EPF exits Felda (2)

Article in The Star: "EPF not to be blamed for leaving FGV", some snippets and some remarks by me.

Regarding the title of the article, I don't blame EPF for exiting, in the contrary, I just question why EPF invested in FGV in the first place.


The FGV was sitting on a cash pile of more than RM5bil and its business model was pretty straight forward – which is to collect the fresh fruit bunches and process them into crude palm oil.


The plan was always to expand aggressively through acquistions (even the name hinted clearly at that, "Global Ventures"), for instance this article in the Borneo Post:


The strategic initiatives to improve efficiency include extensive oil palm replanting programme to improve age profile at approximately 15,000 hectares per year utilising Felda’s award-winning planting materials to increase fresh fruit bunch production and improve oil extraction rate.

The proceeds would also be used for potential acquisitions of additional land bank in South-East Asia and Africa for planting oil palm and rubber by 2015.

Meanwhile, Felda would expand downstream capabilities to enhance value of its upstream products.
This included further acquisitions and investments in refinery assets, consumer packed plants and bulking facilities.

In general, roughly 2/3rd of acquisitions globally fail, either they are done for the wrong reasons, or because of the information bias, etc. Investors in FGV should thus have known at that point in time that things might not work out well, those acquisitions might destroy value instead of enhancing it.

The risk was minimal for the EPF. As long as FGV keeps cutting its production cost and utilises its huge cash pile for re-planting activities there is very little to fear.

First of all FGV had announced already they would not just use the money solely for internal purposes. Secondly, since when has an equity investment "minimal risk"?

However even then, there were some nagging issues especially when it came to some corporate governance practices.

Why invest when there are "nagging issues"?

For starters, FGV chairman Tan Sri Mohd Isa Samad is also the chairman of Federal Land Development Authority (Felda) which is the major shareholder of the listed company. Isa, who is also a politician closely aligned to Putrajaya, also sits on board of many subsidiaries.

Please note this article:

Umno vice-president Tan Sri Mohd Isa Abdul Samad (pix) has been suspended from the party by its disciplinary board for six years for breach of the party's code of ethics during the party elections last year, according to his political secretary, Salim Shariff, on Friday.  

The suspension means that Isa will be stripped of the post of vice-president that he had won with the highest number of votes among the three posts of vice-president at the same party polls.

Salim said Mohd Isa, who is Federal Territories minister, was found guilty on five of nine charges he had faced with regard to party discipline.


The Star continues:


"There is nothing wrong with active politicians sitting on the board of companies."

Oh my ....... where to begin?

One should try to minimize conflict of interest situations, because it is exactly those situations that often cause serious problems.

In Malaysia it looks like the policy is to maximize conflict of interest situations.

"Like all its investment companies, the EPF would have certainly voiced its concerns over FGV’s board composition."

Can the writer give concrete examples of this voicing of concerns? I have hardly ever seen the EPF actively fighting for minority investor's rights. EPF is in a very strong position, I am pretty sure that if they voice their concern many newspapers would write about those concerns. Apart from voicing their concerns, the EPF can also actively vote against resolutions. This would also serve as an example for the small minority investors, who would feel more powerfull.

I normally like Shanmugam's articles, but definetely not this time .....

FGV: mixing politics with business

Article in The Star: "A roller coaster ride in store for FGV"

Some snippets:


The simple kampong folks who had relied on the value of these shares as their retirement income are now wondering what is in store for them now.


This applies to all shareholders of all companies, there is an issue of being properly informed about the possible risks of investing in listed companies, being warned that shares can go up but also down, about not putting all your eggs in one basket. And I don't mean hiding the risks somewhere on page 232 of a listing prospectus 500 pages thick. The media also has a role to play in this.


The reality is that FGV has been the undisputed worst plantation stock performer ever since its initial public offering (IPO) in July 2012. The share price decline was so bad that the company was removed from the Bursa Malaysia KLSE Index stocks last year.

