


Worst case scenario? Surely the analyst must be joking. I can imagine many worse scenario's, for instance the company making an acquisition that doesn't work out, or an investor having to sell their shares with the share being lower then now. The worst case of each share of a listed company is simply that its price goes to zero, SPACs are no exception to that.


.... when Hibiscus announced its QA, the discount was zerorised and thereafter the stock began trading at a premium towards the completion of the deal.

“This underpins our belief that the intrinsic cash value serves as a base return with an upside option from a value accretive QA,” Tan said.


Few comments:

• Building a theory based on one single case (Hibiscus) is a tricky thing to do
• Hibiscus share price did indeed take off after the acquisition, but it has also sharply decreased in price lately, from above RM 2 to currently below RM 1 (although still higher than its IPO price)
• Hibiscus is still showing an operational loss, the only profit it has shown was a "paper" profit based on a revaluation exercise

I continue to be highly sceptical of SPACs, despite certain quarters continuing to write about success stories in other countries (which I strongly doubt). Trading in shares and warrants of SPACs on Bursa appears to me highly speculative.

A new SPAC will be introduced, Asian Healthcare Group led by former banker Yvonne Chia. It will be interesting to follow how that company will fare.

No XMas present for Hibiscus shareholders

Hibiscus Petroleum announced yesterday its findings regarding the first oil well:

• Mud losses in two carbonate sections of the well prevented Masirah Oil Limited from reaching its planned target depth.
• Data analysis indicated presence of non-commercial hydrocarbons.

In other words: bad news for Hibiscus shareholders.

I have written in the past in cautious terms about SPACs and Hibiscus, I think many investors who rushed to buy its shares went over their head in expectations. The oil & gas industry is a hit and miss industry, with much more "misses" than "hits". Fortunes have been made, but also been lost, many well known entrepreneurs have tried it and failed.

The above drilling result does not mean the end for Hibiscus, but it does put things in perspective. Expectations were high, very high, probably too high, also partly fuelled by the company itself:

"The prospect MNN #1, which is about 1,000 metres in depth, was selected for drilling after in-depth technical evaluation and verification using the proprietary Rex Virtual Drilling technology, in addition to confirmations provided via conventional methodologies."

And before the company wrote this about their Rex technology:

• "significantly increases the chances of success in drilling for oil and gas"
• "repeatedly and accurately predicted the presence or absence of oil without physically drilling a well"
• "in eight 'blind' tests .... the technology was successful in all cases". 

"MalaysiaFinance" wrote about the possibility of insider trading, which does indeed look worrisome, hopefully the authorities will investigate in depth.


I would like to draw the attention of the readers to the rather peculiar timing of the events, announcing the results during the holidays, when most likely authorities and fund managers etc. are on holiday.

We saw the same happening to Protasco's Puzzling Purchase which was announced during the Christmas break. It is one of the strangest corporate proposals in Malaysia in the last ten years that somehow or the other was done just before the year end. Despite expectations raised by the company that the deal would be wrapped up in a short time, now, one whole year later, minority shareholders are still left in the dark.

Returning to Hibiscus, the company has booked operational losses so far in its history, which in itself is not such a surprise, given its short existence and the long lead time to earn real revenue.

It was able to book a paper profit due to the following corporate exercise:


Hibiscus Petroleum Bhd said a corporate investor, Palladium Fund Management Inc has acquired a 15% stake in its joint venture company Hirex Petroleum Sdn Bhd via a US$10 million (RM31.5 million) investment.
 
"The subscription is expected to provide Hirex with sufficient working capital to fund its other operational costs for the next two years,'' it said in a filing with Bursa Malaysia yesterday.
 
Palladium's entry is expected to result in an increase in the proforma earnings of Hibiscus for the financial year ending March 31, 2014 by RM12.6 million, or 4.2 sen a share.
 
"The increase earnings is mainly derived from the one-off gain arising from the dilution in Hibiscus' equity interest in Hirex from 48.24% to 41%,'' Hibiscus said.

