Friday, June 29, 2012

Is FGVH's first day premium a precursor for IHH?

FGVH opened at RM5.39 (premium of RM0.84) and closed at RM5.30 to register a premium of RM0.75 on its first day of trading - quite a cool gain for those who are awarded the shares.
Now that FGVH's public trading is already on the way, can its opening price performance be a benchmark for IHH's IPO? You bet!

Why? Basically, both have the same ingredient for success.
  1. Issued by government related organization, hence it has the same parties who probably would have supported the issues - EPF and other government agencies.
  2. Has hired a price stability manager - FGVH (Maybank), IHH (CIMB).
  3. Cornerstone investors where they are not allowed to sell until 6 months after opened for trading.
  4. Small public issuance, hence you can probably expect it having a small float especially for the first 6 months where the cornerstones are not selling.

Just look at the above chart, FGVH's offering in fact has more public and institutional investors (26.9%) as compared to IHH which has 10.52%. How difficult it is to perform the same for IHH, then? In terms of value for small shareholders, IHH is much smaller - RM2.41 billion against FGVH's RM4.46 billion.

I do not believe that trading for the first 4 to 6 months would be based on fundamentals. The trading would be much more relying on the small shareholders involvement (those who are awarded the shares and may sell as they are not really investors anyway. They are much more short term holders who were awarded the shares. In shares, over the short term, it is very much dependent on "demand and supply". Some institutional funds can act as buyer to create the demand and most importantly, there are shortage of suppliers - which is the ideal situation for good IPO opening price.

Notice the large tranche in the MITI tranche. The very notion that it is created where this tranche is only for larger Bumiputera companies or richer individuals makes you think that the portion is created for short term holders. The requirement for the MITI tranches is that companies must prove that they have at least RM10 million assets or for individuals RM3 million in assets. Some of them may be on financing in picking up the shares. It is however easier to monitor individuals or companies who own blocks in 250,000 units multiples rather than smaller sum.

What the stability managers and certain portion of the funds need to do are to trash out these holders who do not have the holding power so that it would make it much easier to support the share price later on.

This issuance is meant to be successful for the SHORT TERM. When the floodgate is opened for the cornerstones to sell after the six months, it may be different though. Fundamentals checks in after this.

As in comparison between FGVH, IHH against the failure of Facebook's IPO in getting a premium, there should not be any comparison besides all of them being sizable offerings for the year. To a certain extent, in the short term FGVH and IHH's IPO pricing can be controlled as the percentage of sellers are not going to be plenty. On the other hand, many Facebook's shareholders were waiting to sell as they have been holding onto the stocks for a long time.

Wednesday, June 27, 2012

SilverBird: When two elephants collide...

I don't think I need to highlight Silver Bird's position as it is common knowledge that they may not survive financially. See below, it is a company with negative book value and will find it tough with Gardenia and Massimo under the PPB group having a good fight in the mass market bakery business. It reminds me of the Malay proverb, "Gajah sama Gajah bertarung, Pelanduk mati di tengah-tengah." Well, this is a guide to show that if you are not big enough in the mass market business, with much stronger competitors smaller players may find it tough to compete. Sad story though.

Balance Sheet of Silver Bird as at 30 April 2012
Note that unlike what some people perceive, Gardenia is a Singapore based company with Bernas owning 30% of the Malaysian entity. Massimo on the other hand is owned by PPB, a unit controlled by the Kuok's family. I like the fight though, as we people benefit when prices of bread become cheaper and there are more choices to choose from. It is high time there is another big player such as PPB to enter this market as Gardenia has been dominant for a while. PPB will be a tougher competitor to Gardenia than Silver Bird as by moving into the bread business, it is only going downstream from its flour business. On top of that, PPB is much stronger financially and going into bread may prove to be the right move.

I like competition. For example, I today bought a "Wheat Germ" bread (whatever it is) by Gardenia at RM2.40 and it is 10 sen cheaper than Massimo's.

Monday, June 25, 2012

Why we may not need to extend the retirement age as yet

Lately, the topic of whether the need to extend the retirement age for the private sector to 60 from 55 is being hotly discussed. The latest coming from EPF on why Malaysians generally need to work longer appeared on TheEdge Daily to explain why we need to work until 60 of age. I agree to the reasoning as there are just not enough savings on average coming from the retirees.

More people extending their working age could also mean more domestic consumption. Generally, retirees are prone to cut down on their spending while people who have a steady income will probably have the tendency to spend more, hence increasing domestic consumption.

While it is true that the life expectancy of Malaysians have improved, it is also important to note that the extension of retirement age may create other problems.

Lesser jobs for the young
It is most important to find out whether we can create enough jobs for our young population. While the statistics on our unemployment is low, it may not mean that we are off the hook.

Quite a bit of the jobs created are from the public sector. It will not solve the problem of the country where we are close to having 1.4 million civil servants in the country. If the private sector's retirement age is pushed towards 60 years of age, it may mean that there are lesser jobs to be replaced which will result in the younger generations finding it tougher to get jobs from this sector. While the government is pushing for involvement from the private sector, we are at the same time increasing the intake of civil servants. In 2000, our total employees in the public sector was 894,788. Today, we have exceeded 1.3 million public servants.

An example of a failed policy when comes to addressing the need for extending the retirement age is Spain where it has close to 50% of its young people unemployed. In addressing the need to cover the increasing liabilities from pensions, the country has extended the retirement age from 65 to 67, while at the same time, its younger generation finds it tough to get jobs.

When the younger generations could not get jobs, many other factors may appear i.e. they may not get enough needed on the job training after their graduations. Personal plans may also be deferred as the younger generations could have find it more difficult to save. Marriage plans could have been deferred. Due to that, people may be forced to have children at older age. Already over the past few years, prices of properties and consumable goods were on exceptional rise. All these issues can itself be a vicious cycle.

I feel that the government has to look through the extension of retirement age once again. Yes, we have extended the retirement age for civil servants and probably reduces the extra burden on pensions but extending the retirement age for private sector would create other implications which on the onset may sound to be the right thing to do. Additionally, this may not be the right time to look into this as the global economies are not having the best of times, hence new jobs creation may be at its low.

Friday, June 22, 2012

MAA: Are they not once bitten twice shy?

I feel odd when MAA said that they are going into private equity business. Remember when they lost in excess of RM500 million going into commercial lending business. This is also the reason why they are forced into selling the general insurance and other core businesses as they could not meet the minimum capital requirement by Bank Negara.

Private Equity as a business can even be tougher than lending in fact as PE involves having the discipline of sensing good businesses as compared to lending where one should be able to cover its grounds on the risks it is taking. Might as well pay some of the excess cash as dividends which they are not. Is this the reason why the shares is now trading at RM0.46 (market cap of RM140 million), way below the Shareholders Funds and with RM200 million cash owings to be received from Zurich Insurance which they are to receive by September 2013?

Market is not trusting they will do it well by providing them that discount?

Thursday, June 21, 2012

AEON Credit: Perhaps this other AEON is even better

I can tell you that I perhaps was looking at the wrong AEON or rather overlooked it. While I like AEON, the supermarket and mall business, what I missed out is its credit business. I have always treated it as a supporting business to its mall operations than a business that can stand alone by itself. Perhaps it is still very dependent on the mall, but its credit business is making waves.

Let me tell you why I took it for granted the business of credit for AEON:
  • I took the cue from Courts. While at first it was doing pretty well, later on it did suffer from its receivables problem as well as other competitors;
  • AEON Credit is non-deposit taking financial organization. When your costs are higher than the banks, it will take a bigger effort to compete. Already most banks are credit card issuers, what is another card issuer from AEON?;
  • the RM50 yearly tax on credit cards by the government. Need I say more, the total cards in circulation will surely drop;
  • receivables - I could not really understand how good or how bad this can go.
Well, then let's look at its 5 years performance.