Since its hyped-up listing at RM4.45 per share, the battered government-linked stock closed at RM1.67 yesterday representing a whopping 62.5% decline in share prices.


Many IPOs are very much hyphed these days and disappoint after being listed. The authorities might want to look into this issue. It (partially) explains the disappointing performance of the Bursa market.


It has serious political implications as the country heads towards a general election, speculated to be held next year.

The small holders are loyal supporters of the Barisan Nasional and their interests deserves [sic] to be protected.

FGV is regarded as a government “protected” stock and rightly so too.


Is the writer of this article (Wong Chun Wai) proposing a new sort of Corporate Governance, one whereby shareholders of listed companies who are loyal supporters of the ruling political party get some sort of special protection and others not?

An "interesting" proposal, but one which can not get any support whatsoever from this blog.

The Star itself is a listed company and majority owned by a political party, may be that explains the writer's thoughts though.

In my opinion, most of the problems of FGV are caused (not solved) by political connections, so the solution is rather simple: cut all ties between politics and business. Let professional managers  run companies (like FGV) without any political interference whatsoever. Cut the dead wood, base decisions on mergers and acqusitions on proper commercial terms, etc.

In the short run there might be some pain in certain quarters, in the long run there will be many gains for all.

"This is not gambling but gaming"

Excellent, courageous article by David Yoong, Tan Hooi Koon and Ng Choung Min (University of Malaya, Malaysia):

‘This is not gambling but gaming’:  Methods of promoting a lottery gaming company in a Malaysian daily

The article can be found here.

The gaming company is Magnum, the daily is The Star.

Some snippets:


..... it was discovered that the odds of actually winning the top prize is much closer to nil, and that articles featuring a local lottery company, Magnum (and their Magnum 4D programme), in The Star are always positive and biased. This prompted us to wonder: as a mainstream newspaper publication, is The Star operating as a Public Relations (PR) media outlet for Magnum? Is there some sort of collusion going on between the two establishments? Textual evidence seems to suggest so, and we present our case in the analysis section.


StarBizWeek: What more can Magnum do to generate income if there is no extension of coverage or more games?

Surin: It is education. Educating people that for a mere RM2, someone can win a jackpot and be a millionaire. This is not gambling but gaming and it can be a fun thing, for if you win it can guarantee a lifestyle change.

In this doublespeak, the senior executive director does not equate lottery gaming with ‘gambling’, despite lottery gaming having the same characteristics as gambling. Moreover, he says that the public ought to be ‘educated’, which is an odd term since education, a basic right, is about the dissemination of knowledge. His interview reflects the capitalist mentality of the company, and he encourages the consumerism of Magnum’s products.


Because of its gambling nature, lottery gaming has been associated with bankruptcy, the destruction of families, crime and gambling addiction (Guryan and Kearney, 2009; Keating, 1998). Not surprisingly then, Magnum has employed PR practitioners to rebrand its image and to remove any negative stigma associated with its lottery gaming. As the textual (and intertextual) analysis shows, these strategies include attaching an array of positive values to the company, such as trustworthiness, ethical practices and consumer focus, incorporating the voices of individuals that further enhance the company’s image, and presenting these textual strategies as news reports.

..... when reporting news articles relating to Magnum, the public has the right to be informed of the perils that can be caused by lottery gaming. As The Star is an influential publication with a huge readership, it needs to be accountable to the public.

Whilst we do not deny that Magnum’s corporate social programmes are beneficial to society, to say that Magnum is a caring role model is disingenuous, because part of the charity money comes from people who have lost their lottery bets. If the company is indeed civic-conscious, Magnum should inform the public that there is a low chance of winning the Jackpot and that part of the losers’ money is channelled into its social programmes while enriching its stakeholders. Having said that, we are not of the view that lotteries should be made illegal, but giving the public a false sense of likely success is harmful.

