Quite a few news articles in Singapore regarding "death spiral" comvertibles lately.
An interesting look in the kitchen of a company (Advance Capital) helpng to structure and issue those bonds can be found here:
"Singapore-based firm starts fund to buy 'death spiral' convertibles"
Some snippets:
The firm and its fund specialises in convertible bonds that have been called "death spiral convertibles" because of their dilutive impact on the underlying shares. Under Advance Capital's programme, a listed company that is in need of funds will issue to Advance Capital convertible notes that are convertible into new shares of the company at a fixed discount to the current market price. Because the notes set the conversion discount, and not the price, some notes have the potential to create a runaway negative impact on the underlying stock as each round of conversion gets even more dilutive.
Advance Capital has previously made such deals with Attilan Group (the former Asiasons Capital), Elektromotive Group, Yuuzoo Corp, Cacola Furniture International and OLS Enterprise. Other firms that are active in such programmes include Value Capital Asset Management, which has made deals with Annica Holdings, ISR Capital, Magnus Energy Group and LionGold Corp.
Advance Capital does not intend to hold the convertible bonds to maturity - Mr Ng told The Business Times that the bonds typically carry only a nominal coupon that is insufficient to cover the credit risk of the issuer. Instead, Advance Capital prefers to convert the notes into shares, and to sell the shares within a few days of conversion for a profit.
David Webb warned about these instruments already eleven years ago, some snippets (emphasis mine):
Webb-site.com has been aware of the toxic convertibles scam for many years and have repeatedly warned the regulators about them in private, urging a regulatory ban. In our view, there can be no logical reason why a listed company would want to cede control to a third party over what amounts to a stream of future equity issues at deep discounts to market. The Listing Rules should be amended to prohibit listed companies from issuing convertible instruments which carry floating conversion prices. We have waited until now to compile this article because we wanted to conduct a comprehensive study of the actual results of these deals, which can each last several years, to prove how damaging they are.
SGX's reaction:
"The company must send shareholders a circular written in plain English and without overly legalistic jargon, before the shareholder vote," Mr Tan wrote. "In it, the company must make clear to shareholders how such a bond could cause a downward spiral of the share price and result in massive dilutions detrimental to investors. The company must state the 'floor', or minimum conversion price and the maximum number of shares which could be issued on exercise." Directors must also give an opinion that the issuance is in the best interest of the company and shareholders, and "explain to shareholders the alternative sources of financing considered before arriving at the decision to issue the convertibles". SGX may reject applications to issue such instruments if disclosures do not meet those minimum standards. Beyond ensuring adequate disclosures, however, SGX is not in the business of assessing the merits of such convertibles, Mr Tan stressed. The instruments are ultimately a source of capital, the appropriateness of which is a commercial decision best left to companies and shareholders, Mr Tan stressed.
And with that we wholeheartedly disagree. SGX can stress the need for plain English in circulars, but who reads them anyway? How much chance realistically has a minority shareholder to overturn a proposal to issue these toxic bonds if the proposal is supported by the Board of Directors?
SGX should heed the advice of David Webb and simply ban convertible bonds which carry a floating conversion price by amending the listing rules.
Showing posts with label financial engineering. Show all posts
Showing posts with label financial engineering. Show all posts
Friday, 9 September 2016
Tuesday, 17 May 2016
Creative Accounting
There used to be a time when creating profits would require a real effort in hard work.
These days a much more simple way is available: call in the financial engineers.
I have written many times about the ways these people are able to polish up accounts.
In the tech world creativity to make profits out of thin air seems to have reached a whole new dimension.
Article from Bloomberg: Tech Startups Come Up With Some Creative Definitions for ‘Profitable’
Some snippets:
.... the startup [SpoonRocket] calculated that the business had become "contribution margin positive," meaning that it sells an item—in this case, pre-made meals delivered to customers—for more than the cost to manufacture, distribute, and sell it.
Uber said it was profitable in the U.S. and Canada during the first quarter of this year. Lyft said it is "on a clear and defined path to profitability." Postmates said it will be profitable by the end of 2017. DoorDash is "cash-flow positive" in some markets. TaskRabbit will be "profitable profitable" by the end of this year. It "won't be too long" until Airbnb is profitable. Instacart is "gross margin profitable." Luxe Valet is "on the precipice of being profitable" in some markets. At Y Combinator's demo day in March, many bright-eyed entrepreneurs clinched their pitches with a robust "and we're already profitable!"
Tech startups are increasingly touting a mix of less common financial metrics, even as their public counterparts move more toward generally accepted accounting principles. Amazon and Facebook recently began breaking out employee stock compensation in more of their results, bowing to pressure from regulators and investors. LinkedIn and Twitter still focus on numbers that exclude equity costs.
When Uber said it is profitable, the company similarly left out equity grants to employees, along with interest and taxes. Its main ride-hailing rival in the U.S., Lyft, declined to elaborate on its "path to profitability" statement, leaving questions about how or when it will reach its destination. Airbnb also declined to provide details on an executive's profitability comments. TaskRabbit said "profitable profitable" means it will turn a net profit but declined to say whether specific costs such as equity grants and taxes were included. Postmates, the courier service, used a profitability calculation that doesn't include taxes.
Several startups slice their numbers by markets to demonstrate financial maturity in certain cities or countries. Again, the criteria for what's included in those calculations can vary. Instacart told Bloomberg in February that it was profitable in its biggest markets and that 40 percent of its volume was profitable. The company later clarified that it meant gross margin profitable, which is usually limited to direct costs such as supplies and delivery labor. Instacart's calculation leaves out other costs, such as customer service, central office salaries, rent, and the cost of acquiring its workers. Instacart also said it is gross margin profitable, on average, across all its markets.
Luxe, an on-demand valet parking service, said it's currently profitable in some cities but declined to name them. The company defined "profitable in a market" as gross profit, excluding central operations costs. DoorDash, which delivers food from restaurants, said its cash-flow positivity is limited to its "earliest markets" and includes customer service and salaries of regional workers but leaves out central rent and operations.
However, at the end of the day, when the dust has settled:
"You can always say, 'We're profitable if we don't include X,' " Behr said. "But no matter how many ways you say you're kind of profitable, if your bank account ends up lighter than when you started—eventually, that doesn't work."
This is what Warren Buffett wrote in his last annual report (page 8, emphasis mine) about GAAP:
Though we sold no Kraft Heinz shares, “GAAP” (Generally Accepted Accounting Principles) required us to record a $6.8 billion write-up of our investment upon completion of the merger. That leaves us with our Kraft Heinz holding carried on our balance sheet at a value many billions above our cost and many billions below its market value, an outcome only an accountant could love.
It definitely seems that accounting these days is more of an art than a science. I am not sure if that is a good thing though.
These days a much more simple way is available: call in the financial engineers.
I have written many times about the ways these people are able to polish up accounts.
In the tech world creativity to make profits out of thin air seems to have reached a whole new dimension.
Article from Bloomberg: Tech Startups Come Up With Some Creative Definitions for ‘Profitable’
Some snippets:
.... the startup [SpoonRocket] calculated that the business had become "contribution margin positive," meaning that it sells an item—in this case, pre-made meals delivered to customers—for more than the cost to manufacture, distribute, and sell it.
Uber said it was profitable in the U.S. and Canada during the first quarter of this year. Lyft said it is "on a clear and defined path to profitability." Postmates said it will be profitable by the end of 2017. DoorDash is "cash-flow positive" in some markets. TaskRabbit will be "profitable profitable" by the end of this year. It "won't be too long" until Airbnb is profitable. Instacart is "gross margin profitable." Luxe Valet is "on the precipice of being profitable" in some markets. At Y Combinator's demo day in March, many bright-eyed entrepreneurs clinched their pitches with a robust "and we're already profitable!"