Its growth is fantastic over the last 5 years, but starting from small base

At its current price of RM11.92, while may have had a run quite a bit recently, it is still trading at below 15x PE. Worth looking, if it's business is to grow at this pace and the concerns that I have mentioned are addressed. Let's look at these concerns then.


Plenty, if you take the banks into account. What differentiates AEON from the banks is that it is a very much shoppers based credit card. If you noticed, Tesco ties up with RHB Bank, Giant ties up with Citibank for the cards. AEON whereas, has its own card. I hold an AEON card but not its credit card (which may be a mistake). AEON does provide better benefits to its credit card holders. Hence, over here if you feel that AEON, the supermarket's business is growing, then the card business will continue to grow, for sure. Competition is there but AEON Credit has its own space that it is slowly building on.

Costs of doing business

Banks are able to have costs of funds as low as 2% to 3%. By issuing cards, banks are enjoying chargeable rates of 18% to 24%. Fantastic. What about AEON Credit? I would have thought its costs of credit would be much higher. If you look at the red box below, its longer term rates are below 5%. Wow! for a non-deposit taking organization. If we read further, it sources for USD financing which it hedges against fluctuations. Well, if the financing is in USD then possibly the rates can be that low.

What about receivables?

My biggest fear in the cards business is bad receivables. From below, its past due receivables are less than 10% of its total. Past due receivables does not mean it is not collectible and the below 10% threshold is very manageable, I should think.

As for the RM50 charge from the government, it is something no credit card company can do about it. If any, the measure by the government has stabilized the credit card base, which means that it is much more difficult to do new customers acquisition than before.

My take

If any measure is to be used, AEON Credit's business has yet to reach its full potential. Riding on its supermarket and mall operations business alone, the credit business itself has the potential to grow further. If you notice, AEON is concentrating on building mid-sized malls in new and some old townships than just operating a supermarket business. Its cards business is working on promotions with the tenants that AEON has. Now, with the growth of the mall business alone, it should be able to ride on the momentum. However, over the last few years, what we managed to see was that AEON Credit in fact grew faster than AEON.

If it continues to be able to manage the bad debts and costs of credit well, then this stock is one attractive company.

What does AEON Credit do?

Rather than trying to explain at length, let me just cut this out from its annual report and show from here. :)

Wednesday, June 20, 2012

IHH: Tell me who is to make the most out of this IPO

Not the employees, not the doctors, not Khazanah really if you study it properly, but perhaps CIMB!

Besides being the lead arranger and many other things (from advising on other programs prior to this IPO), this is what I gather from staffs of IHH.
  1. They will not know the quantum of shares they are being offered until 4 July. From that date, they have until 9 July to subscribe which is 3 working days to pick up, arrange for financing or preparing for their own funds;
  2. To apply for loan which will be offered via CIMB, the processing fee to be charged will be a flat RM130. The bank has advised those who will be offered shares to apply for the financing now, as they have very limited time to pick up once offered. This is basically pushing them towards the financing option. Assuming there are 10,000 staffs being offered and all of them are opting for the financing package from CIMB, the bank will net a cool RM1.3 million just from this non-risk income;
  3. Financing rate will be BLR - 1.6% = 5.0% via CIMB;
  4. The financing is only for six months, upon which if it is not paid, CIMB has the right to force sell the shares.
Now my question to IHH is why the short time frame given to the staffs and partners on the quantum they will be offered. The short time frame will not help them to arrange for financing themselves even if they have the money. Is the time frame provided as such so that they will not have much other options but to go for financing from CIMB? Then my question is already CIMB is making much from elsewhere in this IPO, why the need to make the RM130 for processing the loan from every individual?

Already CIMB is to be appointed for being the price stabilization manager (which also means they can support the price for you retail to sell in the short term). From here, the bank will be paid for stabilizing or rather preventing the shares from going below the issue price. Hence the risks is theirs to control. Why the need to overcharge the staffs (whom consists of nurses and other lower level staffs) as hospitals hire quite a bit of non-executives.

You know what pisses me off. There is no necessity to charge the flat processing fee from the working class as CIMB is already earning from the interest to be charged onto the employees. What is Bank Negara's stand in this? Is this how Malaysian banks are making money from the public? Why the need to only inform them of their entitlement on such a late notice?

In this IPO, CIMB is having the cake and eating it too.

Opensys: Accounting policies change that is to improve its profit

Remember I was saying on Opensys strong free cash flow as against its seemingly weaker Net Profit as it was stuck with needing to continuingly amortize its intangibles. I have even highlighted that one should be looking at its cashflow rather than P&L. Now, you do not need to anymore. Why? Let me highlight below.

Because of change in accounting policies, it has wiped off all its development expenditure. Moving forward, Opensys has no worries over amortizing development expenditure further
What is the effect? Balance Sheet has been cleaned especially to its intangible assets. In another word, it is just writing off its development expenditure in 2011. Fundamentals are still the same though.

Effect to the Balance Sheet. Development expenditure has been zerorised
What about P&L? Net Profit will definitely improve by the stroke of some changes in accounting treatment.

First quarter 2012 results
It is up to you to decide whether you will like this penny stock as it will be trading at 5x - 6x PE. Balance Sheet has already been cleaned. Its business is decently solid with income from the financial institutions and utility sector, although not fantastic growth, and it will still grow no doubt I should think.

I suspect they will continue to have decent dividend policy although nothing concrete is announced by the management - at least not to the public like me. I should say, this is a much more palatable stock with market cap below RM30 million than some of the dodgy companies in the ACE market which have market capitalizations of more than RM100 million, if you search through what I have written about some of them.

If however, you are looking for strong brand and industry excitement, Opensys is not for you though. This is a stock where no funds will notice, no analysts will cover - up to you!

Hmmm...personally, I am just wondering is this permitted though.

Tuesday, June 19, 2012

EPF, I want to withdraw all my money by 55

It is a cause for concern when there are mentions of we may not be allowed to withdraw all our money come 55. There's no smoke when there's no fire. Here, I am not saying that EPF is mismanaging our money. I will be fair with my reasoning.

The very government that has asked to believe in them for indebting the nation further has asked us to trust them in managing our money for us. It is already a cause for concern when we have continued to be in budget spending deficits over the last 14 years until we are to reach a total debt to GDP of almost 55%. Yes, these numbers are better than some European nations but until when you are to continue to overspend. For a government who continues to overspend, how are we to entrust our lifelong savings to you until our late age in life.

While it is true that over the last decades, EPF has done a decently good job at managing our savings fund, it does not mean that we can blindly allow you to continue to manage these funds until we are 60. What happens to the call for us to have money management education? When you hold a large sum of our savings and you feel that you can manage them better we will not have the experience and ability to proof to you aren't we? Since when does the government knows better, and has proven that they have acted best for its people until we are to assign a huge chunk of our savings to you to manage?

With the EPF's fund growing at much more than RM1 billion a month, I am sure you already have problems allocating these money. Already, EPF's investment into equity is reaching 35% of the total fund size of a staggering RM475 billion. The last few years I am noticing that it is getting more and more difficult to put those money in the Malaysian equity market. Which is also why you have gone to buying properties in UK and more recently into Australia. Our money in EPF is now being used to own PLUS. Not a bad move, but it shows that managing these funds successfully is getting tighter. How many more PLUSes are there? Already, the fund is asking for more allowances to invests these money overseas. How confident are you in making a better return overseas? Remember, by going overseas, you will not be given with the same preferential treatment as in locally. Sometimes, a large fund such as EPF may even be treated to be a sucker for deals.

In fact, I have felt that Khazanah has been suckered in the private healthcare deal in Singapore and Turkey. How sure are we EPF will not be treated the same when you are moving more aggressive overseas?

