"Lotte's Chemical Reaction"

A rather negative story about Lotte Chemical Titan from Bloomberg.

Some snippets:


Lotte Group seemed to be getting back to business after a rough year of court battles, family feuds and strained relations with China. 

Not so fast.

Believers in South Korea's fifth-largest conglomerate were hoping for a much-needed win with Lotte Chemical Titan Holding Bhd., the petrochemical unit that began trading in Malaysia Tuesday. Revival of the long-delayed 3.77 billion ringgit ($877 million) initial public offering, Malaysia's biggest since 2012, caps a period that has seen the group also take steps to settle family disputes and boost corporate debt sales.

But in the opposite of a typical IPO bump, shares of Lotte Chemical Titan fell below the opening price pretty much immediately -- and that was after the company cut the bottom of its price range to 6.50 ringgit a share, from 7.60 ringgit. By midday in Kuala Lumpur, the shares were down 2 percent.

Investors are right to bet against the newly listed company. The reason the Malaysian chemical maker cut its IPO price and trimmed the number of institutional shares has little to do with macro issues like equity demand and more to do with how Lotte missed a fundamental shift in the petrochemicals market.

While Lotte was hell-bent on getting the flotation done after taking the company private more than six years ago, it miscalculated in betting that the market would be willing to overlook the business's problems just because of a dearth of IPOs for large investors.

Back when Lotte took the unit private, the global economic recovery was driving strong demand for the raw materials used to make plastic and synthetic fibers used in everything from appliances to automobiles.

But as the years went on, Lotte Chemical did almost nothing to expand capacity -- unlike its global competitors -- despite having ample cash,  according to Smartkarma analyst Toh Zhen Zhou.

In the absence of investment, revenue growth slowed. Lower prices for inputs such as oil have helped prop up profit but as the sales outlook for products like cars weakens, demand for Lotte's offerings has waned. Meanwhile, raw material prices have declined and overcapacity in China is further pressuring the industry.


Is this really the best Bursa can do, as alleged by Bloomberg, the largest IPO since 2012?

A foreign company, again going through the "listed-delisted-relisted scenario", and with the above history?

Where are the homegrown Malaysian companies with increasing (international) revenues, juicy margins, high ROE, making unique products protected by IP (intellectual Property)?

Wing Tai GO: Pangolin not happy (3)

The Independent Advice is out and, as expected, the verdict is: "not fair but reasonable, accept".

More regarding this matter can be found on the following websites:

• The Star
• Serious Investing
• Off-piste investing
• Pangolin Fund

One snippet from the last source:

 .... unfortunately there is a ridiculous clause in the Malaysian Stock Exchange’s rules that insists on a 25% free float. This can be used as a weapon by potential acquirers of companies against minorities, as it is being used in this case. Basically, what WTS is saying is that once they get to 75%, the company will be in breach of the listing rules, that they will do nothing to rectify this breach and that they do not intend to maintain the listed status.

In Singapore, the minimum free float is 10%, which makes sense as it is in line with the compulsory acquisition threshold. I first complained about this crazy Malaysian ruling back in 2003 when Bumi Armada was privatised. Similar wording was used then. In the past couple of weeks, I have twice emailed Malaysia’s stock exchange chairman on this matter. No reply.

In a country where the majority of businesses are family-controlled, minorities need all the protection they can get. The current listing requirements make it easy for controlling shareholders to buy up their companies on the cheap. The authorities are failing investors.

Free float requirement for listed companies

Malaysia 25%

Indonesia 7.5%

Singapore 10%

Thailand 15%

This is indeed odd, and works very much against minority investors. The threat of holding shares in a company that might be delisted is not attractive to many, and definetely not to fund managers. And even if one would hold on, there is the chance that the shares will be mandatory acquired.

Pangolin's article continues:

The independent directors have appointed little-known Mercury Securities to give us independent advice. Cynics would contend that no board has ever appointed an Independent Adviser who will give guidance they don’t want.

In my very first blog posting in 2011 I wrote:

Immediately abolish all “Independent” Reports, they are useless and are even hurting the rights if the Minority Investors.