Tech startups are increasingly touting a mix of less common financial metrics, even as their public counterparts move more toward generally accepted accounting principles. Amazon and Facebook recently began breaking out employee stock compensation in more of their results, bowing to pressure from regulators and investors. LinkedIn and Twitter still focus on numbers that exclude equity costs.
When Uber said it is profitable, the company similarly left out equity grants to employees, along with interest and taxes. Its main ride-hailing rival in the U.S., Lyft, declined to elaborate on its "path to profitability" statement, leaving questions about how or when it will reach its destination. Airbnb also declined to provide details on an executive's profitability comments. TaskRabbit said "profitable profitable" means it will turn a net profit but declined to say whether specific costs such as equity grants and taxes were included. Postmates, the courier service, used a profitability calculation that doesn't include taxes.
Several startups slice their numbers by markets to demonstrate financial maturity in certain cities or countries. Again, the criteria for what's included in those calculations can vary. Instacart told Bloomberg in February that it was profitable in its biggest markets and that 40 percent of its volume was profitable. The company later clarified that it meant gross margin profitable, which is usually limited to direct costs such as supplies and delivery labor. Instacart's calculation leaves out other costs, such as customer service, central office salaries, rent, and the cost of acquiring its workers. Instacart also said it is gross margin profitable, on average, across all its markets.
Luxe, an on-demand valet parking service, said it's currently profitable in some cities but declined to name them. The company defined "profitable in a market" as gross profit, excluding central operations costs. DoorDash, which delivers food from restaurants, said its cash-flow positivity is limited to its "earliest markets" and includes customer service and salaries of regional workers but leaves out central rent and operations.
However, at the end of the day, when the dust has settled:
"You can always say, 'We're profitable if we don't include X,' " Behr said. "But no matter how many ways you say you're kind of profitable, if your bank account ends up lighter than when you started—eventually, that doesn't work."
This is what Warren Buffett wrote in his last annual report (page 8, emphasis mine) about GAAP:
Though we sold no Kraft Heinz shares, “GAAP” (Generally Accepted Accounting Principles) required us to record a $6.8 billion write-up of our investment upon completion of the merger. That leaves us with our Kraft Heinz holding carried on our balance sheet at a value many billions above our cost and many billions below its market value, an outcome only an accountant could love.
It definitely seems that accounting these days is more of an art than a science. I am not sure if that is a good thing though.
Tuesday, 10 May 2016
Keep it simple, stupid
Great article which serves as a warning in the Straits Times:
Retail investors, steer clear of complex structured notes
The name of the product was a mouthful: Six-month, Singapore-dollar non-principal guaranteed autocallable fixed coupon note with memory autocall linked to three shares.
It carried a fixed coupon of 8.01 per cent a year, payable monthly provided that "events" that would trigger an early redemption had not occurred.
The events were tied to the performance of three United States-based technology stocks: Google, Intel and Oracle.
Here is how Memory Autocall worked: The investor would receive a coupon payout of 0.6675 per cent of the principal amount each month, for six months.
But should the three stocks close at or above their initial prices on certain set valuation dates, a knockout event is deemed to have occurred. This would lead to the termination of the note, as a result of which the investor would get back her principal plus the coupon for that month.
She would also get to keep the coupons paid out earlier.
The three stocks did not need to meet the initial price threshold at the same time for the knockout event to take place.
If this does not sound complicated enough, there was another scenario known as the knock-in event to consider.
This would occur should any of the stocks fall to 80.5 per cent or lower of their initial price on any given valuation dates.
On the final valuation date, should the closing price of the worst-performing stock stay below its initial price, the investor's principal would be used to purchase the stock at the initial price. Under this scenario, a loss of capital is guaranteed.
This was exactly what happened to my friend's investment.
From then on, the investment was doomed even as my friend continued to receive her monthly coupons, given there was little chance that Oracle could recover to the initial price in the remaining three months. On maturity, a back-of-the-envelope calculation showed that my friend had suffered a loss of about $29,000 even after factoring in the $8,010 in coupon payments she collected.
On top of that, she was left holding Oracle shares bought at a high price - an outcome that she had not bargained for. She is still debating whether to sell the shares or hold on for a better price.
It bears repeating what I said earlier: Structured products do not compensate investors enough for the risks they are assuming.
My friend lost almost 15 per cent of her capital chasing an investment that would have, under ideal conditions, earned her 4.005 per cent at best.
Retail investors, steer clear of complex structured notes
The name of the product was a mouthful: Six-month, Singapore-dollar non-principal guaranteed autocallable fixed coupon note with memory autocall linked to three shares.
It carried a fixed coupon of 8.01 per cent a year, payable monthly provided that "events" that would trigger an early redemption had not occurred.
The events were tied to the performance of three United States-based technology stocks: Google, Intel and Oracle.
Here is how Memory Autocall worked: The investor would receive a coupon payout of 0.6675 per cent of the principal amount each month, for six months.
But should the three stocks close at or above their initial prices on certain set valuation dates, a knockout event is deemed to have occurred. This would lead to the termination of the note, as a result of which the investor would get back her principal plus the coupon for that month.
She would also get to keep the coupons paid out earlier.
The three stocks did not need to meet the initial price threshold at the same time for the knockout event to take place.
If this does not sound complicated enough, there was another scenario known as the knock-in event to consider.
This would occur should any of the stocks fall to 80.5 per cent or lower of their initial price on any given valuation dates.
On the final valuation date, should the closing price of the worst-performing stock stay below its initial price, the investor's principal would be used to purchase the stock at the initial price. Under this scenario, a loss of capital is guaranteed.
This was exactly what happened to my friend's investment.
From then on, the investment was doomed even as my friend continued to receive her monthly coupons, given there was little chance that Oracle could recover to the initial price in the remaining three months. On maturity, a back-of-the-envelope calculation showed that my friend had suffered a loss of about $29,000 even after factoring in the $8,010 in coupon payments she collected.
On top of that, she was left holding Oracle shares bought at a high price - an outcome that she had not bargained for. She is still debating whether to sell the shares or hold on for a better price.
It bears repeating what I said earlier: Structured products do not compensate investors enough for the risks they are assuming.
My friend lost almost 15 per cent of her capital chasing an investment that would have, under ideal conditions, earned her 4.005 per cent at best.
- Keep it simple, don't go for too difficult constructions that are almost impossible to calculate
- Always be aware of the commissions
Wednesday, 20 April 2016
10 Largest Malaysian IPOs
Below is a list of the ten largest IPOs in the last ten years on Bursa Malaysia.
