Monday, 22 December 2014

Delloyd's hidden gems to be revalued? (3)

I wrote before about Delloyd, here and here.

I hoped that the assets of Delloyd, especially the Sungai Rambai Estate and the estates in Indonesia would be revalued. That has indeed happened.

I also wrote:

"The independent adviser for this corporate exercise is Affin Investment Bank.  I would love to see them write something along the lines: "we estimate that the RNAV per share is around RM 15, therefore we find the proposed price not fair and not reasonable". Will they write that? Although independent advice has been improved significantly, I don't think that will happen."

Indeed, that has not happened.

Affin came up with a SOPV (Sum Of Parts Valuation) of RM 7.60. Since the offer price of RM 5.15 is a 32% discount to that valuation, the offer is deemed to be "not fair".

However, Affine still thinks the offer is "reasonable", hence their verdict: "not fair but reasonable, accept the offer". The rather ambiguous judgement that is quite common these days for independent advisers reporting on deals related to Bursa listed companies.

The most important part of the report is probably this:

Are both assets indeed worth only about RM 320M? I have read much higher valuations than that.

The problem that I have in general with many of the privatisation exercises on Bursa is:
  • Why are so many offers "not fair", is it not the duty of the Board of Directors to try to get an offer that is "fair" to all shareholders?
  • Why is there almost never a competing offer? In this case, Delloyd could have tried to sell its estates individually, to check if there is an interest in them, and if so, at what price. If the price is indeed good, then it could propose to sell the asset and distribute the proceeds to all shareholders. Has the Board of Directors actively tried to find buyers for its assets?

Thursday, 18 December 2014

Masterskill: another deal aborted

I have written many times about Masterskill, I am afraid not often in a positive way.

The company recently aborted its proposed sale of its properties. Below information is from MSWG's newsletter, December 18, 2014:

According to the announcement released by MEGB on 16 December 2014, the independent valuer namely Cheston International (KL) Sdn Bhd, had ascribed an indicative market value of RM110.4 million for Masterskill (M) Sdn Bhd’s operating property assets in Cheras, Kota Kinabalu, Kuching and Pasir Gudang (“Properties 1”), which is significantly higher than the initial indicative sale consideration of RM75 million offered by Mr. Siva Kumar A/L M. Jeyapalan.

Following the above, the parties were unable to mutually agree on a revised sale consideration for the Properties 1. As such, the Board of MEGB had resolved to abort the proposed disposals and proposed ESOS and will consider other alternatives to implement its asset light strategy and raise funds for the company. The Board will make the relevant announcements in due course.

Again another corporate exercise of restructuring to revive the business of MEGB fell off eventually with a significantly higher indicative market value by the independent valuer. Shareholders are growing impatient and disappointed to go through multiple corporate proposals and more so they were also astounded by significant fluctuations in the market value of their shares upon the abortion of multiple proposals. The negotiation price of RM75 million, representing a deep discount of 32% to the indicative market valuation would raise the question on how it was possible that the Company could initially have considered such a low indicative sale consideration of RM75 million which was so much below the indicative market valuation although the offer was subjected to independent valuation and shareholders’ approval.

It is even weirder if we go back to the 3rd quarter result of 2013, the company posted a loss of RM 104 Million, and the (rather short) reason it gave was (emphasis mine):

The higher loss before tax was largely due to provision for impairment loss on goodwill and certain of the Group’s property, plant and equipment totaling RM88.2 million.

In other words, it had just written down its property by a large amount. And Siva Kumar offered to buy the property assets at this low valuation, "willing buyer, willing seller". The independent valuer, Cheston International, seems to think the deal is not that great for the other shareholders.

