Protasco's Puzzling Purchase

The nice thing about blogging is getting high quality comments. I had my fair share, although I can't always follow up on the information due to time restraints.

One (anonymous) poster pointed me at the following announcement, made by Protasco Bhd (PB):

On behalf of the Board of Directors of PB (“Board”), AmInvestment Bank Berhad (“AmInvestment Bank”) is pleased to announce that PB, had on 28 December 2012 entered into a sale and purchase agreement (“SPA”) with PT ASU to acquire 95,000,000 PT ASI Shares (“Sale Shares”), representing 76% equity interest in PT ASI (“Proposed Acquisition”).

The acquisition is huge, RM 170 million, almost half of its shareholders funds (RM 358 million on December 31, 2011).

The value seems to be in exploiting "KST Field" (an oil and gas field) in Indonesia, the corporate structure is as follows:

The announcement is puzzling (to say the least):

• Protasco does not seem to have relevant experience in the notoriously difficult oil and gas industry, why does it want to take so much risk, especially in Indonesia with poor corporate governance?
• PT ASI is only a few months old: "PT ASI was incorporated in Indonesia on 6 September 2012 as a private limited company".
• PT ASI only has one director who hardly owns any shares. No background of this director is given.
• The vendor is 99% owned by Anglo Slavic Petrogas Ltd, a company registered in the British Virgin Islands, no background is given, a search on the internet returns nothing; who is behind this company, what is their track record?
• The company structure of PT ASI owning part of PT FAS owning PT Haseba is rather artificial, why is such a difficult construction chosen?
• Who are the minority shareholders of PT FAS and PT Haseba?
• On the signing of the S&P, Protasco will pay RM 50 million cash, why so much? This is about 30% of the total amount, much higher than normal in comparable deals.
• On November 1, 2012 PT ASI signed a S&P agreement to buy an additional 46% of PT FAS. What was the price paid for that stake? Why does Protasco not wait until this deal is panned out?

"PT Haseba had on 14 December 2004 entered into a 10-year production management partnership agreement (“PMP Agreement”) with PT Pertamina (PERSERO) (“Pertamina”), a state-owned company, wherein PT Haseba has been granted rights by Pertamina to develop and produce oil and gas in the Kuala Simpang Timur Field (“KST Field”) in the Nanggroe Aceh Darussalam Province, Indonesia (“Asset Injection”). The PMP Agreement was then novated by an agreement dated 3 February 2012 by Pertamina to PT Pertamina EP, and was amended by a supplemental agreement dated 22 February 2012 made between PT Pertamina EP and PT Haseba. The Board understands that PT Haseba has been in negotiation with PT Pertamina EP for an extension to the PMP Agreement to operate the KST Field."

In other words, the production agreement will expire in 2014 (next year!) and it is not sure if PT Haseba is able to negotiate a new contract, and if so under what conditions. Why buy into a company with so much uncertainty?

"The KST Field was founded in 1972 and operated by PT Pertamina Doh Nad Sumbangut until 1997. Thereafter, in 2004, Pertamina awarded PT Haseba a 10-year PMP Agreement for KST Field."

Why the gap of seven years? Also, this field seems to be pretty old, often yields are not that great in old fields. Why can't Protasco give some production numbers for KST Field?

"For information, quoted securities (“Blocked Securities”) amounting to approximately the Deposit has been blocked to secure the Deposit. In the event of non-completion, the Blocked Securities may at the option of PB be sold and the proceeds from the sale of the Blocked Securities shall thereafter be  remitted to PB."

Which securities?

The poor quality in writing of in the above paragraph seems typical of the great hurry in which the document is written. Normally I don't make a point of this (my English is also not that good, I am not a native English speaker), but this time it is remarkably poor for this kind of announcement.

"The Vendor further provides and guarantees to PB that the PT ASI Group shall achieve a consolidated profit before taxation amounting to USD50,000,000 (“Total Sum”) for four (4) consecutive financial years and subject to relevant terms in respect thereto. The Profit Guarantee shall be secured by the Vendor depositing all the Consideration Shares with a stakeholder (“Stakeholder”)."

But the "Consideration Shares" only represent about 12% of the total purchase sum. Therefore, a thorough reasoning should be given: where is the profit guarantee based on?