== Market Cap ==
Company IPO date IPO Now Change
Petronas Chem 26/11/2010 42,480 53,600 26%
Maxis 19/11/2009 40,650 44,836 10%
IHH 25/07/2012 24,891 54,855 120%
Felda 28/06/2012 19,335 5,363 -72%
Astro 19/10/2012 15,592 15,199 -3%
Bumi Armada 21/07/2011 12,124 4,165 -66%
Westports 18/10/2013 9,037 14,356 59%
Malakoff 15/05/2015 9,000 8,400 -7%
UMW O&G 01/11/2013 6,702 2,000 -70%
AirAsia X 10/07/2013 2,963 1,452 -51%
Some comments:
== Market Cap ==
Company IPO date IPO Now Change
Petronas Chem 26/11/2010 42,480 53,600 26%
Maxis 19/11/2009 40,650 44,836 10%
IHH 25/07/2012 24,891 54,855 120%
Felda 28/06/2012 19,335 5,363 -72%
Astro 19/10/2012 15,592 15,199 -3%
Bumi Armada 21/07/2011 12,124 4,165 -66%
Westports 18/10/2013 9,037 14,356 59%
Malakoff 15/05/2015 9,000 8,400 -7%
UMW O&G 01/11/2013 6,702 2,000 -70%
AirAsia X 10/07/2013 2,963 1,452 -51%
Some comments:
- 6 out of 10 companies are still below their IPO price, that is not impressive at all
- if one would put the same amount of money in each stock, then one would have a loss of 5%
- on average the companies IPO-ed about 3.5 years ago
- for international investors, the RM is down by about 20% versus the USD since 3.5 years ago, so the results are much worse
- the market cap off all 10 companies together has risen though, since their combined IPOs
- it is mostly IHH saving the day, with EPF continuing to buy IHH shares aggressively even at a rich PE of around 60
- Maxis, Astro, Bumi Armada and Malakoff are all "listed-delisted-relisted" cases, Bursa should really take decisive action to discourage this kind of financial engineering which comes at the expense of the minority shareholders, it is long overdue
- quite a few resource related companies on the list, they have not fared well lately
There was once a time when companies were listed at single digit PEs supported by profit guarantees, the valuation was set by the authorities. Needless to say, there was a lot of interest by investors, and some IPOs were oversubscribed by 100 times.
Those days are over, companies nowadays set their own price, which is of course correct. New, "sexy" terms were introduced by financial engineers, like "cornerstone investors", "greenshoe options" and "stabilising manager".
But from the above data, it seems the IPO price is often quite rich these days, and not much upside (if any) is provided in exchange for the risk that IPO investors take.
Combined with my previous posting about poor earnings growth for the Top 30 companies (not surprisingly there is quite some overlap), things don't look that impressive.
Bursa can hold as many international roadshows as they want, but at the end of the day, it is the fundamentals and valuations that count. And they really have to improve.
Saturday, 9 January 2016
Rating agencies are mostly useless
I have written about rating agencies before, in not too positive terms, being hopelessly slow and conflicted.
Standard & Poor's has added further to this impression by downgrading Noble Group's rating to junk only now:
"S&P lowered Noble Group’s rating to BB+ from BBB- and placed it on watch for further possible downgrade, the ratings company said in a statement on Thursday, following a similar move by Moody’s Investors Service in late December. Noble’s dollar bonds due in 2020 dropped to a record low of 54.78 cents on the dollar, according to prices compiled by Bloomberg."
Iceberg Research, the company that started to roll the ball in this case almost one full year ago, wrote this about the downgrade:
S&P has downgraded Noble Group to junk today, following a similar move by Moody’s.
The downgrade validates one of our main arguments against Noble: this company has never been investment grade. In fact, the question is why did it take so long when it was clear that Noble has been bleeding cash for years, and after we showed that profitability was supported by dubious mark-to-market?
The decision will have an important impact on Noble’s liquidity and the perception of its creditors. This further complicates the refinancing of its debt. Noble’s annual results will soon be audited and we doubt that this time, EY will take more legal risks when they sign off on the accounts.
The financial manipulations were conducted to artificially preserve the investment grade rating. The accounting illusion is now over. With a share price down 71% since our first report, and strong doubts over the balance sheet, Noble is facing an even more acute crisis. The group is slowly moving toward bankruptcy.
Most of our arguments on Noble’s accounting have already become facts. This management has completely lost credibility. It is urgent for Noble’s stakeholders to replace Mr. Elman and Mr. Alireza before the company sinks with them.
Standard & Poor's has added further to this impression by downgrading Noble Group's rating to junk only now:
"S&P lowered Noble Group’s rating to BB+ from BBB- and placed it on watch for further possible downgrade, the ratings company said in a statement on Thursday, following a similar move by Moody’s Investors Service in late December. Noble’s dollar bonds due in 2020 dropped to a record low of 54.78 cents on the dollar, according to prices compiled by Bloomberg."
Iceberg Research, the company that started to roll the ball in this case almost one full year ago, wrote this about the downgrade:
S&P has downgraded Noble Group to junk today, following a similar move by Moody’s.
The downgrade validates one of our main arguments against Noble: this company has never been investment grade. In fact, the question is why did it take so long when it was clear that Noble has been bleeding cash for years, and after we showed that profitability was supported by dubious mark-to-market?
The decision will have an important impact on Noble’s liquidity and the perception of its creditors. This further complicates the refinancing of its debt. Noble’s annual results will soon be audited and we doubt that this time, EY will take more legal risks when they sign off on the accounts.
The financial manipulations were conducted to artificially preserve the investment grade rating. The accounting illusion is now over. With a share price down 71% since our first report, and strong doubts over the balance sheet, Noble is facing an even more acute crisis. The group is slowly moving toward bankruptcy.
Most of our arguments on Noble’s accounting have already become facts. This management has completely lost credibility. It is urgent for Noble’s stakeholders to replace Mr. Elman and Mr. Alireza before the company sinks with them.
Thursday, 7 January 2016
Dangers of Private Equity
I am not exactly a fan of PE (Private Equity), have read to many horror stories about this industry. Too often it involves asset stripping and a huge amount of leverage. I guess there are exceptions though, although I haven't seen many.
One interesting read in this category is the following:
"Dick Smith is the Greatest Private Equity Heist of All Time"
"Want to know how to turn $10m in to $520m in less than two years? Just ask Anchorage Capital. The private equity group has pulled off one of the great heists of all time, using all the tricks in the book, to turn Dick Smith from a $10m piece of mutton into a $520m lamb."
And the not unexpected follow up:
"Why Banks Pulled the Pin on Dick Smith"
One interesting read in this category is the following:
"Dick Smith is the Greatest Private Equity Heist of All Time"
"Want to know how to turn $10m in to $520m in less than two years? Just ask Anchorage Capital. The private equity group has pulled off one of the great heists of all time, using all the tricks in the book, to turn Dick Smith from a $10m piece of mutton into a $520m lamb."
And the not unexpected follow up:
"Why Banks Pulled the Pin on Dick Smith"
Sunday, 19 July 2015
Xidelang: worrying warrants
I wrote before about Xidelang's previous warrant issue.
Xidelang issued a new warrant, XDL-WC. The motivation:
The first two are of course blatant nonsense, since all shareholders receive the same deal there is no reward for any specific shareholder.
And if all shareholders exercise their warrants, then they all have more shares, but in percentage of course still exactly the same.
Let's put it differently: Warren Buffett has managed Berkshire Hathaway for 50 years, increasing the share price from around USD 20 to around USD 200,000, a ten thousand fold increase. He did this without ever issuing warrants (or bonus shares or rights shares or any other instrument).
Can Warren Buffett be accused of not having rewarded its shareholders by not issuing truckloads of warrants?
Xidelang IPO-ed on Bursa in 2009, and the share price is still lower than its IPO price. Just to put things in perspective.
Would it not be better if Xidelang would simply mend its business, instead of bothering with the attempts at financial engineering through issuing all kind of instruments?
The third and fourth reason mentioned above are potentially "dangerous", some companies who issue warrants count on the money to come in from the exercise, but when the shares suddenly go down no warrant is exercised and the company runs into financial troubles.
The Edge Malaysia (edition July 20, 2015) published a article "Why, Xidelang?" in which it wrote that Xidelang has not adjusted the exercise price of the previous warrant of Xidelang, XDL-WB, which was issued last year, leaving it at 35 sen against the mother share of 16 sen.
The Edge writes: "as of the end April 30, none of the directors surface as the 30 largest holders of XDL-WB. Could this be the reason for the nonchalance?".
This sounds outright unfair for the holders of those WB warrants.
And strangely enough, it seems to be allowed according to the rules.
I wrote a few times about the horrific treatment warrant holders get for instance at a delisting exercise (here and here).