In every General Offer (GO) where the controlling shareholders want the minority investors to accept the (low) offer the recommendation will be "not fair but reasonable, accept".

When a GO is made according to the rules where the controlling shareholders want to keep the company listed, the recommendation will be "not fair, not reasonable, don't accept".

Independent reports give an undeserved air of credibility to the whole process of delisting, but in reality it is a complete waste of time and money.

In all those years since my first recommendation, basically nothing has changed. The wording used in the independent advice is now the rather curious "not fair but reasonable, accept" instead of "fair and reasonable, accept", and the quality of the independent report is somewhat higher, but the outcome is exactly the same, and minority investors basically don't stand a chance. 

Authorities should look into this matter and take concrete steps to level the playing field for minority investors:

• The free float requirement should be reduced in line with neighbouring countries
• Independent advice in the current form is a complete waste and even hampers minority investors
• Independent directors should be appointed by the non-controlling shareholders, not by the controlling shareholders
• The authorities should check if the controlling shareholders own or control shares held by nominees (so far enforcement in this matter seems to be close to zero)
• Funds (especially Government Linked Funds which have been notoriously passive) should be engaged in shareholder activism, especially in these kind of exercises
• Companies that are delisted should not be allowed to relist again; this would take away one of the incentives for delisting, since delisting will happen at a cheap valuation and relisting at a high one

Ananda Krishnan playing the listing-delisting-relisting game again?

Article from The Star: "Billionaire Ananda Krishnan exploring taking Astro private".

Some snippets:


According to industry sources, Ananda, who owns 40% of the pay-TV operator, is looking at a corporate exercise to take out the rest of the shareholders in the company via his private vehicle Usaha Tegas Sdn Bhd.

“The exercise is still in preliminary stages and details have yet to be finalised. Usaha Tegas feels that the market is not valuing the company fairly,” said a source.

Listed at RM3 a share in October 2012, Astro’s share price has hovered below that level.

The above is what I call the "listing-delisting-relisting" game, a popular pass time for Malaysian tycoons with Bursa listed companies.

I don't like that "game", since minority investors have no realistic chance to defend themselves, being "threatened" with holding shares in an unlisted company. Unfortunately, nothing much has changed, Bursa does not see this as a problem.

Another snippet:

Based on previous takeover exercises, Ananda is known not to stinge on taking his companies private, and is likely to offer a fair price to shareholders for the takeover.

"Not to stinge"? I don't agree with that statement at all, for more background on the Bumi Armada delisting and relisting, please read the following blogpost: 2 Billion: "a little money"

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:

• 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.

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 .....

Malakoff associate gets penalty of RM 157M

MMC Corporation announced regarding legal proceedings against an associate company of Malakoff  in connection with sea water desalination plant in the district of Tlemcen, Algeria:


"...that MCB [Malakoff Corporation Bhd] had been informed by AAS [Almiyah Attilemcania Spa] solicitors on 30 December 2014 that the lower court of Ghazouet (“Court”) in the district of Tlemcen has imposed a penalty of DZD3,929,038,151.36 (approximately US$44.6 million at the exchange rate of US$1=DZD88) on AAS in respect of the Legal Proceedings (“Penalty”).

AAS has been advised by its solicitors that the Penalty would not be enforced until the exhaustion of all rights to appeal by AAS in respect of the Legal Proceedings. AAS had filed an appeal against the decision of the Court to the Algerian Court of Appeal."


That is quite a high penalty, it is not often that one sees a penalty of more than RM 100 million.

The Malaysian press has been rather silent about the case. Some more details can be found in this announcement:


3. During the financial year 2009, it was discovered that there was a considerable gap between the value of the delivered equipment and the value of the payment made by AAS to the supplier cum contractor (“Invoice Gap”). AAS wrote to the supplier cum contractor requesting for clarifications as they are responsible to resolve tax and customs issues. The invoice gap however was not resolved by the supplier cum contractor and the Algerian Customs then initiated investigations and thereafter the charge was brought against AAS.

4. Due to the Invoice Gap, it is alleged that AAS has failed to repatriate a sum of USD26,900,000. No interest is imposed in the Legal Proceedings but the Court can impose penalty as it deems fit.