The strange thing is that searches on "Triax Ventures Corp" and "Palladium Fund Management" do not reveal any information at all about these companies. Which is rather speculiar for a company engaged in fund management in the age of the internet.

SPACs: two very different views

Frequent readers of this blog probably know that I am very sceptical towards SPACs, in general and more specifically in the Malaysian low enforcement environment. Articles can be found here, here and here.

However, I do acknowledge that the SC has tightened the initial rules regarding SPACs and also rejected quite a few SPAC applicants (even with some VIPs involved), so that is definitely good news.

Two articles about SPACs this week, two very different opinions.

To start with Errol Oh wrote "Time to end the SPAC-ulation?" in The Star.

A good, well balanced article I think. I especially like the last two paragraphs:

"There are a lot of ifs and buts about SPACs. That’s not necessarily reason enough to reject them, but if people ignore the uncertainties and are quick to believe just any story about an imminent QA, we may be better off without SPACs.

Executive editor Errol Oh was once intrigued by the idea of SPACs being listed in Malaysia. He may have overestimated the maturity and sophistication of investors here."


Completely different is the article in The Edge Malaysia "SPAC, a new promising investment platform" from Gan Kim Khoon, who we encountered before in this blog article.

Gan's article leans very much towards SPACs in a rather unabashed, positive way. To write in detail what I don't like about it would take too much space, so I will just stick to the main points:

"In introducing new instruments, the intent is to bring variety and vibrancy into financial market activities, while safeguarding investors’ interests and promoting confidence. In that respect, the Special Purpose Acquisition Company (SPAC) instrument introduced by Securities Commission Malaysia (SC) in 2009 is no different from any other financial instruments introduced by SC in the past."

That is quite a statement, as far as I remember Malaysia never listed companies with no track record, no assets, no business.

Another issue is, why should a market actually be vibrant? The companies that have brought the most value to minority shareholders are often the most boring companies.

"SPACs are a well established instrument designed to help entrepreneurial, skilled management teams to start new businesses and can represent high-return investment instruments for public investors at the earliest stage of value creation."

Well established, in which country exactly? I have read mostly negative stories about SPACs so far in a global context.

"High-return" often is accompanied by "high-risk", should people who invest in counters listed on Bursa invest in high-risk companies? The current batch of listed companies which IPO-ed with a business is already risky enough, I think.

"Clearly, the SPAC model can and does work."

I would first like to read some thorough research on that before I would agree with that statement.

"Imagine being offered the opportunity to buy into Facebook when Mark Zuckerberg was still in his Harvard dormitory (or Bill Gates or Steve Jobs, for that matter)."

Wow, talking about making statements with 20/20 hindsight. Just pick some of the most successful companies ever and then assume the managers of SPACs can identify them correctly in an early stage and act upon that with confidence by investing in them. Which SPAC actually did invest in these three companies? My guess is none. And what about the hundreds of failures for each success case, which is quite typical for these tech start-ups?

"SPACs may be assetless at the time of listing, but they do have a business plan that is as detailed and robust as that of any IPO."

It seems that Gan and I have a rather different opinion about what a business plan is. For me it describes past, present and future (including forecasts etc.). Regarding past and present, one sentence will do for SPACs since there is nothing except for a few people in a management team. Regarding the future, at the moment of an IPO the assets that the SPAC is going to acquire are unknown, therefore there is no possibility to give any forecast whatsoever.

"It stated that the average return of SPACs that completed a business combination between September 2003 and March 2006 was nearly 40%."

The period over which the profit is reported (only 2.5 years) is much too short to make any reliable assumption whatsoever. Also, readers should note that 2003 until 2006 was during the "happy go lucky" Greenspan/Bernanke time. I would like to see the returns from March 2006 until September 2008, the hart of the global financial crisis. I am sure that numbers will be very different, and will start with a minus sign. We need to see at least ten (preferably twenty) years for measuring returns, with at least one recession included.

The whole article "Special Purpose Acquisition Companies: SPAC and SPAN, or Blank Check Redux?" can be found here. The article is based on US companies in their environment, which is quite different from the Malaysian situation.