For minority investors in shares the environment on Bursa is already difficult enough from a corporate governance point of view. So often the big guys win.
But for investors in warrants things appear to be much worse, they don't have much rights at all.
That bags the question: is the public properly informed of this, is there a label attached to warrants warning potential investors about the lack of rights that they will have?
If the rights of warrant holders are so minimal, why can Bursa not simply do away with them? These financial instruments are simply not needed. Abolishing them will not negatively impact the Malaysian economy in any way, shape or form. If there is any impact, it would be (slightly) positive.
Wishing all Muslim readers:
Xidelang issued a new warrant, XDL-WC. The motivation:
The first two are of course blatant nonsense, since all shareholders receive the same deal there is no reward for any specific shareholder.
And if all shareholders exercise their warrants, then they all have more shares, but in percentage of course still exactly the same.
Let's put it differently: Warren Buffett has managed Berkshire Hathaway for 50 years, increasing the share price from around USD 20 to around USD 200,000, a ten thousand fold increase. He did this without ever issuing warrants (or bonus shares or rights shares or any other instrument).
Can Warren Buffett be accused of not having rewarded its shareholders by not issuing truckloads of warrants?
Xidelang IPO-ed on Bursa in 2009, and the share price is still lower than its IPO price. Just to put things in perspective.
Would it not be better if Xidelang would simply mend its business, instead of bothering with the attempts at financial engineering through issuing all kind of instruments?
The third and fourth reason mentioned above are potentially "dangerous", some companies who issue warrants count on the money to come in from the exercise, but when the shares suddenly go down no warrant is exercised and the company runs into financial troubles.
The Edge Malaysia (edition July 20, 2015) published a article "Why, Xidelang?" in which it wrote that Xidelang has not adjusted the exercise price of the previous warrant of Xidelang, XDL-WB, which was issued last year, leaving it at 35 sen against the mother share of 16 sen.
The Edge writes: "as of the end April 30, none of the directors surface as the 30 largest holders of XDL-WB. Could this be the reason for the nonchalance?".
This sounds outright unfair for the holders of those WB warrants.
And strangely enough, it seems to be allowed according to the rules.
I wrote a few times about the horrific treatment warrant holders get for instance at a delisting exercise (here and here).
For minority investors in shares the environment on Bursa is already difficult enough from a corporate governance point of view. So often the big guys win.
But for investors in warrants things appear to be much worse, they don't have much rights at all.
That bags the question: is the public properly informed of this, is there a label attached to warrants warning potential investors about the lack of rights that they will have?
If the rights of warrant holders are so minimal, why can Bursa not simply do away with them? These financial instruments are simply not needed. Abolishing them will not negatively impact the Malaysian economy in any way, shape or form. If there is any impact, it would be (slightly) positive.
Wishing all Muslim readers:
Saturday, 20 June 2015
GMT on AirAsia: "New Dog, Old Tricks"
On Vimeo a video is released giving some (but not all) of the issues that GMT Research has raised on AirAsia.
The video can be found here.
It is reasonably detailed and I recommend the viewer to pause the image when numbers are being shown.
Tony Fernandes has immediately described the report as "rubbish", and that he will proof the writers of the report wrong. Not an unexpected reaction.
However, what is needed is a more sophisticated reaction, not the kind of reaction from Nobel (listed in Singapore).
Airasia has announced a pretty decent reply a few days ago, however, there are some shortcomings.
First of all it prides it self on transparency, but good transparency is something else than good governance or good accounting.
For good governance for instance a neat corporate structure is needed, something AirAsia (and its mother company) doesn't have. The amount of related party transaction between the many parties (each with different shareholders) is simply overwhelming.
Regarding the good accounting: AirAsia has always accounted very aggressively, in my opinion much too aggressively, and in AirAsia X's case to an extent that is doesn't make sense at all (deferred tax when it continues to make losses).
Regarding the first part (the consolidation has just not been possible), surely it could have been presented in some form or shape in the year report, what the consequences would be of consolidating.
Good however that from the second quarter onwards the company will include the numbers.
For me, AirAsia has always relied much too much on a combination of financial engineering and marketing hyphe, something I don't like at all.
This report by GMT is a refreshing, different approach from the usual stuff we normally read in the Malaysian media.
Who will be right at the end of the day? I guess we have to wait and see.
AirAsia is however warned, and could thus take appropriate actions, for instance by raising more capital.
Another unrelated but interesting video by GMT can be found here, some of its contents:
The video can be found here.
It is reasonably detailed and I recommend the viewer to pause the image when numbers are being shown.
Tony Fernandes has immediately described the report as "rubbish", and that he will proof the writers of the report wrong. Not an unexpected reaction.
However, what is needed is a more sophisticated reaction, not the kind of reaction from Nobel (listed in Singapore).
Airasia has announced a pretty decent reply a few days ago, however, there are some shortcomings.
First of all it prides it self on transparency, but good transparency is something else than good governance or good accounting.
For good governance for instance a neat corporate structure is needed, something AirAsia (and its mother company) doesn't have. The amount of related party transaction between the many parties (each with different shareholders) is simply overwhelming.
Regarding the good accounting: AirAsia has always accounted very aggressively, in my opinion much too aggressively, and in AirAsia X's case to an extent that is doesn't make sense at all (deferred tax when it continues to make losses).
Regarding the first part (the consolidation has just not been possible), surely it could have been presented in some form or shape in the year report, what the consequences would be of consolidating.
Good however that from the second quarter onwards the company will include the numbers.
For me, AirAsia has always relied much too much on a combination of financial engineering and marketing hyphe, something I don't like at all.
This report by GMT is a refreshing, different approach from the usual stuff we normally read in the Malaysian media.
Who will be right at the end of the day? I guess we have to wait and see.
AirAsia is however warned, and could thus take appropriate actions, for instance by raising more capital.
Another unrelated but interesting video by GMT can be found here, some of its contents:
- WorldCom & Enron explained
- Goodwill & impairments
- CP ALL: A very over-leveraged buyout
- Youku: Growth through acquisitions
- Curious Assets
- Wilmar: Leveraged Chinese carry trade
- Reliance Infrastructure: Capitalising expenses?
- Chinese Concessionaires: Paper profits
- P&G H&H: Corporate governance
- Larsen & Toubro: Cutting off the lifeline
Saturday, 6 June 2015
Bernas' worrying financials
My attention was drawn to an article in The Edge Malaysia with the above title.
I have written about Bernas in the past (here and here), about the serious (alleged) possibility that Bernas' minority shareholders were not treated fair and equal, which would imply a clear breach of the rules. No news yet from the authorities (Bursa, SC or SSM) regarding this matter, but then again, enforcement against VVIPs has never been their strongest point, to put it mildly.
After it's delisting Bernas was not hindered anymore by those "pesky" minority shareholders, and apparently it used this freedom to forward huge amounts of money to its parent company (something that would have required the approval from minority investors, besides a healthy dose of transparency).
It also hugely increased its dividend policy, money that now does not need to be shared anymore with their previous minority shareholders who were bought out.
From RAM's website: "RAM Ratings downgrades ratings of Bernas’ sukuk, some snippets:
After the delisting of Bernas in April 2014, the Group had channelled large amount of advances to its holding companies and related parties totalling over RM700 million. “Support of this nature and magnitude is not within RAM’s expectation and such a move implies increased influence and explicit control of TWM.
The negative outlook reflects our concerns over additional shareholder-friendly manoeuvres and operational challenges that would further compromise Bernas’ financial profile. Although new advances to shareholders/related parties are unlikely, the Group has committed to future dividend payouts (from fiscal 2015 onwards) that are much higher than the Group’s net earnings.