Malakoff is planning a relisting exercise, after having been listed and subsequently delisted before. The kind of "games" that are often played by Malaysian tycoons on Bursa. The valuation at relisting is often very much higher than the valuation when the company was delisted. Unfortunately, there is not much that minority investors can do against this practice.

Good articles (1)

Lots of good articles recently, many on subjects I am passionate about. Below are just some snippets, please click on the links for the full articles.


Is settling the right choice? (The Star)

When pushing for a no-contest settlement becomes the default option, market discipline is likely to soften. The people will perceive that the culprits are being let off after paying disgorgements, which is a little more than a rap on the knuckles for those with deep pockets.

Also, the lack of admission of liability is confusing. Are those guys innocent but are forced to settle to avoid being entangled in messy and costly trials? Or did they indeed commit the offences but seized the opportunity to avoid prosecution by paying money?

In addition, the SC [Securities Commission] should reconsider how it informs the market about its regulatory settlements. It issues press releases on criminal prosecution and civil actions, but not on the settlements. To get details of the latter, you need to check the SC website or refer to the commission’s annual reports or enforcement bulletins.

Could it be that the settlements are never meant to pack a deterrent punch? After all, how could they serve as a warning when they mostly escape public attention?


How the investing public loses from delisting (KiniBiz)
Preventing minority abuse during delistings

What do Maxis Communications Bhd, IOI Properties, Astro All Asia Networks plc and Seven Convenience have in common? All the companies have been listed, delisted and then relisted (some more than once) by their majority shareholders in the span of five years.

.... there are no specific regulations in way of what an offeror can give or threaten to take away during privatisation. Nothing governs valuations or a company’s listing status. So in a situation where an offeror is attempting a mandatory takeover that minorities do not like, the latter’s only option is to take the matter to court.

Of course, it would be akin to a kancil taking on a tiger. And Tiger is willing to bet that like the kancil, most minorities are unlikely to be able to match the spending capacity of the majority shareholders and would struggle to sustain a long-drawn court battle.

Similarly during the relisting process, the regulators keep intervention to a minimum. A source familiar with the regulators’ policies said that the SC demands that a relisting company provides justifications for its new valuations and details on why it believes it can perform better on the market this time around.

However, there are no pre-imposed rules which would make returning to the bourse difficult — regardless as to how the company treated minorities during the relisting process, or in the period between then and the relisting.

When the depth of the regulations are considered, the pertinent question seems to be if they are adequate to protect the companies covered in the earlier parts of this week’s series — or at the very least, give them a fair deal.

It would appear not. Rather, minorities in fact had very limited options during the privatisation deal. The majority shareholders benefitted handsomely both on and off the market, and at the expense of the minority investors.

Which leads to the question if Bursa is really the place for the retail and long-term investors. Tiger believes not, and feels that more must be done. The regulators should consider making delisting, promising companies, from the bourse tougher.

....majority shareholders, because they appoint management, know how much a company is valued. If they are willing to buy out the company, they must know something. And if a significant number of minority shareholders want to stay on for the ride, they should be allowed to and not be unceremoniously ejected from their seats which they have already paid for.

In a nutshell, Tiger says that minorities should not be frightened into selling their stakes. If Bursa is serious about increasing the participation of retail investors on the bourse, it is time that the SC and Bursa reconsider the issue of indiscriminate delisting and relisting, and start protecting the minority long-term investor. It’s easy to do.


Submission to HKEx on Weighted Voting Rights (David Webb)

The naked self-interest of HKEx in continuing to push for weakening our regulatory standards in the interest of its own profitability once again exposes the conflict of interests between being a regulator and a for-profit company. The Exchange has no profit incentive to care about quality, only about volume.

Your Chief Executive's  proposition that HK risks "losing a generation of companies from China's new economy" is a false one. Good regulation improves the value added by markets, and investors will pay for that value. Companies which are willing to sign up to standards will get a higher price for their shares than they would in a market with lower standards, and the flip side of this is a lower cost of capital for the companies, both existing and new. There will always be exceptions to this overall outcome, but it is the overall outcome that matters. HK should be focusing on improving its legal and regulatory framework, not degrading it.