Sunday, 14 December 2014

Some great links

"122 Things Everyone Should Know About Investing and the Economy"

Written by Morgan Housel, a treasure trove full with wisdom about investing. A few of my favourites, which are probably also relevant in the Malaysian share market:

  • Saying "I'll be greedy when others are fearful" is easier than actually doing it.
  • When most people say they want to be a millionaire, what they really mean is "I want to spend $1 million," which is literally the opposite of being a millionaire.
  • My main life lesson from investing: self-interest is the most powerful force on earth, and can get people to embrace and defend almost anything.
  • Buy and hold only works if you do both when markets crash. It's much easier to both buy and hold when markets are rising.
  • 72% of mutual funds benchmarked to the S&P 500 underperformed the index over a 20-year period ending in 2010.
  • The phrase "double-dip recession" was mentioned 10.8 million times in 2010 and 2011, according to Google. It never came. There were virtually no mentions of "financial collapse" in 2006 and 2007. It did come.
  • Our memories of financial history seem to extend about a decade back. "Time heals all wounds," the saying goes. It also erases many important lessons.
  • The most boring companies -- toothpaste, food, bolts -- can make some of the best long-term investments. The most innovative, some of the worst.
  • There were 272 automobile companies in 1909. Through consolidation and failure, three emerged on top, two of which went bankrupt. Spotting a promising trend and a winning investment are two different things.
  • Try to learn as many investing mistakes as possible vicariously through others. Other people have made every mistake in the book. You can learn more from studying the investing failures than the investing greats.
  • If you roll dice, you know that the odds are one in six that the dice will come up on a particular side. So you can calculate the risk. But, in the stock market, such computations are bull -- you don't even know how many sides the dice have!
  • Most people still haven't figured out that brokers don't have their best interest at heart.
  • Twenty-five hedge fund managers took home $21.2 billion in 2013 for delivering an average performance of 9.1%, versus the 32.4% you could have made in an index fund. It's a great business to work in -- not so much to invest in.
  • You can control your portfolio allocation, your own education, who you listen to, what you read, what evidence you pay attention to, and how you respond to certain events. You cannot control what the Fed does, laws Congress sets, the next jobs report, or whether a company will beat earnings estimates. Focus on the former; try to ignore the latter.
  • Companies that focus on their stock price will eventually lose their customers. Companies that focus on their customers will eventually boost their stock price. This is simple, but forgotten by countless managers.
  • Several academic studies have shown that those who trade the most earn the lowest returns. Remember Pascal's wisdom: "All man's miseries derive from not being able to sit in a quiet room alone."
  • The best company in the world run by the smartest management can be a terrible investment if purchased at the wrong price.
  • No investment points are awarded for difficulty or complexity. Simple strategies can lead to outstanding returns.
  • No investment points are awarded for difficulty or complexity. Simple strategies can lead to outstanding returns.

"The PMARCA Guide to Startups"

A series of articles about starting a tech start-up. My guess is that most readers of this blog are more interested in general investing. Start-up tech companies are special, in that they are supposed to scale very quickly, enabled by new technology, which also serves as a barrier to entry to (future) competitors.

There are many gems of wisdom which are also relevant for normal business. For instance a list of the risks involved:
  • Founder risk -- does the startup have the right founding team? A common founding team might include a great technologist, plus someone who can run the company, at least to start. Is the technologist really all that? Is the business person capable of running the company? Is the business person missing from the team altogether? Is it a business person or business people with no technologist, and therefore virtually unfundable?
  • Market risk -- is there a market for the product (using the term product and service interchangeably)? Will anyone want it? Will they pay for it? How much will they pay? How do we know?
  • Competition risk -- are there too many other startups already doing this? Is this startup sufficiently differentiated from the other startups, and also differentiated from any large incumbents?
  • Timing risk -- is it too early? Is it too late?
  • Financing risk -- after we invest in this round, how many additional rounds of financing will be required for the company to become profitable, and what will the dollar total be? How certain are we about these estimates? How do we know?
  • Marketing risk -- will this startup be able to cut through the noise? How much will marketing cost? Do the economics of customer acquisition -- the cost to acquire a customer, and the revenue that customer will generate -- work?
  • Distribution risk -- does this startup need certain distribution partners to succeed? Will it be able to get them? How? (For example, this is a common problem with mobile startups that need deals with major mobile carriers to succeed.)
  • Technology risk -- can the product be built? Does it involve rocket science -- or an equivalent, like artificial intelligence or natural language processing? Are there fundamental breakthroughs that need to happen? If so, how certain are we that they will happen, or that this team will be able to make them?
  • Product risk -- even assuming the product can in theory be built, can this team build it?
  • Hiring risk -- what positions does the startup need to hire for in order to execute its plan? E.g. a startup planning to build a high-scale web service will need a VP of Operations -- will the founding team be able to hire a good one?
  • Location risk -- where is the startup located? Can it hire the right talent in that location? And will I as the VC need to drive more than 20 minutes in my Mercedes SLR McLaren to get there?