We had previously expected Bernas to gradually pare down its debts following the collection of delayed subsidy receivables from the Government of Malaysia in 2014. On the contrary, the Group’s debt level had increased 20.0% to nearly RM2 billion (end-December 2013: RM1.64 billion). Besides advances, Bernas had also taken on additional trade lines to fund its heftier working-capital needs. Given the expected erosion of its equity base (from outsized dividend payments) and the absence of any improvement in its profitability, the Group’s gearing ratio could reach 1.8 times by FY Dec 2016 while its FFODC will likely stay below 0.10 times.
Bernas' actions seem puzzling to say the least, is this all really prudent?
What is going to be the end play, a heavily indebted Bernas targeting an IPO on Bursa in the near future, playing the "infamous" listing-delisting-relisting "play" with new shareholders having to pump in fresh money to pay of the debts Bernas is now incurring?
Time will tell .....
I have written about Bernas in the past (here and here), about the serious (alleged) possibility that Bernas' minority shareholders were not treated fair and equal, which would imply a clear breach of the rules. No news yet from the authorities (Bursa, SC or SSM) regarding this matter, but then again, enforcement against VVIPs has never been their strongest point, to put it mildly.
After it's delisting Bernas was not hindered anymore by those "pesky" minority shareholders, and apparently it used this freedom to forward huge amounts of money to its parent company (something that would have required the approval from minority investors, besides a healthy dose of transparency).
It also hugely increased its dividend policy, money that now does not need to be shared anymore with their previous minority shareholders who were bought out.
From RAM's website: "RAM Ratings downgrades ratings of Bernas’ sukuk, some snippets:
After the delisting of Bernas in April 2014, the Group had channelled large amount of advances to its holding companies and related parties totalling over RM700 million. “Support of this nature and magnitude is not within RAM’s expectation and such a move implies increased influence and explicit control of TWM.
The negative outlook reflects our concerns over additional shareholder-friendly manoeuvres and operational challenges that would further compromise Bernas’ financial profile. Although new advances to shareholders/related parties are unlikely, the Group has committed to future dividend payouts (from fiscal 2015 onwards) that are much higher than the Group’s net earnings.
We had previously expected Bernas to gradually pare down its debts following the collection of delayed subsidy receivables from the Government of Malaysia in 2014. On the contrary, the Group’s debt level had increased 20.0% to nearly RM2 billion (end-December 2013: RM1.64 billion). Besides advances, Bernas had also taken on additional trade lines to fund its heftier working-capital needs. Given the expected erosion of its equity base (from outsized dividend payments) and the absence of any improvement in its profitability, the Group’s gearing ratio could reach 1.8 times by FY Dec 2016 while its FFODC will likely stay below 0.10 times.
Bernas' actions seem puzzling to say the least, is this all really prudent?
What is going to be the end play, a heavily indebted Bernas targeting an IPO on Bursa in the near future, playing the "infamous" listing-delisting-relisting "play" with new shareholders having to pump in fresh money to pay of the debts Bernas is now incurring?
Time will tell .....
Monday, 13 April 2015
CIMB selling part of PE business?
Article in Focus Malaysia (partially behind paywall): "CIMB’s ex-CFO to buy its PE biz".
Please note that the article is based on rumours: "It is learnt", "A banker says", etc., no official announcement has been made, so we need to wait for official confirmation.
The deal would be noteworthy since there would be a large conflict of interest the stake being takeover by the people who manage it:
"... former chief financial officer Kenny Kim and senior executives mulling a takeover of the banking group’s private equity business.Under the deal, Kim and his associates are expected to acquire a 70% stake in the CIMB private equity unit, with the balance to be retained by the banking group."
The reasoning behind the possible move seems to be:
" .....a move by CIMB to detach the private equity unit’s financials from the group’s consolidated accounts. This is part of the implementation of Target 2018 or T18, announced in February, that includes the bank’s aim of a return on equity (RoE) of more than 15% by 2018.In FY13, the latest financial year for which its results are available, the CIMB private equity business went into the red with a RM4.68 mil loss after four years of profit. The sale of CIMB’s private equity business may improve some of the T18 financial benchmarks."
That would be kind of reasoning (dressing up of the accounts) of which I am not exactly a fan.
Managers of PE funds normally work under a 2/20 rule, meaning they would get 2% a year (in this case a cool RM 120 Million) and subsequently 20% of the profit after returning the original amount to the investors (since the amount under management is RM 6 Billion, this could be very substantial).
The PE industry in the US is quite controversial, here is a collection of articles from one of my favourite bloggers on this subject.
Please note that the article is based on rumours: "It is learnt", "A banker says", etc., no official announcement has been made, so we need to wait for official confirmation.
The deal would be noteworthy since there would be a large conflict of interest the stake being takeover by the people who manage it:
"... former chief financial officer Kenny Kim and senior executives mulling a takeover of the banking group’s private equity business.Under the deal, Kim and his associates are expected to acquire a 70% stake in the CIMB private equity unit, with the balance to be retained by the banking group."
The reasoning behind the possible move seems to be:
" .....a move by CIMB to detach the private equity unit’s financials from the group’s consolidated accounts. This is part of the implementation of Target 2018 or T18, announced in February, that includes the bank’s aim of a return on equity (RoE) of more than 15% by 2018.In FY13, the latest financial year for which its results are available, the CIMB private equity business went into the red with a RM4.68 mil loss after four years of profit. The sale of CIMB’s private equity business may improve some of the T18 financial benchmarks."
That would be kind of reasoning (dressing up of the accounts) of which I am not exactly a fan.
Managers of PE funds normally work under a 2/20 rule, meaning they would get 2% a year (in this case a cool RM 120 Million) and subsequently 20% of the profit after returning the original amount to the investors (since the amount under management is RM 6 Billion, this could be very substantial).
The PE industry in the US is quite controversial, here is a collection of articles from one of my favourite bloggers on this subject.
Wednesday, 4 March 2015
DCF: Hall of Shame (1)
Interesting article from Professor Aswath Damodaran:
"DCF Myth 1: If you have a D(discount rate) and a CF (cash flow), you have a DCF!"
He defines "the consistency test" for DCF:
"Many of the DCFs that I see passed around in acquisition valuations, appraisal and accounting don’t pass these consistency tests. In fact, at the risk of being labelled a DCF snob, I have taken to classifying these defective DCFs into seven groups:"
Followed by the seven DCF groups and their description. The following picture gives some insights:
From the above we can see that there are many pitfalls in making a correct DCF. That is a serious problem with DCF.
But I think there is an even larger problem: dishonesty from the side of the DCF modeller. In the Malaysian context (and may be even in the global context), that is in my opinion a huge problem.
I will detail my reasons for this in a subsequent posting.
"DCF Myth 1: If you have a D(discount rate) and a CF (cash flow), you have a DCF!"
He defines "the consistency test" for DCF:
- Unit consistency
- Input consistency
- Narrative consistency
"Many of the DCFs that I see passed around in acquisition valuations, appraisal and accounting don’t pass these consistency tests. In fact, at the risk of being labelled a DCF snob, I have taken to classifying these defective DCFs into seven groups:"
Followed by the seven DCF groups and their description. The following picture gives some insights:
From the above we can see that there are many pitfalls in making a correct DCF. That is a serious problem with DCF.
But I think there is an even larger problem: dishonesty from the side of the DCF modeller. In the Malaysian context (and may be even in the global context), that is in my opinion a huge problem.
I will detail my reasons for this in a subsequent posting.
Saturday, 28 February 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.
"... 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.
Thursday, 25 December 2014
"all the IPOs this year were making money for investors", really? (2)
According to an article in The Edge (December 22, 2014) named "A dreary year for listings" 14 companies IPO-ed in 2014 on Bursa.