The vast majority of listing applicants and existing listed companies already have a controlling shareholder with at least 30% of the equity. They don't need their companies (or spin-offs) to issue second-class shares or pervert their constitution to cement their position. For the remainder with management who have been diluted by pre-IPO financing, most would have enough self-confidence in their abilities as managers that they would not need protections against removal, knowing that investors will only seek change in extreme circumstances and if they consider that new management can offer better value. This is just as true for "technology" companies as for any other industry, and the fact that shareholders have the reserve power to be able to change bad or stale management in itself provides a higher valuation than if they did not have that power.

Aircel-Maxis case: are the Malaysian authorities refusing to cooperate? (2)

Astro Malaysia Holdings Berhad announced today:

"Astro Malaysia Holdings Berhad (“AMH”) refers to the media statement issued by Astro All Asia Networks Limited ("AAANL") that the Central Bureau of Investigation, India (“CBI”) has on 29 August 2014 filed a charge-sheet in relation to, among other things, AAANL's acquisition of shares in Sun Direct TV Private Limited in 2007. The media statement states that AAANL has learnt from media reports in India that the charge-sheet names AAANL, Mr. T. Ananda Krishnan and Mr. Augustus Ralph Marshall, amongst others.

Mr. T. Ananda Krishnan has a deemed substantial indirect interest in both AMH and AAANL while Mr. Augustus Ralph Marshall is a non-executive director of AMH as well as a director of AAANL.

We wish to clarify that AAANL is a separate and distinct legal entity and is not a member of the AMH Group of Companies.

This charge does not implicate, nor impact AMH, the entity listed on Bursa Malaysia Securities Berhad."


Maxis Berhad announced today:

"Maxis Berhad refers to the announcement made on 10 October 2011.

Maxis Berhad refers to the press release issued by Maxis Communications Berhad (MCB) today pertaining to media reports that the Central Bureau of Investigation, India has on 29 August 2014 filed a charge-sheet in relation to, among other things, MCB’S acquisition of Aircel Limited from Siva Ventures Limited in 2006. The charge-sheet names, amongst others, MCB, Mr. Augustus Ralph Marshall (a non-executive director of Maxis Berhad and MCB)  and Mr. T. Ananda Krishnan (who has a deemed substantial indirect interest in both Maxis and MCB).
    
This development does not implicate and will not have any impact on Maxis Berhad, the entity listed on Bursa Malaysia Securities Berhad."


That is of course good news for the current shareholders of Astro Malaysia Holdings Berhad and Maxis Berhad.

But the case is still highly relevant for Astro All Asia Networks Limited  and Maxis Communications Berhad, both their Board of Directors and their shareholders, during the above mentioned acquisitions in 2006 and 2007. And thus also for the Malaysian authorities.

Interestingly, both companies were subsequent to the alleged events delisted, Maxis Communications Berhad in July 2007, Astro All Asia Networks Limited  in June 2010.

And both were relisted again, but under a different name and in a different corporate structure: Maxis Berhad in November 2009 and Astro Malaysia Holdings Berhad in September 2012.

And both in such a way that "this charge does not implicate, nor impact" them, according to the above two announcements.

Was that one of the reasons behind the delisting and subsequent relisting (in a different structure) of both companies?

More information at The Malay Mail:

"Maxis denies wrongdoing in Indian telco scandal, scrambles for investment treaty shields"

Symphony and Ranhill

I wrote several times about Ranhill Energy, here and here.

Today The Star published an article "Ranhill's utility businesses to anchor Symphony".

Some snippets:

Ranhill Group, whose oil and gas business contributed to its failed listing last year, will now be going to the market without that unit.

Ranhill’s planned reverse takeover (RTO) of Symphony House Bhd will have its water and power businesses that include a valuable water concession in Johor and operation of two power plants in Sabah.

When Ranhill first announced its intention of reversing its businesses into Symphony back in March, it comprised the utility divisions and the oil and gas portfolio.

But in late June, Ranhill said the RM800mil RTO would only include its water and power assets.

Recall that Ranhill had previously pursued an initial public offering (IPO) slated for July 31 last year but withdrew it after a non-disclosure breach relating to a suspension of a Petronas licence of an affiliate company in the oil and gas division.