Moreover, while there are calls for us to work until 60, at 55 years of age it is important for us to be allowed to enjoy some of our savings. I am sure there are better ways than for the government to continue to say that it is better for them to manage those funds for us. If there are those who prefer to park their money in EPF, let them do so. Create an annuity fund, if you may. However, do allow for those who feels that they can do better without EPF's assistance. Let us have liberty to choose. As it is now, the option is very limited.

This very idea and mentality of government knows best is perhaps the very reason where you have ballooned up our nation's debt. Maybe it is better to give us back the money at our earlier age so that we can have better and more careful planning with them. After all it is still our money!

Green Packet: Another USD51 million raised but can it continue to do this?

This is something I did not see it coming. Green Packet has raised another USD50 million. This time from 2 boutique Private Equity firms - Kendall Court and Leafgreen Capital (names that we do not hear often).

On my own calculation, Green Packet and Packet One (subsidiary) have raised in excess of RM1.1 billion since 2006 (not inclusive of its own IPO fund raised). I am actually quite amazed with their ability to raise funds. If any, their persistence and survival instinct surpassed my belief.

Total funds raised via multi-type facilities
I have even written that I foresee the company will be facing liquidity crunch. While my forecast is true, what it manages to surprise me is the ability to raise funds. At its market capitalization of RM325 million today, its total fund raising for the WIMAX and 4G LTE initiatives of more than RM1.1 billion way surpassed the valuation given by market. If at all, the story line from the market with the valuation attached is that the group may not be able to survive as it it continuing to suck cash while the business has yet to see any future profits or cashflow positive.

For now let's not even look at profit. A business like this where lots of cash have been sunk in, we expect high revenue growth especially for the investors, lenders etc. Do we see it?

Where is the high Growth?
I am actually quite perplexed. Do the investors think that by Packet One going IPO, it will solve the problem? Telco is continuous investments (see Maxis, Digi, Celcom) and the most important thing is where is Green Packet's position now? It's RM1 billion is nothing compared to what the 3 plus TM can generate in a year in terms operational cashflow.

Let me give you a hint, even a country as large as US, the third player - Sprint is facing it tough to compete against AT&T and Verizon. Name me a country where there are 5 large telcos surviving together in the long run. (I can only think of India but the Indian story is different due to its licenses issued by states. Even then it is consolidating.) Someone is bound to fall and Malaysia already has those 3 names plus TM and not to mention YTL continuing to pitch its old 4G story.

Monday, June 18, 2012

IHH IPO: Where's the beef?

There is no doubt that private healthcare is a fast growing industry. The IHH IPO, it seems has no problem getting institutional funds to take up as apparently 62% of the shares on offer are to be taken up by cornerstone investors. These cornerstone investors will be disallowed from selling their shares for six months after the listing takes place. Among the cornerstones, EPF (8%) and Kuwait Investment Authority (6%) will be taking up more than 5%, while 20 others (including Blackrock, Singapore GIC) will be securing less than 5%.

Shares on offer

17.22% out of the 27.74% are taken by cornerstone investors
Besides the shares held by the substantial shareholders including Khazanah, Mitsui, Abraaj Capital and the Adlinyar family (who originally controlled the Acibadem group), with the majority portion taken up by cornerstone investors, only 8.81% will be offered to retail which over here includes MITI tranche. On top of that, CIMB will be the stabilization manager for this issue. Hence, for the first half of the year, the transacted portion will be very much controlled. Unless something unforeseen crop up, I do not see any reason for deterioration in prices below the offered price for the first few months. Hence, whoever that are offered pink (staffs) or blue (partners, doctors) forms etc, do take up.


Now we know that it is easy for the controlling shareholder to support the share price due to the low tradeable portion, how about its valuation? Is IHH worth it in the long run as an investment? Also what makes the cornerstone investors commit themselves?

The high financing costs for 2011 was due to Acibadem, the Turkish unit took a high charge for its forex losses from Euro and US dollar financing - RM350 million equivalent for 2011

If you look at the above proforma income, the one that came into notice is the first quarter 2012 results. There is no doubt that IHH is selling the first quarter and its prospective earnings from 2012 onward rather than focusing on the previous years income. This is how they are pricing the IPO at RM20 to RM23 billion. My question however is even if we forecast the full year income for 2012 at RM700 million i..e the top end of expectations, its prospective PE for 2012 will still be between 30x to 33x. Note that IHH will need good results for the full year 2012, before the lock up period for the cornerstones are up.

If however we based the valuation on 2011 income, even if we are to discount the Euro and US Dollar financing losses for Acibadem totalling RM350 million, the total group profit would have come at RM483 million. On that, the pricing of RM23 billion would have valued IHH at 47.6x PE.

Is there anymore room for growth with this kind of pricing?

What about Price / NTA

If anyone is saying that one should not look at the NTA, then they are dead wrong. Hospitals are property and capex investments due to its high capital expenditure involved. To really decipher how profitable the investments are, one should look at the speed of its investments return. Hence, it is important to see whether the group has invested too much in order to grow or their balance sheet position is just nice. As you can see below, IHH has no doubt needed this IPO as they are quite highly in debt. They needed the fund raising to reduce the debt level of the group. I have actually split the balance sheet into 2 sections: (1) asset and (2) liabilities and equity.
The Group has a very high intangible assets due to the acquisitions

There is no doubt that the more than RM5.3 billion to be raised from the IPO would have improved the balance sheet of the company. Now, I realize why Khazanah needs to rush this IPO as they have plans to open more hospitals in a hurry and its current balance sheet is not providing the right position to gear further.

Notice the almost zero Net Tangible Assets prior to the IPO
If you notice, the IPO is offered at a proforma Price / NTA of more than 5x, which is high.

Prospects of the IHH group

There is no doubt due to many factors such as pricing elasticity of private hospitals, medical tourism, greying communities and societies need for better healthcare, private healthcare is a good business. Over the last few years, private healthcare has registered more than average growth. For IHH, this is especially strong when it is one of the largest group in the world. IHH can make use of the brand to do tie ups. Brands that it carries such as the Acibadem and Gleneagles can be expanded.

Now, with this what is the take? While I like the business, the valuation that's being asked is way too expensive for me to digest. I am not too comfortable with the way Khazanah piecing up the individual groups over last 3 years and promote them as one of the largest private healthcare group in the world either, as some things are better off with organic growth than building them like "Lego" blocks.

Notice the original Parkway management on the Board despite it becoming largely a Malaysian controlled company. This also shows that the IHH group is desperately in need of managers to manage this business as they have only knew how to buy businesses at very high price but to manage them, Khazanah probably needed Parkway. Can Parkway deliver - this is the question? Let's wait and see.

Another thing to note, Parkway was just valued at RM5.2 billion in 2008. Less than 4 years later, with the addition of 60% of Acibadem, 60% of Pantai and 100% of the IMU, Khazanah is selling at RM23 billion post IPO. You might want to ask, has the industry improved so much over the last 4 years?


IHH will be one of the largest listed private healthcare providers in the world based on market capitalisation upon Listing. It focuses on markets in Asia and in the CEEMENA region, which are highly attractive growth markets. IHH operates an integrated healthcare business and related services which have leading market positions in our home markets of Singapore, Malaysia and Turkey, and we also have healthcare operations and investments in the PRC, India, Hong Kong, Vietnam, Macedonia and Brunei. Its global healthcare network operates over 4,900 licensed beds in 30 hospitals and has one other hospital in Turkey, the acquisition of which is pending completion, as well as medical centres, clinics and ancillary healthcare businesses across eight countries. In addition, it has over 3,300 new beds in the pipeline to be delivered through new hospital developments and expansion of our existing facilities over the next five years, which includes two potential hospital development projects in Turkey. These new beds in the pipeline also include approximately 760 new beds in those facilities which it expects to manage through HMAs, over the next five years.