Excluding Only World Group (which just listed) the results are:
That is not exactly a good score. Bearish sentiment on Bursa and in particular in the Oil & Gas industry have played an important role.
Icon Offshore was the worst performer, I wrote some cautious words about the company before.
Last year I wrote about an article in The Star, where the following quote was made:
"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."
That all IPO's made money in 2013 was simply not true.
And some of those listed companies did rather bad in 2014, for instance China Automobile Parts, AirAsia X, Sona Petroleum, Caring Pharmacy Group and UMW Oil & Gas.
But the advice to "ride the wave of Malaysia's IPO market" in 2014 also seems dubious, with hindsight, as the above results show.
Five years of booming share market have led to too much financial engineering, too much hot air being injected in soon to be listed companies, too much focus on the Oil & Gas industry.
Not surprisingly, things have come down to more realistic levels.
Wishing all readers Happy Holidays.
Excluding Only World Group (which just listed) the results are:
- 3 are in positive area
- 2 have the same price as the IPO
- 8 have gone down, some considerably
That is not exactly a good score. Bearish sentiment on Bursa and in particular in the Oil & Gas industry have played an important role.
Icon Offshore was the worst performer, I wrote some cautious words about the company before.
Last year I wrote about an article in The Star, where the following quote was made:
"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."
That all IPO's made money in 2013 was simply not true.
And some of those listed companies did rather bad in 2014, for instance China Automobile Parts, AirAsia X, Sona Petroleum, Caring Pharmacy Group and UMW Oil & Gas.
But the advice to "ride the wave of Malaysia's IPO market" in 2014 also seems dubious, with hindsight, as the above results show.
Five years of booming share market have led to too much financial engineering, too much hot air being injected in soon to be listed companies, too much focus on the Oil & Gas industry.
Not surprisingly, things have come down to more realistic levels.
Wishing all readers Happy Holidays.
Saturday, 15 November 2014
Cutting accumulated losses through financial engineering (2)
I wrote before about this issue. I received two reactions that confirm my suspicion.
From "Anonymous":
Sadly, it is a global accounting treatment. Just google "accumulated losses write off", you can see lots of same treatment for this situation. Mitsubishi, Yamaha, United Bank of India and etc. I suppose this is a grey area in the accounting standards.
From "Avatar":
I'll be slightly more brief here. What you have illustrated above is a good example, so I'll use that simple one. I'll try to state the issues in a more simplistic manner.
1. A clean slate or forever blacklisted
To put it simply, just like a ex-convict that has been released and is looking for a job, is it fair to forever label him as an ex-convict when the prospective employer searches his records through some database?
Similarly, in this situation ~ the so-called accounting 'innovation' (it's not btw) goes along the same line of thinking. Since the company has made substantial losses, it weighs down on the mind of any future investors, same as the employer with the ex-convict. That's why most companies go down this route to wipe out the past bad track record, so to speak. In this time where first impressions count, I don't blame them.
2. The cat has flown the 'coop' so to speak
The accumulated losses is just a summary or 'report card' of all the bad decisions made by the company, so to speak. It doesn't really matter whether it's netted off against the share premium of share capital, as more importantly, the cash is already gone. You are right though, keeping it there, lets the investor see all the bad decisions that have accumulated throughout the years, but a good investor can always look at the losses throughout a 5 or 10 period anyways.
3. Companies Act 1965 and SC
There are some safeguards before companies are allowed to set off their losses against the share capital and premium, especially if they are listed on the Bursa. It's not a difficult thing, but there are some procedures to be followed, so it's on some whim and fancy. Probably it's pursuant to some restructuring and injection of new share capital and such.
As to your last question, YES! It's a perfectly legitimate technique though there are safeguards in the UK Companies Act to prevent share capital from being reduced in this manner, which was exported to the Commonwealth Countries such as Malaysia and Singapore.
Thanks for the two contributions, appreciated.
I guess we have to be careful and review the whole history of a company before we make a judgement. We actually even need the history of the larger subsidiaries, to be complete.
On a slightly related matter, I am completely puzzled why companies are getting away with publishing only their last few (often three) years of results in an IPO prospectus. A prospectus often contains hundreds and hundreds of pages, a lot of that information is not very useful.
Why not make one simple table with say the last ten years of results containing the most important numbers, like revenue, PBT, PAT and dividends? At most it would cover half a page, and it would likely be the most important information of the whole document. It would also exactly help in the cases described where accumulated losses are written off.
I have seen many instances where the last three years before the IPO showed net profits in a nicely rising pattern, like RM 20M, RM 40M, RM 60M and after the IPO the company hugely disappointed despite the injection of fresh money. Giving the numbers of the last 10 years might have shown a very different pattern than just the last three years.
From "Anonymous":
Sadly, it is a global accounting treatment. Just google "accumulated losses write off", you can see lots of same treatment for this situation. Mitsubishi, Yamaha, United Bank of India and etc. I suppose this is a grey area in the accounting standards.
From "Avatar":
I'll be slightly more brief here. What you have illustrated above is a good example, so I'll use that simple one. I'll try to state the issues in a more simplistic manner.
1. A clean slate or forever blacklisted
To put it simply, just like a ex-convict that has been released and is looking for a job, is it fair to forever label him as an ex-convict when the prospective employer searches his records through some database?
Similarly, in this situation ~ the so-called accounting 'innovation' (it's not btw) goes along the same line of thinking. Since the company has made substantial losses, it weighs down on the mind of any future investors, same as the employer with the ex-convict. That's why most companies go down this route to wipe out the past bad track record, so to speak. In this time where first impressions count, I don't blame them.
2. The cat has flown the 'coop' so to speak
The accumulated losses is just a summary or 'report card' of all the bad decisions made by the company, so to speak. It doesn't really matter whether it's netted off against the share premium of share capital, as more importantly, the cash is already gone. You are right though, keeping it there, lets the investor see all the bad decisions that have accumulated throughout the years, but a good investor can always look at the losses throughout a 5 or 10 period anyways.
3. Companies Act 1965 and SC
There are some safeguards before companies are allowed to set off their losses against the share capital and premium, especially if they are listed on the Bursa. It's not a difficult thing, but there are some procedures to be followed, so it's on some whim and fancy. Probably it's pursuant to some restructuring and injection of new share capital and such.
As to your last question, YES! It's a perfectly legitimate technique though there are safeguards in the UK Companies Act to prevent share capital from being reduced in this manner, which was exported to the Commonwealth Countries such as Malaysia and Singapore.
Thanks for the two contributions, appreciated.
I guess we have to be careful and review the whole history of a company before we make a judgement. We actually even need the history of the larger subsidiaries, to be complete.
On a slightly related matter, I am completely puzzled why companies are getting away with publishing only their last few (often three) years of results in an IPO prospectus. A prospectus often contains hundreds and hundreds of pages, a lot of that information is not very useful.
Why not make one simple table with say the last ten years of results containing the most important numbers, like revenue, PBT, PAT and dividends? At most it would cover half a page, and it would likely be the most important information of the whole document. It would also exactly help in the cases described where accumulated losses are written off.
I have seen many instances where the last three years before the IPO showed net profits in a nicely rising pattern, like RM 20M, RM 40M, RM 60M and after the IPO the company hugely disappointed despite the injection of fresh money. Giving the numbers of the last 10 years might have shown a very different pattern than just the last three years.
Thursday, 30 October 2014
Maximizing Shareholder Value is the worlds dumbest idea
James Montier tells it as it is, he is very outspoken about the financial world, the things that are very wrong in his view.
In this extremely interesting presentation he argues that Maximixing Shareholders Value (MVS) is arguably the worlds dumbest idea. The presentation starts at 5:30.