How SPACs in Malaysia will perform in the long term (in real operational earnings or in profitable asset disposals), I guess we have to wait and see. For the time being, I remain (very) sceptical.

"all the IPOs this year were making money for investors", really?

Article from the website of The Star: "At least 9 IPOs worth RM18.14bil for 2014".

First of all a list of nine big IPO's in 2014. I have been sceptical about big IPO's, I think Bursa has been pushing this too much, it really should not be a target on itself. The target should be to bring good quality Malaysian companies to Bursa, at a reasonable price, leaving some money on the table for retail investors who might be willing to take the risk.

On the list:

• Two Iskandar developers, I am scared all the clever money has been made already, and the property market is way too hot and might already be cooling;
• 1MDB (floating its energy assets), I am critical of 1MDB due to the lack of transparency;
• Malakoff and IOI Properties, both playing the listing-delisting-relisting "game";
• 7-Eleven, the listing possibly will not go through, according to an article in The Edge today.

Further, the article mentions:

"Besides these IPOs, there is likely to be another group of companies coming to the market under the guidelines for special purpose acquisition companies, or SPACs, and business trusts."

I am highly sceptical of SPACs, and business trusts have performed badly (on average) in Singapore.

In other words, I am not very positive about the announced plans for future IPO's in Malaysia.

The article continues:

"RHB Investment Bank Bhd director and regional head of equity capital markets Gan Kim Khoon recently said that investors should ride on the wave of Malaysia’s IPO market, but only after doing their homework on the new entrants.

He noted that all the IPOs this year were making money for investors and said this trend was likely to continue next year, when speaking at a recent panel discussion on the prospects for next year’s equity market."

All the IPO's this year making money for investors? Surely that can't be true:

 

Further more statements like "investors should ride on the wave of Malaysia’s IPO market" and "this trend was likely to continue next year", I find those pretty dangerous statements given the high valuations and the bubble like conditions worldwide.

I have never bought a share for long-term investment at IPO price, the risk is pretty high: [1] often there is a lot of hot air injected in the company and [2] the quality of the audits is not up to the standard compared to when the company is properly listed.

I normally wait for at least two full years of audited results before I even consider investing in a listed company. Although I must have missed a few nice gains, I definitely also missed lots of misery.

I do agree though with the following statement: "but only after doing their homework on the new entrants".

Sona Petroleum, speculation about a possible acquisition? (2)

I wrote before about speculation regarding a possible acquisition by Sona Petroleum. I on purpose highlighted all the speculative elements in the article, in the "Moolah" style: "a source", "could be", "details are scant".

As "wammo" highlighted, an article in The Star indicates that the acquisition will not go through:


"Contrary to earlier speculation, special-purpose acquisition company (SPAC) Sona Petroleum Bhd will not be taking up any stake in Singapore-listed RH Petrogas Ltd, sources said.

RH Petrogas is an oil and gas (O&G) company controlled by Sarawak tycoon Tan Sri Tiong Hiew King.

The sources said that Tiong, whose flagship company is the unlisted Rimbunan Hijau Group, was not too keen on diluting his interest in RH Petrogas.

“Sona is now in the midst of evaluating other assets. It has moved on from RH Petrogas,” they said.

Market speculation had been rife that Sona could be buying a stake in RH Petrogas via both a placement of shares, as well as acquiring some of its assets, mainly offshore O&G blocks.

Earlier reports had indicated that Sona was close to taking up a 10% share placement in RH Petrogas. This had sent RH Petrogas’ shares to new highs, doubling in the last month alone.

The counter rose from 51.5 Singapore cents (RM1.28) on Sept 16 to a peak of 92 cents on Oct 10, before sinking to 81 cents at Monday’s close.

Meanwhile, Sona has not seen much movement. The mother shares closed unchanged on Monday at 44 sen, while its warrants ended 0.5 sen lower at 27.5 sen."


Much too much speculation these days, if one would ask me.