As at 31 March 2012, it employs more than 24,000 people worldwide. IHH's core businesses are operated through its key operating subsidiaries, namely PPL, Acibadem Holding and IMU Health.

Other related articles:

Why listing healthcare is such a dangerous thought

Will IHH follow FGVH in clocking a cool premium on its first day?

IHH: Who will make the most from this IPO?

Portfolio Update - 18 June 2012

From the last update on 6 April 2012, there were no change in the portfolio. I still maintain the 4 stocks in the portfolio i.e. DKSH, AEON, Oldtown and Wellcall. I have also mentioned why I like these 4 stocks in the previous update.

I believe that if there are no necessity to change the holdings, don't change. In terms of performance, over the period of 507 days since the portfolio was created, it achieved a nice 81.88% return thumping the KLCI (4.11%) and Fixed Deposits at 3.2% fixed rate (4.23%).

You would have noticed that among the 4 stocks, the largest is AEON which only has a RM3.2 billion market capitalization. None of them are KLCI stocks. The other 3 are below RM1 billion stocks. If you follow my blog, this does not mean I do not like large cap stocks but to me sometimes these stocks are dominated by EPF which is the largest fund by far. Their action can move any stocks in Malaysia hence it is difficult to anticipate what their next move be like. Anyway, stocks that are invested by EPF or even Khazanah, although some of them are quality stocks are normally quite fully priced, I believe. I am not saying they are doing the wrong thing as it is not easy to manage a RM470billion fund than managing a RM50k personal fund.

Also, if you check around seldom analysts cover stocks such as DKSH, Wellcall or even Oldtown. In fact, I have read more sell calls for Oldtown than buy call which is rare. Analysts tend to have more buy calls than sell calls as by having sell calls they have nothing to "sell".

This portfolio is not for any reader to follow my call as these are purely my own decision and opinion. Any decisions to buy or sell is entirely up to you. The reason for me to do this is to show that by being diligent and if we have a certain program, stocks may be a better longer term investment than your safer bet of putting money in FD or under our bed. Some people may like gold, some may like properties - go ahead if you think is right. Just that I prefer stocks.

Earlier updates:

6 April 2012

27 May 2011 
6 April 2011
14 Feb 2011 

Friday, June 15, 2012

Why Airasia may benefit more by moving to Indonesia

Tony, it seems this time is quite real moving to helm Airasia from Indonesia while appointing a new CEO for its Malaysian operations. While he may not called it on paper, but his move to the bigger country could be just equivalent to having another base operating off Indonesia.

I wrote an article on why Airasia may benefit more by moving to Indonesia.

Here's why:
  1. Airasia, while has been given quite a number of landing rights by the Malaysian government, its relationship with them has never been smooth. From buying the company at RM2 from DRB-Hicom about 10 years ago, it has grown its operations into a very respectable one - or probably one of the most respected airline globally. Currently, the company is valued at RM10 billion or more by investors. Despite that, its growth has always been hindered with the government not allowing them to operate off Subang airport and having been too slow to build a new low cost terminal to handle the volume that is ever growing. Note that, for several times Airasia has postponed the delivery of aircrafts from Airbus most probably due to current airport not allowing it to grow fast enough. Hence the very government that allowed the sale to Tony the airline has now hindered its growth.
  2. Tony Fernandez has always been on the lookout to grow its business from anywhere that can provide them opportunities to even growing further. My last check, Airasia is flying to 68 destinations from Kuala Lumpur while it is only flying to 22 destinations from Jakarta. To obtain the route rights, it needs the assistance from the government in countries where it intends to fly from and land into. Hence, this is probably why Tony is willing to move - i.e. to grow Airasia even further.
  3. Furthermore, just look at Indonesia alone, other competing airlines such as Merpati Air and Garuda have much more routes. Airasia if provided the route rights will benefit much more from there. I do not know what are the arrangements that the Indonesian government has provided to Airasia for the latter to move the HQ to Jakarta but looking at the moves that Tony has made before, it could be substantial. Tony is a negotiator and he is good at it. He is not afraid to make drastic decisions and the latest is another example to prove a point as well as showing who's the boss. At Airasia's size currently, he thinks he can be the boss, even to the Malaysian government. (I like that)
  4. Operationally, while it may not be a smooth one to move from KL to Jakarta but an airline business is one which can be managed from anywhere in the region, what more from an airline which thrives through online booking, not so much via agencies. If it is implemented well, in fact it may save Airasia costs and to Tony saving costs is what it matters while it still manages to execute. After all, Airasia is never popular for its services. It is just there to provide the best bang for your buck to its users - that is what makes it successful. Hey! Ryanair is one of the most hated brand in Europe but look at them grow.
  5. For a while, Indonesian airlines have always been viewed negatively until at one point of time, no Indonesian airline is allowed to fly to Europe. On safety, Airasia is viewed positively. Airasia by growing big in Indonesia will bring something to the country what the current bigger airlines in Indonesia are not able to bring immediately. Hence, to Indonesia besides creating jobs will be a win-win situation for the country.
  6. Look at all the benefits - tourism, airport tax, jobs, country's airline perceptions, business travel etc. Indonesia sees it and Malaysia does not see it - this goes to both the government of Malaysia and its opposition who sometimes say things that does not make sense.
  7. Since the share swap with Khazanah for MAS is called off, what the heck.
In the end this move I think is positive for Airasia but a loss to Malaysia - yet again.

Other related article

Why I do not like the MAS-Airasia deal. (This article has its relevance on why Airasia should just go out and do deal overseas.)

Read article below on why Tony Fernandez feels the collapse in tie-up with MAS is a good thing.


KUALA LUMPUR: AirAsia boss Tony Fernandes has called the collapse of a tie-up with struggling flag carrier Malaysia Airlines a relief that will free him up to focus on his fast-growing budget carrier.

In his most extensive comments to date on the failed deal, Fernandes said in interviews published Friday that "massive" Malaysia Airlines union resistance was to blame and implied that the carrier had deep problems to resolve.

"I was off blood pressure pills as soon as the swap was off. I'm serious," he told The Edge business daily.

"Sometimes you need a bit of a kick up your backside. When we have built fantastic operations at AirAsia, we didn't appreciate it until we (saw) something else," he said.

His comments appear two days after AirAsia announced it is setting up a strategic planning centre in Indonesia, away from its Malaysian headquarters, with Fernandes expected to lead expansion of regional operations from there.

AirAsia had agreed in August last year to buy 20.5 per cent of Malaysia Airlines under a strategic tie-up aimed at turning around the national carrier.

But the share swap deal was pulled early last month after pressure from Malaysia Airlines' powerful employees union, who feared job cuts and other cost-reducing moves.

Fernandes said Malaysia Airlines' problems could have been fixed under the tie-up.

"Yes, there will be short-term pain but you have to make the business successful as you cannot be on life-support," he told The Star newspaper..

"(But) you reach a point of why waste time talking? ... I'm glad it's over," he added.

With Fernandes moving to Indonesia the airline will announce on Monday a replacement to head its Malaysia operations.

Fernandes said he would "still be heavily involved in the day-to-day running of the airline" and "not leaving anytime soon" but was keen on a succession plan.

The former music executive took over the airline a decade ago and turned it from an ailing outfit with two planes into one of the region's biggest success stories.

Last month, AirAsia posted a 4.0 per cent increase in first-quarter net profit with the company citing a solid business model as the reason. It also posted a record quarter revenue of 1.17 billion ringgit (US$367 million).

Malaysia Airlines, on the other hand, reported its fifth consecutive loss, amounting to 171.8 million ringgit for the quarter ended March 31.