Ranhill’s major shareholder Tan Sri Hamdan Mohamad was reprimanded and fined RM300,000, while the company that was to have been listed, Ranhill Energy and Resources Bhd was imposed a fine of RM200,000 by the Securities Commission (SC).

In an email reply to StarBizWeek, a Symphony spokesperson explains that the omission of Ranhill’s oil and gas division into the current RTO exercise was because the latter had slipped into the red in 2013.

“Ranhill WorleyParsons Sdn Bhd (RWorley) was excluded from the initial assets to be injected into the RTO as it made losses in 2013, and by virtue of this fact we decided not to include it into the RTO,” the spokesperson says.

RWorley is Ranhill’s main O&G asset specialising in engineering procurement and construction services. It is 51%-owned by Ranhill in a joint venture with WorleyParsons Ltd, Australia’s largest oil and gas engineering company. The Australian-listed WorleyParsons holds the balance 49% in company.

According to the Symphony spokesperson, the losses that RWorley incurred was attributed to work for Petronas Gas Bhd’s liquefied natural gas (LNG) regasification plant project in Malacca. In 2011, RWorley together with Muhibbah Engineering Bhd had undertaken the RM1.07bil contract for engineering, procurement, construction and commissioning (EPCC) of topside construction work for regasification plant.

Symphony did not reveal the amount of losses RWorley had made but says that “it has been fully accounted for in 2013.”

A fund manager said that while Ranhill’s oil and gas division was to provide a growth story for its listing, he understood why a decision was made not to include that in the listing now.

“A loss-making division in the RTO equation would not have been palatable. While an RTO is a fast track way for a public listing, it is still subject to approvals from the regulators,” says the fund manager.


"A loss-making division in the RTO equation would not have been palatable", I agree, but would a loss-making division in an IPO be palatable? This company was included in the IPO of Ranhill which was only cancelled at the very last moment.

The authorities really should look into this case, since there are quite a few corporate governance issues in this group.

Ranhill was a listed company before, this would be another example of a listing-delisting-relisting exercise, something I am not keen on, to put it mildly.

On another note, Symphony, the listed company which will be used for the RTO, has not exactly been a shining example of profitability. Its results of the last four years:

Year  Revenue   PATMI
2010    175m    -22m
2011    186m     -4m
2012    205m    -38m
2013     52m    -39m

Bernas: are all minority shareholders really treated fair and equal? (2)

I wrote before about the privatisation exercise of Bernas,

In a new twist to this story, The Malaysian Insider published the following article:

"Story behind Syed Mokhtar’s ‘RM2.25 billion tax-exempt’ Bernas deal revealed, says PKR MP"

In it is again allegedly confirmed that minority shareholders of Bernas are not treated the same:


"In the letter, Syed Mokhtar gave his personal undertaking that he would guarantee the national interests of rice in Malaysia. In the relisting of Bernas, 10% shares of Bernas IPO will be allotted to Putrajaya for the National Farmers Association (Nafas) and the National Fisherman Association (Nekmat). Syed Mokhtar also pledged annual contributions to the welfare programmes of Nafas and Nekmat for five years or until the relisting exercise of Bernas was completed."


And that is simply not allowed, according to the rules.

Will the authorities (Securities Commission and/or Bursa Malaysia) investigate the above and take any action, if appropriate? I guess we have to wait and see, even if action is taken it can often take a very long while.

The shares of Bernas have been removed from the Official List of Bursa Securities with effect from 9.00 a.m., Friday, 18 April 2014.

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

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

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


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


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

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


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

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

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


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

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

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

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

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

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

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


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

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

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


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

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


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

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


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

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

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


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

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

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

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

On the list:

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

Further, the article mentions:

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

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

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

The article continues:

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

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

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

 

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

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

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

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

Ranhill Energy: is the fine really adequate?

The Securities Commission announced the following:


"Securities Commission Malaysia (SC) has imposed a fine of RM200,000 on Ranhill Energy and Resources Berhad (Ranhill) and reprimanded and fined Tan Sri Hamdan Mohamad RM 300,000 for failure to disclose to SC material changes related to Ranhill’s listing.