It is definitely not based on the profit from PT Haseba, its results are poor, its revenue in 2011 is even zero:

Why are no preliminary results for 2012 given? At least the half year numbers should be made available? And why are all the financial statements not audited?

What are the results for PT FAS for the last three years?

The following risk factors are mentioned:

• The PT ASI Group is engaged in oil and gas concessions as well as oil and gas development. In this respect, the Proposed Acquisition represents a diversification from the core business activities of PB in road construction, rehabilitation and maintenance, engineering services and consultancy as well as higher education.
• The Proposed Acquisition would thus expose the Company to the political and regulatory risks in Indonesia and the inherent risks associated with the oil and gas industry which include amongst others, fluctuations in demand for and prices of oil and gas, natural disasters and extreme weather conditions as well as shortage of experienced managerial and supervisory personnel. 
• In particular, the PMP Agreement in relation to the KST Field is for a period 10 years from 2004. There can be no assurance that PT Haseba will be able to procure the extension to operate the KST Field.

Protasco is a listed company with a otherwise decent track record and pays a quite good dividend.

Bursa Malaysia has strangely enough not yet asked any queries to Protasco.

I hope the authorities and/or MSWG will urgently look into this matter. And Protasco really should be a lot more transparent regarding this deal.

Lending money to a related company is a no-no

David Webb advises independent shareholders of Aeon Credit Service (co) Ltd (ACSA, 0900.hk) to vote against a proposal to lend money to its parent company.

Strong words by David Webb:

"Loans to controlling shareholders are always a bad idea. The controlling shareholder, through its power to control the composition of the board, can in practice decide whether to repay the loan or seek rollover. If a controlling shareholder gets into financial difficulties, it is more likely to repay its bankers than it is to repay a company it controls. Its bankers may even have a security pledge over the listed company's shares.

If a company has surplus capital beyond its foreseeable requirements, then the golden rule is that this should be returned to all shareholders by way of a dividend, not to one shareholder by way of a soft loan. Loans to controlling shareholders are an abuse of company funds.

ACSA is in the business of consumer credit, on which it normally makes a decent spread. In the year to 20-Feb-2012, it had interest income of $1,010m and interest expenses of just $118m, on outstanding loans of $4775m. That's an average interest rate of about 21% on the loans, ignoring the near-zero rate on time deposits. But for a loan to its parent, it proposes to charge only 0.75% above its unspecified "Cost of Funds", which is probably only about 2% p.a.. ACSA says that "the Company" (presumably, its directors) "considers it desirous to grant the Loan Facility to ACH to generate a reasonable return for the Group". Desirous for ACH, perhaps, but not for minority shareholders, given the risks involved.

Setting aside the issue of whether lending money to a controlling shareholder is a bad idea, the terms are lousy. ACH does not even offer any security, and the interest rate is not reasonable compared to the rate on consumer loans. If ACH wishes to borrow money, then it should go directly to the banks and pay market rates.

Another concern for ACSA shareholders is what this says about the parent's strategy in greater China. ACH wants to use the money to invest in its own "PRC Business" outside of ACSA, defined as micro-finance, leasing and consumer finance. That puts it into competition with ACSA, and reduces the potential for ACSA to expand beyond its mature HK business. ACH also has wholly-owned subsidiaries in Taiwan doing credit cards and hire purchase. If AEON wishes to regain investors' confidence after this proposal is either withdrawn or defeated, then it should announce a consolidation of all its greater China business into ACSA and sign a non-compete undertaking, removing the conflicts of interest."

In Malaysia, Panasonic Manufacturing (Malaysia) Bhd (previously known as Matsushita Electric Company (M) Bhd) is engaging in a similar practice. From its latest quarterly report:

The amount involved is huge, by all standards, twice as much as its non-current assets.

In its latest year report the company was keen to brag about its track record of having delivered good returns to its shareholders. It has all rights to do so, investors who would have invested in the shares of the company at its IPO in the 70's would have done very well indeed. But that doesn't mean that placing funds with related companies is a good practice, in the contrary.