- AFP/ck

FGVH's price stabilization or "distortion" mechanism?

After all the confidence in the FGVH IPO, they are going ahead to go for the price stabilization mechanism or "greenshoe" some may call it. Several companies have used this mechanism with success. Among them, Petronas Chemical, MSM although the first to use this, Xingquan had seen its shares tanked despite using this option. Basically FGVH will be much different though. I am wondering why are they proposing this option if the confidence level was so high and despite having secured several cornerstone investors initially. The greenshoe option however could be used to attract these cornerstones. Normally the term cornerstone does not coincide with the need for greenshoe, although these cornerstones may disagree.

Price stabilization mechanism may sound nice, but if used carelessly can be a "price distortion mechanism". Hey, for the stakeholders it is stabilization in the name but for me it is a distortion of market pricing. Tell me here, who has the power to distort the price - retailers?

If we noticed, so far companies that used this mechanism since the introduction by the market in 2008 was either GLCs or those companies that have low investors confidence.

On another note, the IPO ended with final retail price of RM4.45 and institutional price of RM4.55 per piece.

For read up on price stabilization mechanism or greenshoe.

Greenshoe - How it works

The mechanism by which the greenshoe option works to provide stability and liquidity to a public offering is described in the following example: A company intends to sell 1 million shares of its stock in a public offering through an investment banking firm (or group of firms which are known as the syndicate, whom the company has chosen to be the offering's underwriter(s).

The underwriters function as the broker of these shares and find buyers among their clients. A price for the shares is determined by agreement between the company and the buyers. One responsibility of the lead underwriter in a successful offering is to help ensure that once the shares begin to publicly trade, they do not trade below the offering price.

When a public offering trades below its offering price, the offering is said to have "broke issue". This creates the perception of an unstable or undesirable offering, which can lead to further selling and hesitant buying of the shares. To manage this possible situation, the underwriter initially oversells to their clients the offering by an additional 15% of the offering size. In this example the underwriter would sell 1.15 million shares of stock to its clients. When the offering is priced and those 1.15 million shares are "effective" (become eligible for public trading), the underwriter is able to support and stabilize the offering price bid (which is also known as the "syndicate bid") by buying back the extra 15% of shares (150,000 shares in this example) in the market at or below the offer price. They can do this without the market risk of being "long" this extra 15% of shares in their own account, as they are simply "covering" (closing out) their 15% oversell short.

If the offering is successful and in strong demand such that the price of the stock immediately goes up and stays above the offering price, then the underwriter has oversold the offering by 15% and is now technically short those shares. If they were to go into the open market to buy back that 15% of shares, the underwriter would be buying back those shares at a higher price than it sold them at, and would incur a loss on the transaction.

This is where the over-allotment (greenshoe) option comes into play: the company grants the underwriters the option to take from the company up to 15% more shares than the original offering size at the offering price. If the underwriters were able to buy back all of its oversold shares at the offering price in support of the deal, they would not need to exercise any of the greenshoe. But if they were only able to buy back some of the shares before the stock went higher, then they would exercise a partial greenshoe for the rest of the shares.

Wednesday, June 13, 2012

Who are to be blamed if MAS needs help?

I just came back from a meeting with a government linked organization. My meeting stretched until after 5.30pm. When I walked out of the office the entire building was just empty and dark except for the lobby.

Now let me point this to MAS. How many times have they changed CEOs after the Tajudin Ramli debacle? Except probably for Idris Jala, do you have the feeling that the other CEOs have the political strength and will to push through the right agenda? Or is the more important agenda to protect their own positions, addressing the demand from the powers that be and in pleasing the Board of Directors? How do they attend to a minister who wanted to upgrade the entire family including the maid to first class for example? Can they say no? If they can't, how does the management rally the staffs?

These are questions which you probably have answers but we still blame MAS for failing. MAS is competing in a very competitive industry. They have Emirates, Singapore Airlines, Cathay Pacific, Thai Airways and Qantas to contend with besides the shareholders and government to answer. On top of that, over the last 10 years they have the most successful low cost airline in the region back at their heels. Yes, part and parcel of competition, we should say. But really, is Malaysia a much better and preferred business and convention destination? Are we a top notched tourist destination? If we are, then we are able to help MAS as they probably are finding it easier to fill up their seats. Fact is our neighbors (Singapore and Thailand) are doing better in this aspect - tourism and convention. Yet again, we are blaming MAS. We want them to do as well as SIA. In business, once you are on a high gear, you are flying. However, once you are stuck in a traffic jam, you will be crawling and be facing disgruntled people around you, while continuing to fail.

The latest sukuk fund raising called "perp" is not going to help. Yes, it is an exercise to stop the rot but at 6.9% financing costs, their financials are not going to strengthen. It is an exercise to make the financial guys look presumingly good. Yes, the fund appears in the equity section of the balance sheet and not on the debt section, but really are the prospective financiers to MAS in future be that blurr that they do not know. If I may be blunt, it is just an exercise to delay their demise as they are going to increase the costs of doing business for MAS. It is an exercise to make the balance sheet look nice, not the cashflow and the P&L. It is just a financial engineering, not business reengineering.

What does MAS need then? MAS needs a total revamp out of the eyes of the public. It needs to cut routes even though the cabinet may oppose to it. Can they do that?

If they can't, who should we blame here? The people for expecting too much from MAS and the government for giving us too much hope!

My call is follow Ananda Krishnan footsteps, delist MAS, really clean it up this time, have a no nonsense CEO on board for long term and only list it back after this. This time, I will support for this although I do not support Ananda's delisting of Astro.

Or an even more drastic move, can they do a GM? - as what the Obama administration did to the automotive giant few years ago, which is let it go bankrupt. From here, they probably can terminate some of the unjustified long term contracts. Just a naughty thought!

Tuesday, June 12, 2012

KWAP taking up MAS "perp" is close to your bailout of the airline?

First, let me highlight these few things:

What is Perp?
Perpetual bond, which is also known as a Perpetual or just a Perp, is a bond with no maturity date. Therefore, it may be treated as equity, not as debt. Perpetual bonds pay coupons forever, and the issuer does not have to redeem them. Their cashflows therefore, those of a perpetuity. Examples of perpetual bonds are consols issued by the UK Government. Most perpetual bonds issued nowadays are deeply subordinated bonds issued by banks. The bonds are counted as Tier 1 capital, and help the banks fulfil their capital requirements. Most of these bonds are callable, but the first call date is never less than five years from the date of issue—a call protection period.

What is KWAP?
KWAP was incorporated in March 2007 to help the government in funding its pension liability. 

Who contributes to KWAP?
The Federal Government contributes 5% of the total annual budgeted emolument of the Federal Government employees while Statutory Bodies, Local Authorities and Agencies contribute 17.5% of the basic salaries of their pensionable employees respectively to KWAP on a monthly basis.

Now, my question is with the instrument not redeemable (except for MAS who has the option under certain circumstances) and with NO MATURITY DATE, wouldn't it be close to a bailout? Who buys up this perp issued by MAS? KWAP, which is government's pension liability fund. What if when KWAP loses money? Government will still pay the pensioners right? So wouldn't it be close to your usual bailout, I wonder?

With the issuance of perp then, it is categorised as an equity in the balance sheet, hence MAS is boosting up its balance sheet in fact. What if MAS is not able to pay its dividends listed at a rate of 6.9%? Should it be regarded as a bad debt or just a carried forward owing? How creative.

I am reading with disgust that MAS can redeem the sukuk in the event there is a change in recognition in accounting treatment from equity to debt. Isn't this another accounting play? The fundamentals of the instrument is the same. At a time when most government are cracking down on investment banks taking opportunity of "off balance sheet" item and/or accounting loopholes, these guys are working in tandem embracing it.