Also, Magnum’s success in disguising the negative connotations of lottery as an act of gambling is due in part to the way lottery has been defined by Malaysian law. If laws were amended to define lottery gaming as gambling, inevitably lottery companies could not declare that ‘lottery is not gambling’.


The Star must know about the existence of the above article, written in 2013. Has it changed its ways? Is the reporting more objective, is there a more realistic picture about the small chances to win, the negative expectation of the participants (pay-outs are often in the 60% region), the dangers of compulsive gambling that hit so many families in Malaysia?

The reader can find the answer in this link. It is most disappointing, to say the least.

Golden Plus: public reprimands, fined and delisted

I wrote several times about one of the "bad boys" of Malaysian corporate governance, Golden Plus.

Bursa Malaysia apparently had enough of it, and reprimanded and fined the directors and delisted the company.

Errol Oh from The Star wrote "From Golden Plus to black box", adding historical context and raising several issues, for instance:


"It’s one of the greatest mysteries of corporate Malaysia that a Main Market company’s minority shareholders — close to 5,000 of them — can be starved of updates on the company’s performance for years.

The last GPlus annual report was for a two-in-one edition covering 2008 and 2009, and after the release of the results for the fourth quarter ended December 2010, there has been little information about the state of the company’s operations and assets.

As remarkable as it sounds, a listed company worth about RM150mil (just before its shares were suspended in August 2009) has transformed into a black box."


And one final question:


"How do we make sure that there’s no way another listed company can leave its minority shareholders in the dark for years?"

Loopholes plugged by SC

Article in The Star, some snippets:


An amendment to a securities law is to plug a loophole in the law that allowed parties to exclude liability for the veracity of statements made in marketing material related to corporate bonds.

The Capital Markets and Services (Amendment) Act 2015 (CMSA 2015) now makes it clear that any “document, agreement or contract” that seeks to exclude the liability of the issuer of that document from the accuracy and reliability of information in that document will be deemed as void.

In other words, this means that parties preparing information memoranda (info memo), that typically accompany the issuance of private debt securities such as corporate bonds, can no longer seek to exclude their liability.

The amendment effectively addresses the issues that arose following the 2014 decision of the Federal Court in the Pesaka Astana bond case.


I wrote several times about the Pesaka Astana issue (here, here and here).

More from the article from The Star:


The amendments to the CMSA also enhanced minority shareholder protection in the event of corporate takeovers and mergers. The amendment allows the SC to appoint an independent adviser for an offeree if the latter fails to appoint one.

Another good change.

I noted before regarding KPMG's independent advice on Maybulk's RPT:

I think that is highly debatable, I think there is a very good case to be made that KPMG is liable. Anyhow, I strongly recommend the authorities to come down hard on independent advisers who issue these kinds of statements:

If advisers don’t want to take any responsibility while at the same time they make very clear judgment calls which have consequences for the voting behavior of shareholders then they should simply not be allowed to be independent adviser.


I hope with the above changes that this issue is also settled.

Goh Ban Huat: connecting the dots

Excellent detective work by Errol Oh in The Star: "From Casio King to King of Coincidences".

This in regard to the acquisition by Goh Ban Huat of 20% in Time Galerie (M) Sdn Bhd for RM 14 Million, as announced here and here.

The detailed work showing possible relationships is much too cumbersome for ordinary retail investors.

Unfortunately, because there are systems out there that would make things much more easy, for instance "Handshakes" and "Webb-site". Pity that Bursa is not making similar systems for retail investors.

Related Party Transactions (RPTs) have a horrific reputation in Malaysia, as detailed in many cases in this blog (and much more cases in "Where is Ze Moola") where minority investors often received the short end of the stick.

But there is one category even worse, RPTs that are dressed up as non-RPTs. With many big players registering their holdings under nominee accounts, in a country where conflict of interest is normal, surely this is happening many times per year.