Both Ranhill and Tan Sri Hamdan, Executive Director/President and Chief Executive of Ranhill, were found to have breached section 215(3) read with section 354(1) of the Capital Markets and Services Act 2007, for failing to immediately inform the SC of the suspension of the licence issued by Petroliam Nasional Berhad to Perunding Ranhill Worley Sdn Bhd (PRW), a company controlled by Tan Sri Hamdan. The notice of suspension was received on 17 July 2013.

Ranhill relies on PRW for contracts secured from PETRONAS. This contract represents a material contribution to Ranhill Group’s revenue. The suspension of the license is therefore deemed as a material change in circumstance as it poses potential adverse implications on Ranhill’s oil and gas business. Under the circumstances, Ranhill and Tan Sri Hamdan were required to immediately inform the SC of the material change in circumstance under section 215(3) of the CMSA as the earlier disclosures in the listing prospectus of Ranhill would no longer be considered accurate or reflective of prevailing circumstances, and possibly misleading.

In the disclosure of such material development in this case, time is of essence, given that the retail and institutional offering by Ranhill had closed, the date for the allotment of shares to successful applicants was approaching, and investors needed to be given the opportunity and time to re-evaluate their investment decision.

SC views timely and transparent disclosure of material information by companies and promoters seeking to raise funds via an IPO, as fundamental to ensuring trust and confidence in the capital market. Companies, promoters and advisers are reminded to exercise vigilance in this regard."

The Star writes about the same issue, some snippets:


A corporate lawyer explains: “It is not so much about the value of the contracts concerned. It is the fact that your licence was suspended or contract cancelled. That’s not necessarily the end of the world but it needs to be disclosed. Any reasonable investor would tell you that this is material information that impacts how he or she views and values the affected company. Non-disclosure therefore is more likely to assume that the offerors were looking to mislead investors.”


"The withdrawal of the listing has also caused other problems. The IPO was meant to raise RM750mil, out of which, Cheval Infrastructure Fund was to receive RM77mil for the shares it was selling. Cheval is acting on behalf of private equity firm Tael Management Co (Caymans) Ltd.
Ranhill Energy’s listing was supposed to be part of Cheval’s exit from the company. In 2011, Cheval together with Hamdan took Ranhill Bhd private at 90 sen per share. Cheval had wanted to pare down its stake in Ranhill Energy to 15.8% post-IPO, from 36.25% before the listing."

Ranhill Energy is another of those listing-delisting-relisting plays that happen much too often at Bursa Malaysia. Bursa should discourage this by invoking a new rule that delisted companies are not allowed to relist in the next, say, ten years.

Let's put things in context regarding the amounts involved:

• IPO Amount to be raised: RM 750 Million
• Total fine: RM 0.5 Million

Punishment is supposed to act as a deterrent. The fine imposed in this case is 1/1500th of the amount of money raised. Although it is good that the SC has taken action, the fine itself hardly seems adequate.

IOI Prospectus, 1623 pages!

I wrote before about the delisting in 2008 and possible relisting of IOI Properties (IOIP), here and here.

It looks like the relisting of IOIP will indeed go through, the prospectus exposure can be found on the website of the Securities Commission.

I wrote before about making IPO documents readable, lamenting documents that contain around 600 pages.

I guess that the principal advisers of the IOIP listing don't agree with me, since the prospectus has a whopping 1,623 pages. Honestly, which prospective investor is going to read that?

With so many pages available, I do expect at least a very thorough discussion about the rather controversial delisting, and a proper comparison with the current valuation, something along the following lines:

• IOIP was delisted in 2008 at a valuation of ...., its Net Asset Value was ...., its Revalued Net Asset Value was .... and its (normalized) net earnings were ....
• Since then the amount of dividend that has been paid to the shareholders of IOIP was ....
• The amount raised by rights issues (if any) was .....
• The amount raised by loans was ....
• IOIP will be relisted at a valuation of ...., its Net Asset Value is ....., its Revalued Net Asset Value is .... and its (normalized) net earnings were .....

(With "normalized" I mean excluding one-off items)

The above will give a rough but simple estimate how the current valuation (at a moment when property prices have boomed and are appearing to be toppish, at least to me) compares to the one in 2008 (in the midst of the global recession, when property prices were falling).