I love capitalism, despite its short comings I don't know of any system that is better. It performs best if left alone, with a decent amount of corporate governance. Japanese companies have their own sense of corporate governance, by global standards it is very disappointing for such a developed and rich country. After the share market bubble in the 80's burst, the performance of the NIKKEI index has been bad. Japanese companies should welcome good, internationally accepted, corporate governance practices, it is long overdue.

MMM and 4 directors reprimanded, fined 494K

Bursa Malaysia has taken action against MMM (Malaysian Merchant Marine Bhd) and 4 of its directors: Dato’ Ramesh Rajaratnam, Kamil bin Abdul Rahman, Datuk K. Anthony @ Merlyn Kasimir and Dato’ Khairil Anuar bin Aziz.

"Bursa Malaysia Securities Berhad (Bursa Malaysia Securities) has publicly reprimanded Malaysian Merchant Marine Berhad (MMM) and its four directors for various breaches of the Listing Requirements of Bursa Malaysia Securities (LR) / Bursa Malaysia Securities Main Market Listing Requirements (Main LR). The four directors were also fined a total of RM493,750.

MMM was publicly reprimanded for committing various disclosure breaches arising from its failure to disclose/make accurate disclosures in respect of the termination/non-completion of certain vessel acquisitions and financial reporting breaches as follows:-"

And then a long list of incidents, for example:

"The QR Disclosures were not factual, unclear, ambiguous, inaccurate, not succinct, not balance, not fair, did not contain sufficient information to enable investors to make informed investment decisions and particularly misleading as to the funding and continuance of the Bow Santos Acquisition. There was also blatant omission of the termination / non-completion of the Bow Santos Acquisition and forfeiture of the deposit in MMM’s 1st QR 2010, 2nd QR 2010 and 3rd QR 2010. In respect of the statement on funding, there was no evidence of any confirmation from lenders to grant MMM credit facilities for the Bow Santos Acquisition before MMM executed the MOA and paid the deposit."

Etc, etc, etc.

Kudos to Bursa for taking action and giving a detailed description of the facts.

Still, questions remain, most incidents happened in 2009 and 2010, could Bursa not take action more early? The company was officially delisted on March 17, 2011, its shares were suspended since August 2010. The punishment seems rather late to offer any solace to its long suffering minority shareholders. Also, are fines really a sufficient deterrent?

MMM has been a controversial company for a long time, something Bursa was well aware off: since its listing in 1999 MMM had to reply a whopping 36 times to queries from Bursa.

Other events have well been documented by Where is Ze Moola.

MMM was linked to M3nergy, a company that was delisted in October 2010, and which was also reprimanded and its directors fined on August 17, 2010.

Observations and stock picks from Marc Faber

Marc Faber's always interesting (and highly recommended, but rather expensive) "The Gloom, Boom & Doom Report" of January 2013 starts with a common subject, how bad economists have performed:

"Too much time has been spent on constructing econometric models and too little on thinking about how the economy works".

Another favourite subject, the huge decline in purchasing power of the USD against gold. Between 1800 and 1933 the price was quite stable, around USD 20 per ounce, then until 1970 about USD 35, after which the price exploded (after leaving the gold standard) to now around USD 1,800 per ounce.

Another observation: the extremely low current yield on USD Long-Term treasuries, the last time that happened was in 1946 (2.1%), in 1980 they were 14%.

Faber is bullish about stocks from Vietnam and China since they have lagged the other markets, the latter one through Hong Kong listed shares. Some examples are Hang Seng Bank (0011), Swire Pacific (0019), Sun Hun Kai (0016).

In Singapore Faber owns a host of REIT's: Ascendas, Ascott, CapitaCommercial, CapitaMall, CDL Hospitality, First, K, Fraser Centerpoint, Mapletree Logistic, Parkway Life and Suntec.

In Malaysia he prefers: Fraser & Neave, Berjaya Sports, BAT, Guinness, Carlsberg, JTI, PB Bank, SP Setia and Hektar Reit.

This is more meant as a shotgun approach, buying a large basket of holdings in SE-Asian stocks, readers should do their own homework, as usual.

Last year was a wonderful year for investors who were long equities. The S&P 500 is up by 12%, many Asian markets are up by 20 to 30%. Bond investors also achieved gains of 10 to 15%. Agricultural commodities are up by 25%. Faber doesn't see similar gains for 2013 and recommends a defensive strategy.