One of his main arguments is wrong incentives, a subject that is also close to people like Warren Buffett and Charlie Munger, who warned about it many times. Many of the problems in the financial world stem from incentives that are either too much focused on the short term, or are misaligned.
One slide contains a collection of more dumb financial ideas, according to Montier:
Fans of Milton Friedman might want to consider skipping a few minutes from 10:00 onwards, Montier doesn't mince his words, describing the damage that Friedman has caused.
An earlier post on Montier can be found here.
In this extremely interesting presentation he argues that Maximixing Shareholders Value (MVS) is arguably the worlds dumbest idea. The presentation starts at 5:30.
One of his main arguments is wrong incentives, a subject that is also close to people like Warren Buffett and Charlie Munger, who warned about it many times. Many of the problems in the financial world stem from incentives that are either too much focused on the short term, or are misaligned.
One slide contains a collection of more dumb financial ideas, according to Montier:
Fans of Milton Friedman might want to consider skipping a few minutes from 10:00 onwards, Montier doesn't mince his words, describing the damage that Friedman has caused.
An earlier post on Montier can be found here.
Saturday, 11 October 2014
Cutting accumulated losses through financial engineering
[updated version, with a request at the end]
The Net Asset Value (NAV) of a company at a certain moment is defined as:
NAV = Assets minus Liabilities
That makes sense. But there is another way to look at NAV:
NAV = Equity plus Retained Earnings
With the Equity being the amount that has been put in the company by the shareholders (initially, and later possibly through rights issues or an IPO) and Retained Earnings being the accumulated Earnings minus the accumulated Dividends over the lifespan of the company up to that certain moment.
If we combine the two above formula's:
Assets minus Liabilities = Equity plus Retained Earnings
A simple and beautifully balanced formula.
Example 1
Assets 40M Equity 10M
Liabilities -15M Retained Earnings 15M
NAV 25M NAV 25M
However, there is one group of companies which might not be too happy with this formula, and that is the group of companies which makes persistent losses. For them things might look like:
Example 2
Assets 30M Equity 40M
Liabilities -20M Retained Earnings -30M
NAV 10M NAV 10M
It is rather obvious that future investors can see that this company might have a problem (especially if no or very little dividends have been paid out in the past, which is often the case).
Financial engineers (of the kind that I don't like, to put it mildly) have come up with a creative solution. What would happen if the Retained Earnings (or losses, as is often the case) could be lowered?
Since the Assets and Liabilities (and thus the NAV) would stay the same, the Equity has to be lowered. So this is the solution they came up with:
Example 3
Assets 30M Equity 10M
Liabilities -20M Retained Earnings 0M
NAV 10M NAV 10M
This suddenly looks a lot more healthy than example 2. The reduction of the equity is done by reducing the par value or a transfer from the reserves (accumulated profits).
Needless to say, I like this kind of financial engineering as much as I like a toothache. This is the kind of "innovation" that is not helpful at all, brings no economic benefit, is not transparent but only distracting and costs money and effort that should be used to build the business.
There are many examples on Bursa of companies which have used the above accounting "trick", for instance MAS.
The above is from the 2013 audited accounts from MAS:
Because of this, in my opinion, the meaning of the term "accumulated profits" (or losses) has completely lost its meaning, at least after any capital reduction exercise. The definition as used in Wikipedia, doesn't seem correct, there is no mentioning of the "accounting magic" which might distort the numbers.
One recent example is XOX Bhd, The Star wrote an article "XOX unveils plan to cut accumulated losses of RM50m" on their website.
When I read this headline, I thought (rather naively, I admit) that XOX would cut the losses by making profits. At least, that would make sense to me.
But I was rather surprised when I read the rest of the article:
XOX Bhd has announced several proposals to reduce its accumulated losses amounting to RM50.05mil as at end-June. The mobile virtual network operator, which has a market cap of RM33.2mil, told Bursa Malaysia that it was proposing to reduce up to RM32.73mil from its share premium account. “The credit arising therefrom shall be utilised towards setting off against the accumulated losses of the company,” it said. On top of that, it has proposed to halve the par value of its shares to five sen each, subsequently consolidating every two XOX shares of five sen each into one new XOX share of 10 sen. The par value reduction would give rise to a credit of RM16mil, which would be used to reduce its accumulated losses, it added.
XOX is one of the worst performing companies on Bursa, I will write soon a separate blog posting about all the issues.
Request: is there any accountant who can comment on this (anonymous is fine). I also would like to know: is the above a global convention?
The Net Asset Value (NAV) of a company at a certain moment is defined as:
NAV = Assets minus Liabilities
That makes sense. But there is another way to look at NAV:
NAV = Equity plus Retained Earnings
With the Equity being the amount that has been put in the company by the shareholders (initially, and later possibly through rights issues or an IPO) and Retained Earnings being the accumulated Earnings minus the accumulated Dividends over the lifespan of the company up to that certain moment.
If we combine the two above formula's:
Assets minus Liabilities = Equity plus Retained Earnings
A simple and beautifully balanced formula.
Example 1
Assets 40M Equity 10M
Liabilities -15M Retained Earnings 15M
NAV 25M NAV 25M
However, there is one group of companies which might not be too happy with this formula, and that is the group of companies which makes persistent losses. For them things might look like:
Example 2
Assets 30M Equity 40M
Liabilities -20M Retained Earnings -30M
NAV 10M NAV 10M
It is rather obvious that future investors can see that this company might have a problem (especially if no or very little dividends have been paid out in the past, which is often the case).
Financial engineers (of the kind that I don't like, to put it mildly) have come up with a creative solution. What would happen if the Retained Earnings (or losses, as is often the case) could be lowered?
Since the Assets and Liabilities (and thus the NAV) would stay the same, the Equity has to be lowered. So this is the solution they came up with:
Example 3
Assets 30M Equity 10M
Liabilities -20M Retained Earnings 0M
NAV 10M NAV 10M
This suddenly looks a lot more healthy than example 2. The reduction of the equity is done by reducing the par value or a transfer from the reserves (accumulated profits).
Needless to say, I like this kind of financial engineering as much as I like a toothache. This is the kind of "innovation" that is not helpful at all, brings no economic benefit, is not transparent but only distracting and costs money and effort that should be used to build the business.
There are many examples on Bursa of companies which have used the above accounting "trick", for instance MAS.
The above is from the 2013 audited accounts from MAS:
- MAS had accumulated losses of RM 8.2 Billion as of January 1, 2013.
- It lost again money in 2013 to the tune of RM 1.2 Billion.
- One would expect accumulated losses of RM 9.4 Billion as of December 31st, 2013.
Because of this, in my opinion, the meaning of the term "accumulated profits" (or losses) has completely lost its meaning, at least after any capital reduction exercise. The definition as used in Wikipedia, doesn't seem correct, there is no mentioning of the "accounting magic" which might distort the numbers.
One recent example is XOX Bhd, The Star wrote an article "XOX unveils plan to cut accumulated losses of RM50m" on their website.
When I read this headline, I thought (rather naively, I admit) that XOX would cut the losses by making profits. At least, that would make sense to me.
But I was rather surprised when I read the rest of the article:
XOX Bhd has announced several proposals to reduce its accumulated losses amounting to RM50.05mil as at end-June. The mobile virtual network operator, which has a market cap of RM33.2mil, told Bursa Malaysia that it was proposing to reduce up to RM32.73mil from its share premium account. “The credit arising therefrom shall be utilised towards setting off against the accumulated losses of the company,” it said. On top of that, it has proposed to halve the par value of its shares to five sen each, subsequently consolidating every two XOX shares of five sen each into one new XOX share of 10 sen. The par value reduction would give rise to a credit of RM16mil, which would be used to reduce its accumulated losses, it added.