"Zero to One: Notes on Startups, or How to Build the Future"

Peter Thiel is a intelligent and outspoken (sometimes controversial) person. A very clear book full with interesting theories, many of them quite general and not only relevant for start-ups. One of the best business books I have ever read.

Friday, 12 December 2014

Insider trading effectively legalized in US?

Yves Smith wrote "Bill Black: Second Circuit Decision Effectively Legalizes Insider Trading", a very worrisome article. Some snippets:

A U.S. appeals court dealt federal prosecutors a blow in their crackdown on insider trading on Wall Street on Wednesday, overturning the convictions of two former hedge fund managers charged with making illegal trades in technology stocks.

The 2nd U.S. Circuit Court of Appeals in New York said prosecutors presented insufficient evidence to convict Todd Newman, a former portfolio manager at Diamondback Capital Management, and Anthony Chiasson, co-founder of Level Global Investors.

The court held that defendants can only be convicted of insider trading if the person trading on confidential information knew the original tipper disclosed it in exchange for a personal benefit.

What does this mean in practical terms? The court has just provided a very-easy-to-satisfy roadmap for engaging in insider trading legally. Don’t give the person who gave you the choice tidbit any explicit payoff. You can give him all sorts of buttering up before hand (fancy meals, hot women, illicit substances, box seats, whatever you think will induce cooperation and show your seriousness and ability to pay) and just engage in vague winks and nods. As long as you don’t pay the tipster for the trade in any crass or traceable way (and no communications that point to an explicit payoff), you are good to go. Compensation down the road, in hard dollar or soft forms is perfectly kosher.

Needless to say, the implications are terrible. Thanks to high frequency trading, way too cozy a relationship between the Fed and its preferred banks, and years of suspicious trading patterns (markets too consistently not breaching technically significant price levels, with the trading looking decidedly not organic) has sapped the faith of retail and even smaller institutional investors in the integrity of markets. The Second Circuit has just announced open season on pervasive misuse of inside information.

Wall Street’s court of appeals (the Second Circuit) has just issued an opinion not simply overturning guilty verdicts but making it impossible to retry the elite Wall Street defendants that grew wealthy through trading on insider information. Indeed, the opinion reads like a roadmap (or a script) that every corrupt Wall Street elite can follow to create a cynical system of cutouts (ala SAC) that will allow the most senior elites to profit by trading on insider information as a matter of routine with total impunity. The Second Circuit decision makes any moderately sophisticated insider trading scheme that uses cutouts to protect the elite traders a perfect crime. It is a perfect crime because (1) it is guaranteed to make the elite traders who trades on the basis of what he knows is secret, insider information wealthy absent successful prosecutions and (2) using the Second Circuit’s decision as a fraud roadmap, an elite trader can arrange the scheme with total impunity from the criminal laws. The Second Circuit ruling appears to make the financial version of “don’t ask; don’t tell” a complete defense to insider trading prosecutions. The Second Circuit does not simply make it harder to prosecute – they make it impossible to prosecute sophisticated insider fraud schemes in which the elites use junior cutouts to create (totally implausible) deniability.

In Malaysia, recently regulatory activities regarding insider trading has increased. However, progress is very slow, a recent announcement by the SC involved an alleged insider trading case which happened more than 7 years ago.