Other articles on MAS financial debacle.

PETALING JAYA, June 12 — Malaysia Airlines’ (MAS) fund-raising efforts received a boost today when the civil service pension fund (KWAP) took up the entire first tranch of RM1 billion of the airlines’ perpetual sukuk today.

MAS also said in a press conference here that it received firm commitments for the rest of the RM1.5 billion of the perpetual sukuk, which MAS said today does not carry a government guarantee.

Perpetual bonds, also known as perps, are considered higher risk bonds as there is no guarantee of repayment.

The perpetual sukuk will pay a rate of 6.9 per cent and is not rated. It allows the financially troubled airline to raise money without affecting its gearing ratios as it is treated as equity under Malaysian accounting conventions.

“We consider it the cheapest form of equity,” said MAS deputy group CEO Mohd Rashdan Yusof. “It’s a great deal for our shareholders.”

MAS group chief executive Ahmad Jauhari Yahya said the successful subscription of the first tranche indicated the trust investors had in the airline.

“This firmly secures the first pillar of our funding plans and is testament of the confidence in MAS,” he said.

Ahmad also said he hoped the proposed government-funded special purpose vehicle (SPV) that will be used to finance the delivery of MAS aircraft will be finalised by the end of July.

MAS, which has posted large losses for the past several quarters, is proposing to raise about RM9 billion through a combination of perpetual sukuks, commercial loans and government financial assistance.

Interest in perpetual bonds has risen in the region, prompting the Monetary Authority of Singapore to express concern over the demand for the higher risk fixed income instruments.

The Thai SEC (Securities and Exchange Commission) also issued a warning earlier this month for investors to fully understand the details of subordinated debentures, which is corporate debt that ranks as a low priority for repayment.

MAS said that the perpetual junior sukuk will be recognised not as debt but as equity, and payment obligations will at all times be junior to the claims of present and future creditor of MAS but ahead of other share capital instruments.

The tenure of the sukuk is perpetual and MAS has a call option to redeem the junior sukuk at the end of the 10th year and on each following periodic distribution date.

MAS can also redeem the junior sukuk if there is a change in accounting standards resulting in it no longer being recognised as equity.

The airline may also defer periodic distributions but the deferred distributions will be cumulative.
Interest in perpetual bonds has grown as companies look to take advantage of the opportunity to raise funds without any impact on gearing ratios and investors look for higher payouts in the current low interest-rate environment.

Reuters reported that more perpetual bonds, informally called perps, were sold in Singapore in the first three months of 2012 than in the previous 15 years.

Perps are uncommon in Malaysia and mostly issued by banks.

MAS is also the world’s first corporation to issue an Islamic perpetual bond.

IHH Healthcare locks in cornerstones for IPO

On the IHH IPO, it seems that I may be wrong based on the news by Reuters below. However, notice that no price indication is mentioned but it did say 2.2 billion shares are on offer representing 25% of its enlarged capital with 80% new shares. Am I seeing it being valued at RM20 billion? Is it really possible? As a comparison KPJ is at RM3.66 billion.

As I said, I prefer to be wrong in this one than being right.
(Reuters) - Blackrock Inc, Capital Group and Och-Ziff Capital Management Group have emerged as cornerstone investors in the $2 billion listing of Malaysia's IHH Healthcare Bhd, according to two sources with direct knowledge of the flotation.

The other cornerstone investors are Singapore sovereign wealth fund Government of Singapore Investment Corporation, Fullerton Fund Management, AIA Group and Hwang Investment Management, the sources said.

The dual listing of IHH, slated to debut on the Malaysian and Singapore bourses by the end of July, comes at a time when a string of initial public offerings have been delayed or scrapped because of investor worries about Europe's debt crisis and China's slowing economy.

"The profile of the cornerstone investors will give the IPO some boost in confidence," said one of the sources, who declined to be identified as the talks were confidential. "In good or bad times, it (the IPO) will still do well. It (IHH) operates in a defensive sector."

IHH is the healthcare arm of Malaysia's state investor Khazanah Nasional Bhd. Its assets include Turkish hospital group Acibadem AS, Singapore's Parkway Holdings, India's Apollo Hospitals Enterprise Ltd and Malaysia-based Pantai Hospitals and International Medical University.

It is offering 2.2 billion shares, out of which 80 percent will be new shares while the remaining secondary. The sale amounts to some 25 percent of its enlarged capital. "The cornerstones will take 1.3 billion out of the 2.2 billion shares available," said the second source, declining to elaborate.

IHH officials were not immediately available for comment.

The dual listing would be the fourth-biggest IPO in Singapore's history and Malaysia's second-largest this year after the planned listing of Malaysian plantation group Felda Global Venture Holdings Bhd. International Financial Corp, a member of the World Bank Group, has said it plans to take part in the IHH listing in a move to help validate IHH's emerging markets strategy. Reuters reported earlier that IHH was also in talks with Kuwait's sovereign wealth fund on becoming a cornerstone investor.

Malaysia's pension fund and Prudential Plc's Eastspring Investments have committed to invest in the IPO.
State-owned fund manager Permodalan Nasional Bhd and the Haj Pilgrims fund are also investors, according to the sources.

Malaysia has bucked the IPO trend in other markets such as Singapore, where motor racing firm Formula One decided to postpone its near $3 billion offering due to volatile markets.

Shares of Gas Malaysia Bhd closed 10 percent higher on their debut on Monday after a $230 million listing, overcoming the negative sentiment surrounding a slump in global market flotations.

CIMB, Bank of America Merrill Lynch and Deutsche Bank are joint lead co-ordinators, while Credit Suisse, DBS, Goldman Sachs and Maybank  are joint bookrunners. Nomura, OCBC and UBS are co-lead managers.

Other article on IHH IPO.

IHH IPO: Where's the beef?

Saturday, June 9, 2012

RHB-OSK: Will 2 ordinaries merge into 1 great bank?

There is no doubt that the RHB-OSK merger is a great deal for OSK, at least on paper. Besides the RM174.3 million of net cash, OSK will end up holding 10% of the enlarged group, something for so many years having operated as a stockbroking concern is not bad at all. I have read that investors are not too happy with the valuation of 1.77x book value on OSK, hence probably the drop in the share price of OSK. Considering the fast deterioration on the future of retail stockbroking in Malaysia due to the country's inability to attract funds as well as large listings together with the thinning of commission, it is a deal which OSK will not walk away. This is despite OSK still being the leading stockbroking house in Malaysia. Perhaps just for thought, let's look at OSK's last 5 years performance, we will understand.

You will notice that revenue has somewhat tapered slowly but margin is the one that is thinning sharply. It is not due to OSK being a much lesser concern over the years but basically trading margin is deteriorating due to online trading and other newer types of competition. Stock broking is not lucrative anymore. One would say, what about investment banking. In Malaysia, if you are not CIMB or to a certain extent Maybank Investment, one should not even bother.

What about RHB as a bank?

After a series of mergers 10 or more years ago, it is today a bank that is not exciting but has somewhat stabilized. RHB today is a result of Kwong Yik, Sime Bank (UMBC), DCB Bank combined but unable to carry the combined dynamism. What is its strength today? I really could not think of any. It is not strong in retail, corporate - not particularly able to reach out to the middle working class or even the wealthy. It is a so so bank in every angle.

By merging an average bank which in my eyes has no particular strategy with a deteriorating investment bank may not achieve anything.