XOX is one of the worst performing companies on Bursa, I will write soon a separate blog posting about all the issues.
Request: is there any accountant who can comment on this (anonymous is fine). I also would like to know: is the above a global convention?
Thursday, 11 September 2014
"The Great Australian Investment Ponzi"
A friend pointed me at an interesting, hard hitting blog with the above title, written by someone who calls himself "Dr. Benway".
From Wikipedia: "Dr. Benway is the name of a recurring character in many of William S. Burroughs' novels, including Naked Lunch and Nova Express. He is referred to only as "Dr. Benway" or "Doc Benway" (his first name is never revealed).
He lacks a conscience and is more interested in his surgical performance than his patients' well-being."
The last sentence does indeed seem to be valid for the blog.
In the blog, rather specific cases are mentioned regarding Australian listed companies.
Some of the companies have links to companies listed on the Singapore or Malaysia exchanges, so readers of this blog might be interested.
The readers should themselves judge if they agree with the contents and/or if the wording chosen by "Dr. Benway" is too strong/controversial for their taste. As usual: "reader beware".
Articles regarding the Blumont group: here, here and here.
Articles regarding the Catcha group: here, here and here.
Other articles: here, here and here.
From Wikipedia: "Dr. Benway is the name of a recurring character in many of William S. Burroughs' novels, including Naked Lunch and Nova Express. He is referred to only as "Dr. Benway" or "Doc Benway" (his first name is never revealed).
He lacks a conscience and is more interested in his surgical performance than his patients' well-being."
The last sentence does indeed seem to be valid for the blog.
In the blog, rather specific cases are mentioned regarding Australian listed companies.
Some of the companies have links to companies listed on the Singapore or Malaysia exchanges, so readers of this blog might be interested.
The readers should themselves judge if they agree with the contents and/or if the wording chosen by "Dr. Benway" is too strong/controversial for their taste. As usual: "reader beware".
Articles regarding the Blumont group: here, here and here.
Articles regarding the Catcha group: here, here and here.
Other articles: here, here and here.
Wednesday, 21 May 2014
AirAsia profit up 33%? And why does it need derivatives?
Many news sites reported about the good numbers of AirAsia, for instance Business Times / New Straits Times:
AirAsia profit up 33.3pc
BRIGHT SKY: Carrier earns RM139.7m in first quarter on flat revenue of RM1.3b
LOW-cost carrier AirAsia Bhd’s net profit for the first quarter ended March 31 2014 rose 33.3 per cent to RM139.71 million from RM104.79 million registered in the corresponding quarter last year.
....
“(I am) very pleased with what we have achieved despite (the) turmoil in (the) industry. Well done all stars. The future is bright,” AirAsia group chief executive officer Tan Sri Tony Fernandes posted in his tweet yesterday afternoon before the company’s results announcement.
That sounds all very optimistic.
But if we analyse the bare numbers, then a very different picture appears:
1st quarter results 2014 2013
Revenue 1302M 1300M
Operating Profit 224M 251M
Net finance -97M -86M
Net Operating Profit 127M 165M
Foreign Exchange gain 7M -33M
PBT 134M 132M
Taxation -3M -4M
Deferred Taxation 9M -23M
PAT 140M 105M
From the above we can easily see that operationally the result in 2014 was much worse than in 2013: minus 23%.
Only because of a foreign exchange loss in 2013 and the difference in Deferred taxation does the PAT suddenly grow by 33%.
Frequent readers of this blog will know that I don't like the aggressive accounting of AirAsia by using deferred taxation (I like it even less in the case of AirAsia X). Good companies should account in a conservative way, in my opinion.
But there is something else in the accounts that worries me much more:
AirAsia has burned their fingers in the paste with derivatives in oil, why do they need such large contracts regarding interest rates and foreign currencies, almost RM 7 Billion in Notional Value?
This is from their 2008 results, losses of more than RM 1 Billion on derivatives:
Warren Buffett wrote in the 2002 annual letter to the shareholders of Berkshire Hathaway:
AirAsia profit up 33.3pc
BRIGHT SKY: Carrier earns RM139.7m in first quarter on flat revenue of RM1.3b
LOW-cost carrier AirAsia Bhd’s net profit for the first quarter ended March 31 2014 rose 33.3 per cent to RM139.71 million from RM104.79 million registered in the corresponding quarter last year.
....
“(I am) very pleased with what we have achieved despite (the) turmoil in (the) industry. Well done all stars. The future is bright,” AirAsia group chief executive officer Tan Sri Tony Fernandes posted in his tweet yesterday afternoon before the company’s results announcement.
That sounds all very optimistic.
But if we analyse the bare numbers, then a very different picture appears:
1st quarter results 2014 2013
Revenue 1302M 1300M
Operating Profit 224M 251M
Net finance -97M -86M
Net Operating Profit 127M 165M
Foreign Exchange gain 7M -33M
PBT 134M 132M
Taxation -3M -4M
Deferred Taxation 9M -23M
PAT 140M 105M
From the above we can easily see that operationally the result in 2014 was much worse than in 2013: minus 23%.
Only because of a foreign exchange loss in 2013 and the difference in Deferred taxation does the PAT suddenly grow by 33%.
Frequent readers of this blog will know that I don't like the aggressive accounting of AirAsia by using deferred taxation (I like it even less in the case of AirAsia X). Good companies should account in a conservative way, in my opinion.
But there is something else in the accounts that worries me much more:
AirAsia has burned their fingers in the paste with derivatives in oil, why do they need such large contracts regarding interest rates and foreign currencies, almost RM 7 Billion in Notional Value?
This is from their 2008 results, losses of more than RM 1 Billion on derivatives:
Warren Buffett wrote in the 2002 annual letter to the shareholders of Berkshire Hathaway:
Friday, 14 March 2014
Monday, 27 January 2014
"Mega" default in China? (2)
It looks like, at least for the time being, the danger of a possible default that would have roiled the Chinese financial markets is over. However, there is still the case of setting a precedent and of "moral hazard".
The article is from Bloomberg:
China Credit Trust earlier said it reached an agreement for a potential investment and asked clients of ICBC, China's biggest bank, to contact their financial advisers.
The accord staves off a default that threatened to roil China’s markets and stoke concerns of financial fragility in emerging economies after assets from Argentina’s peso to the Turkish lira plunged last week. The bailout may encourage risk-taking by wealthy investors in China’s $1.7 trillion trust industry -- the fastest-growing part of the shadow-banking system -- even as authorities try to curtail the nation’s debt.
“A default was bound to lead to systemic risks that China is unable to cope with, so in that sense a bailout is a positive step to stabilize the market,” said Xu Gao, the Beijing-based chief economist at Everbright Securities Co. Still, implicit guarantees distort the market and “delaying the first default means risks are snowballing,” he said.
The article is from Bloomberg:
China Credit Trust earlier said it reached an agreement for a potential investment and asked clients of ICBC, China's biggest bank, to contact their financial advisers.
The accord staves off a default that threatened to roil China’s markets and stoke concerns of financial fragility in emerging economies after assets from Argentina’s peso to the Turkish lira plunged last week. The bailout may encourage risk-taking by wealthy investors in China’s $1.7 trillion trust industry -- the fastest-growing part of the shadow-banking system -- even as authorities try to curtail the nation’s debt.
“A default was bound to lead to systemic risks that China is unable to cope with, so in that sense a bailout is a positive step to stabilize the market,” said Xu Gao, the Beijing-based chief economist at Everbright Securities Co. Still, implicit guarantees distort the market and “delaying the first default means risks are snowballing,” he said.
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