Unfortunately, I could not find this essential information, nor anything comparable, although some snippets of information can be found.

In paragraph 4.1.2:

The first paragraph is extremely general, so general that it is basically worthless. If BM and/or SC let companies get away with such general descriptions, then it would save time and money to just leave away this kind of non-information.

The second paragraph implies that operations could not be expanded if the company had stayed listed. That is rather strange, IOI Corporation was firmly in charge of IOIP, so why exactly is the above true?

The third paragraph seems to indicate that, since 2008, earnings have increased by about 43% and its Net Assets by about 129%. Not bad, but very far away from numbers being mentioned in the order of an increase in valuation of 800%, like in the report mentioned by "Ze Moola": current valuation of about RM 9 Billion, versus a valuation of RM 1.3 Billion in 2008.

The company was at its delisting valued at a steep discount to its Net Asset Value, rather controversial, to say the least. We will have to wait for the exact price for which the shares will be relisted, but most likely it will be relisted at a steep premium to its current Net Asset Value.

Previous IOIP shareholders who sold out in 2008 will not be happy with the turn of events.

The return of IOI Properties

The following article is from The Star: "The return of IOI Properties".

Some excerpts:

• “People associate Lee Shin Cheng as a planter. They have forgotten that he is an equally good property developer as seen from IOI Properties' track record before its delisting.
• “IOI is the sort of company that big money and institutions will be attracted to,” says one fund manager who used to invest in IOI Properties.
• Prior to IOI Properties' delisting in 2009, it was the biggest property company in terms of profitability.
• Even now under parent IOI Corp, IOI Properties is the second largest company in terms of operating profitability after SP Setia Bhd. As of its financial year ended June 30, 2012, IOI Properties recorded an operating profit of RM506.3mil.
• “The listing of IOI Properties will certainly be interesting. It is one of the biggest property companies in Malaysia and now has a track record in China. As we all know, the China market is never easy to penetrate,” said Etiqa Insurance & Takaful Bhd's Head of Research Chris Eng.

This all sounds very good indeed, surely Malaysia would be proud to have this company listed on Bursa?

But this very same company was actually listed on the very same Bursa, only four years ago. And it was taken private at an extremely low valuation, in the midst of the global crisis.

"Where is Ze Moola" has written many times about this issue.

This is what Gerald Ambrose, fund manager of highly regarded Aberdeen Asset Management remarks:

• ...IOI Properties was an excellent property developer while IOI Corp Bhd was an outstanding upstream and downstream oil palm player.
• “For sure, the company has got the track record and excellent management skills. At Aberdeen, we are long term holders with an investment horizon of 8 to 10 years. We used to be a shareholder of IOI Properties before its privatisation in 2009.
• “We were very disappointed when we had to sell the stock because we considered the privatisation price of 0.66 times to its net tangible asset as greatly undervalued. We hope that this will not happen again,”

Here is the (rather shocking) share graph from Ze Moola's website:

Bursa Malaysia's stand in this matter:

At the AGM, a shareholder also asked what Bursa's role was following an  increasing trend of listed companies being taken private, wiping billions off the exchange. And after several years, these companies got relisted.

"When [privatisation and relisting of the same companies] happens, I think someone is making money but not us shareholders," remarked the shareholder.

To that question, Tajuddin responded: "Bursa has engaged with its stakeholders on this. The conclusion was that these corporate exercises were business decisions .

That sounds like a very unsatisfactory answer. Who were those "stakeholders", where they major shareholders, brokers, lawyers, financial advisers and the like, the usual mix of insiders who only profit from these exercises? Or did they also include retail investors and fund managers like Aberdeen, who are on the receiving end of the stick?

Bursa Malaysia should urgently look into the unfair advantage that majority shareholders have, using the "listing-delisting-relisting game" to book large profits at the expense of the minority investors. It is long overdue. To simply conclude that these are "business decisions" will not do.

Bursa needs to come with an answer on Ambrose's statement "We hope this will not happen again" with which we very much agree, not only regarding IOI Properties, but any listed company on Bursa.