Unfortunately, enforcement on this aspect is really weak, we hardly hear about relevant cases against major shareholders who do business deals with related parties and fail to report this.

This is very relevant, since RPTs have to follow much more stringent rules and guidelines than non-RPTs. Larger RPTs even require an independent adviser and have to be approved in EGMs where the related parties have to abstain.

That all doesn't mean that Goh Ban Huat's acquisition is a RPT. But it does mean that the regulators actively should look into this deal (and in many similar deals).

It also doesn't mean that it is bad for its shareholders, Time Galerie looks like a very decent, profitable company.

There is one part in the reply to Bursa's query though that I don't like, the comparison to similar transactions. It shows that the PE of Time Galerie (11.8) compares reasonable with five other deals done with listed companies.

However, unlisted companies are sold for much lower PE's, a PE of 5 is often considered reasonable, and a PE of 2 is not unheard of. Shares in unlisted companies are very illiquid, and the standard of the audits is much lower than those of listed companies, hence those companies are trading at a large discount to their listed rivals.

In an unrelated matter, an interesting story about how Robert Tan gained control over Goh Ban Huat can be found here, paragraph 4.3. And for readers who like to know more about Syed Mokhtar (about whom I have written many times in this blog), paragraph 4.2 seems to be interesting.

"Listing of IOI Properties rushed and ill-timed"

Article on the website of The Star: Listing of IOI Properties ‘rushed and ill-timed’:

"Minority shareholders claim listing of IOI Properties rushed and ill-timed".

Details follow, mostly from remisiers on behalf of their clients:

• "as most of them (their clients) were away for the holidays or had yet to receive the necessary documents by post"
• "While the application is downloadable from Bursa Malaysia’s website, a remisier said this put senior citizens at a disadvantage. “Many of them don’t have access to the Internet. It shows a lack of concern for shareholders,” he said."
• "Stockbrokers are not authorised to sign on behalf of clients. We can try to help one or two clients, but not if it involves thousands of ringgit"

Rita Benoy Bushon, Chief Executive Officer, Minority Shareholder Watchdog Group, is even more outspoken in "The Observer, Message from the CEO", dated 3 January 2014:


"Minority shareholders of IOI Corp Bhd have every right to feel disgruntled by the short space of time given to subscribe for their entitlement for shares of its soon-to-be-listed IOI Properties Bhd.
 
Although the Company has announced the book closing date of the ROS (Restricted Offer Shares) on 19 December 2013 which is at least 11 market days before the date of application according to the Main Market Listing Requirement, it nevertheless had only issued the prospectus on 26 Dec 2013, which is a mere five working days before 2 January 2014, if the public holidays and weekends are excluded.

IOI should have realised that by conducting this exercise over the vacation period, many people may be on leave, postal deliveries could also be delayed in this period, which also meant that many may not have received the necessary documents by post on time. (Thus the complaints are valid.)

The company should really have given minorities more time to subscribe for their entitlements.
 
We view this as especially serious since it has been the subject of criticism following its delisting in 2009 (being bought out at just 0.66 times NTA for a RM1.3 billion valuation).

We hope IOI Corp will further extend the closing period for the application (noting that they have already done so today by 4 days) and show their good faith to the current minority shareholders, who are expected to be keen to take advantage of the offer. The reason being, that each IOI Properties share at RM1.76 under the ROS comes at a 30% discount to the reference price of RM2.51. In addition, an even steeper 42.7% to IOI Properties’ pro forma net asset per share of RM3.07. Otherwise, it could be construed negatively by the public that the offer not taken by entitled shareholders (for reasons beyond them) would be given to other shareholders at the discretion of the Board, at a discount."


I have written before about this IPO: "The return of IOI Properties" and "IOI Prospectus, 1623 pages!".

The only good news I can bring is that the length of the IPO prospectus is indeed brought back to 750 pages, a reduction of almost 1000 pages, although for me, it is still much too long.