RHB has stabilized in terms of its income. However it does not seem to have a solid strategy to enable it to grow more than average. Over the years with the liberalisation of the banking industry, I have a feeling that RHB will be acquired
In business, if you are not great but somewhat stays in an attractive and ever changing industry landscape, you will be taken over. May not necessarily be a bad proposition sometimes for an investor. If you notice in Malaysia, we have slowed down the liberalisations of our financial industry. CIMB and Maybank over the past few years have gone out acquiring banks in our neighboring countries but we do not see this happening in Malaysia from other financial institutions. What we only see are new correspondence banks being setup or perhaps foreign banks allowed to increase their number of branches. This slow in liberalising the industry may draw flak (in fact already) from our neighboring countries and internationally as we do not reciprocate what other countries have allowed us to do. Do you really see Singaporean, Indonesian or Thai banks acquiring our financial institutions? The fact of the matter is that CIMB, Maybank or Public Bank for the matter can already compete on equal footing against any other overseas banks.

Hence, I see that RHB Bank may become a candidate for takeover especially it is now owned by EPF. EPF will be able to put stabilisation effect to RHB but will not turn RHB into a dynamic organization. At its current Price to Book Value of 1.4x, RHB Capital is a very attractive concern especially for its branch and customer reach which any foreign concern would be attracted to.

The fact of the matter is that this merger would not do much to turning the RHB Group into something special but perhaps give some additional impetus or dynamism to the retail stockbroking arm of RHB. In fact, as I see it over time, EPF may allow some dynamic organization to take over the banking concern. Much better this way.

OSK at its current price of RM1.35 and market cap at RM1.3 billion seems to be attractive with the deal.

Friday, June 8, 2012

IHH IPO: Will Khazanah need to pull the rabbit out of the hat?

Private healthcare is great and a fast growing business especially when you consider that many nations in this world are greying. As a result, it may not be that difficult to sell an IPO of supposedly the second largest private hospital group in the world. At this moment, there is yet to be any conclusion on what will the market value be for the IPO, however indication from the Managing Director of Khazanah is that it will be slightly smaller than Felda's IPO. Since Felda is valued at around RM16.6 billion, would RM15 billion be close to the mark? In fact, the latest apparently, IHH is to be valued in excess of RM20 billion.

First of all, how does Khazanah get into owning so many hospitals so fast?
  1. Started off with a controlling stake in Pantai Hospital Group when there were complaints of Parkway acquiring strategic hospital assets in Malaysia. As a result, Khazanah was used to purchase an effective 60% stake of Pantai Hospitals from Parkway. Hence Khazanah started off with owning all the Pantai(s) in Malaysia.
  2. Instead of just expanding its list of private hospitals in Malaysia, Khazanah started to accrue many more hospitals overseas hence turning itself into the 2nd largest group. In its acquisition of Parkway in Singapore, Khazanah had to fend off controlling ownership and later buyoff the Group from the Fortis Group of India. Price: USD3.3billion (RM10.56 billion) at valuation of 39x PE based on Parkway's financial results for 2009.
  3. Latest round of acquisition, the IHH group under Khazanah bought into 60% of Acibadem group at valuation of between USD1.1 billion to RM1.68 billion depending on which group they bought from. Based on my calculation, the valuation on Acibadem is in excess of 15x EBITDA and more than 100x PE. Even if it is calculated at Price / Book Value it is more than 14x book value.
  4. On top of that, Khazanah already owns 12.2% of Apollo Hospitals which it acquired as an investment in 2005.
Financials of Acibadem before the acquisition from IHH

Hence, despite Khazanah managed to accumulate that many hospitals, it is at the expense of very high price being paid for these assets.

Latest Structure for the IHH Group
Although the proforma financials for IHH is not yet available, based on my estimation from past financials here are possible contributions from each.

As a comparison, KPJ Group (2700 beds) has a net profit of RM150 million for FY2011, hence RM473.4M for IHH may not be off the mark by far. The very profitable and more luxurious Bangkok Dusit Hospital Group (4,987 beds) on the other hand, made around RM487 million for FY2011. Its market cap todate is around RM13.9 billion with Price / Net Asset at 4.15x at PE around 28x

If that number is close to accurate, I would think to achieve market valuation of around RM20 billion, Khazanah will be selling this IPO at not less than 40x historical PE, which is very little room for valuation growth. At that price, I think the national investment arm will have a hard time looking for takers especially at a time when many companies are postponing IPOs.

I hope I am wrong for this one!

(Note that the combined valuation of Parkway and Acibadem were USD4.4 billion (RM14 billion) when they were taken private. How much do you think the listed IHH would be? Would Khazanah be willing to take a valuation cut if it is going for RM15 billion or less? Hence the question, is Khazanah that desperate to sell?)  

Anyway, is the term 2nd largest misleading as it only owns 12.2% of Apollo?

Despite all the positiveness, the business of private healthcare which has a great advantage i.e. its pricing inelasticity is facing greater competition in future. I still like the IHH private healthcare group though as a business but the issue here is price. Frankly, I do not see the need to rush this IPO. If Khazanah is not valuing the IPO at in excess of RM15 billion, why do they need to let go part of the group at a lower price especially when the purchases were made at a high price. They could have waited it out and do the IPO by 2013 or 2014. I do not believe this is a political IPO either unlike the Felda IPO which they need to be quick.

Other article on IHH IPO:

IHH IPO: Where's the beef?

Thursday, June 7, 2012

Should EPF reinvests into KFC?

Unlike the McDonald's franchise, KFC is a franchise which has garnered quite a bit of corporate news in Malaysia over the years. If you noticed the history of KFC franchise in Malaysia, it has changed hands quite a few times. The reason for this is that KFC is a very strong franchise particularly in this region and over those years, the owners that controlled the franchise are never that financially strong to really stake their claims decisively. Hence, on one hand the franchise itself is attractive (as it is a strong cash generating business with good dividends) but on the other hand, parties that are acquiring the controlling stake are never able to consolidate their positions in the group. In its history of owners, most of them are having the wrong mindset when comes to its ownership - they see KFC as the golden goose - not knowing that it was still a business which they really need to nurture for growth.

In 2005, with the assistance of CIMB as the debt financier, Johor Corp managed to take control of KFC via its control of QSR (holding company of KFC). Unfortunately, Johor Corp was exactly in the same mould as the scenario I mentioned above. They are never financially strong to see through it but on the other hand, they know that it is a golden goose. They are reluctant to sell the goose. In keeping the goose however, their debt ballooned. (CIMB as the hand that fed them will definitely not sit still and allow that to happen - as the nation's most INNOVATIVE investment banker, why not make more from other fees besides the income from interest). Hence, the pressure for the Johor Corp Group to restructure their finances. To restructure, they need to do something with KFC.

As in the above structure, although Johor Corp is able to control KFC, effectively it only has 15.1% stake in the fast food franchise. Even though KFC is the golden goose assumingly, there are not much to be reaped from the group once it reaches to Johor Corp. The 15% effective ownership is not going to solve its debt problem even though KFC gives good dividend. One must remember the prized possession here is KFC, not QSR and not really Kulim. Johor Corp nevertheless has control of the group through the layered ownership despite the continuous mess surrounding KFC's structure.

To top off the mess, the Johor Corp group made some related party transactions which from news pissed off EPF. In an unusual move EPF which owned some 10% of KFC sold off its entire invested stake in KFC. I am not sure what are the reasons which caused this but if you look at some announcements, KFC was buying several pieces of land from Johor Corp for development of new restaurant sites and other business purposes. Transactions like this would be hard to quantify especially on its valuations and other strategic reasons.

Now with the new structure, EPF is back to KFC. It seems that EPF has already changed its perception in Johor Corp for them to now decide to have effective 25% control of KFC group. What makes them change their mind? Better control now? Tough one to convince I would say as the ultimate controlling shareholder remains the same. If those concerns however are really resolved, then I would say KFC is worth it as there are not many assets like this out there.

Wednesday, June 6, 2012

BJToto divesting Sports Toto into a trust in Singapore - My view

Do you see something coming when Ananda Krishnan divested his Tanjong's gaming business? Quite interestingly, rumour has it that it was his son (who is a Buddhist monk) who advised him to sell, as owning a gaming business is against his Buddhism practice. Perhaps, but my question is would he sell the business when it was enjoying good growth. At least that one went the right way towards education. I actually liked it.

This BJToto deal on the other hand goes in the name of unlocking value as apparently the stock is being avoided by Shariah compliant funds. By going to Singapore it will be able to attract more funds - really? More funds yes but not necessarily better valuation. The fact of the matter is that gaming business in Malaysia is not enjoying growth anymore.

In fact as seen above, the last 3 years revenue growth stagnated while profit dropped. BJToto for the Berjaya family is still great. It is literally a money printing machine (in fact better) as their costs are just the paper and printers where the numbers are being printed from. No more marketing, no more mind boggling ideas on how to grow the business. At the end of the year, they still earn in excess of RM5 million salaries and tonnes of dividends. Who would want to let go business like this?

For other shareholders though, what used to be a great investment, the holding of BJToto has become purely a dividend share for the last few years with no capital appreciation. No doubt to some, it is still decent though as the yield is more than your FD now. However, do you know that Berjaya is squeezing more money from debt to pay you?

By reaching out to Singapore, do you think they will be able to expand the gaming business. Expand yes, but competition is also much greater. The fact of the matter is that gaming business globally has become more open and competitive. Tell me which government will provide Berjaya Group gaming license, like the one given by Malaysian government 20 years ago where it was a monopoly for lotto and just 2 other competitors for the 4 digit gaming business. Seriously, what was once ideal later became a business - it was supposed to provide funding for Malaysian sports, hence the name.

Another example of gaming gets tougher - Just look at the mess Genting is getting into in New York now.

The writer feels that gaming actually is more than a political lobbying business.

Tuesday, June 5, 2012

YTL Corp offering YTLP - WB shares to its shareholders - any catch?

I received a question on the potential rationale for YTL to offer YTLP - WB shares to its shareholders at a ratio of 1 warrant share for every 15 shares held. The offered price is RM0.20 per warrant which is a substantial discount from its current traded price of RM0.415.

My opinion:
  1. Subscribe as it is a discount to the traded price anyway. You have 2 options after the subscription - sell it or exercise it. The warrant is in the money. Or about there, depends on timing.
  2. As in my earlier opinion, YTL selling the warrants are due to they are not interested to exercise the shares as doing so would increase the debt of the parent anyway. As it is, the Group is already heavily geared with around RM24 billion in debt. It does not mean that the company is in trouble but they are more interested to reduce their debt at this moment of time rather than increase the gearing.
  3. The cheaper offering may not mean that YTLP-WB current share price will be largely affected as YTL Power's current price is decently attractive. My take is that since they are to announce the warrant offer (shareholders will not know this until they announced), the slow drop in YTL Power's shares are probably due to this as it is the intention of YTL Corp to dispose off the warrants. They want to have a low and attractive price to allow shareholders to take up. If the price is not low, nobody would care to take up anyway.
  4. Disposing off the market would look bad on the group, much more difficult and almost impossible. Hence, it looks good by doing a one off exercise such as this. At least on paper.
  5. By offering the warrants, they are obviously asking you to exercise the shares as they need more cash. YTL Corp is not going to do the exercise.
  6. This exercise as below, will allow YTL Corp to realise immediate gain of RM55.6 - RM60.2 million as announced below. YTL Corp's original costs was RM0.1185 per share. Why Not for them?
As published in the announcement:


The Proposed ROS is undertaken by YTL Corp with the intention of rewarding its shareholders by offering YTL Power Warrants to the Entitled Shareholders at a discount to its prevailing market price. Further, the repayment of borrowings from the proceeds of the Proposed ROS is expected to give rise to interest savings to the YTL Corp Group.

1 The total cash proceeds to be raised under the Proposed ROS cannot be determined at this juncture as it will be based on the actual number of Offer Warrants subscribed for by the Entitled Shareholders and/or their renouncees.

2 Based on the Offer Price and assuming full subscription of the Offer Warrants by the Entitled Shareholders and/or their renouncees, YTL Corp expects to raise cash proceeds from the Proposed ROS of approximately RM136.5 million and RM147.7 million under the Minimum Scenario and Maximum Scenario, respectively.

3 The proceeds from the Proposed ROS, after deducting expenses in relation to the Proposed ROS (the quantum of which have yet to be determined at this juncture), will be used to repay bank borrowings of the YTL Corp Group and is expected to be fully utilised within 12 months from the completion of the Proposed ROS.

1 Share capital and substantial shareholders’ shareholdings
The Proposed ROS will not have any effect on the issued and paid-up share capital of YTL Corp and the shareholdings of its substantial shareholders in YTL Corp.

2 Earnings per share (“EPS”)
The Company’s average cost of investment for each YTL Power Warrant is RM0.1185. Based on the Offer Price and assuming full subscription of the Offer Warrants by the Entitled Shareholders and/or their renouncees, YTL Corp expects to realise a gross gain from the Proposed ROS of RM55.6 million and RM60.2 million under the Minimum Scenario and Maximum Scenario, respectively. The gross gain will increase the EPS of YTL Corp by approximately 0.54 sen under both the Minimum Scenario and Maximum Scenario. Upon the exercise of the YTL Power Warrants by Entitled Shareholders and their renouncees who have subscribed for the Offer Warrants, the earnings contribution from YTL Power to YTL Corp will be diluted. Nevertheless, this dilution will not have any impact on the earnings of the YTL Corp Group for the financial year ending 30 June 2012 as the Proposed ROS is expected to be completed after 30 June 2012. Upon completion of the Proposed ROS, the dilution is not expected to have a material effect on the earnings of the YTL Corp Group.

Reply from the Deputy CEO / CIO of EPF

I received a reply through my facebook from the Deputy CEO of EPF,  Dato' Shahril Ridzuan - here are his reply with regards to my articles on his share trades and ownership in MRCB and being offered IPO shares through his directorship in FGVH.

Dato' Shahril Ridzuan:

I noticed your postings on FGVH and MRCB with interest. I just wanted to clarify that at EPF, we have clear policies prohibiting our staff from trading on the markets due to potential conflicts of interest. These policies do allow our staff to sell securities that they owned prior to joining EPF.

In relation to FGVH, I had already declined my IPO entitlement and had in fact asked them to allot it to the settlers instead. I believe the prospectus has to legally state that I am entitled to subscribe if I want to.

In the case of MRCB, all my shares in the company are from the company ESOS and rights issue. As you know, I was the MD there for several years and a large chunk of my entitlement vested after I had joined EPF. I have never acquired shares from the open market. Subsequent sales have been to settle my financing under the ESOS scheme and also to reduce my holdings in MRCB to reduce its weightage in my own personal finances.

I hope that clarifies the points raised. Appreciate if you could also let your readers know. I tried to leave a comment on your blog but it didn't seem to work...

Also, this is a personal reply since the references in your postings seemed to be about myself (rather than EPF) and I want to assure you that I have, and will continue to, always act professionally in the interests of EPF.

My comment:

I would like to thank him for his quick reply and in my opinion he is definitely doing the right thing by rejecting shares in FGVH. Kudos to him for offering his portion to the settlers as the 800 shares per settler's family is a little pathetic, don't you think. However, seriously come to think of it, imagine - there may be a mess if too many shares are allocated to 112,000 households. The selling can be uncontrollable. Maybank for example has 60,187 shareholders as at 8 Feb 2012.

I would like to apologize if my postings harm him in any manner as it was never my intention to do so but rather as an observer who would like to protect his live long savings as well. I wish him the best.