Friday, November 9, 2012

Icap: My opinion on some of the remarks made on The Star

It seems interesting that both parties - Tan Teng Boo and representative from Laxey are appearing on The Star to rally for votes from the shareholders.
Here below, I am trying to find whether rationale from Tan Teng Boo makes sense:
Point 1
Tan, however, pointed out that a share buyback in a closed-end fund such as would benefit only short-term investors looking to make a fast buck.
It’s not quite true. It seems that over the years iCap has accumulated cash sitting on a low interest income from short term deposits. One would say that he is waiting for opportunities. It does not matter however if a fund allows people to make fast buck as a closed end fund is a closed end fund. It is different from an open ended fund. In a closed end fund, the fund manager is not afraid of the shareholders selling as the total number of shares remain the same. The fund manager is in control of the amount of cash and equity he holds. There is no fear of run in the fund. If the share price of the fund trades far below the NAV, he can initiate a buyback which will improve the value of the fund further, which I am supporting him to do. I am perplexed why he is adamant that this is not a good option or even consider it.
Point 2
The top 30 shareholders of have remained since 2006, he said.
Not quite right. See below.
Top 30 shareholders 2006

Top 30 shareholders. 13 shareholders (see the one underlined) remain in the Top 30. Some of them are related party like Yeoh Ah Tu, Capital Dynamics, Tunku Sara
Point 3
“Hence, it would not matter if the discount between the share price and the NAV narrowed, because, these shareholders are in it for the long haul.
“If Laxey comes in and initiates a share buyback, this means that it will be using the fund's excess cash to boost's share price, which will only benefit short-term traders,” he said
I do not think so. In fact, once the fund initiates a call for share buyback (say if the share price is traded at below 90% of its NAV, the management initiates a share buyback), I doubt the share price will trade much below 90% anymore. Investors will be cognizant of this. How is this benefiting short term traders only and not benefiting the fund? Is the fund manager too against short term traders benefiting? In this case, both parties are benefiting.
Point 4
Furthermore, for a closed-end fund like, share buybacks would not work, Tan said.
He pointed out that share buybacks to increase the share value for companies such as IOI Properties and AirAsia Bhd, would work as they have their business operations and are not reliant on their cash pile to generate profits for the company.
However, in the case of, its cash is its main asset and that is needed to invest in other equities in order for profits to be made.
Look below. iCap is not a fund that time the market (as it did not time 2008 market crash very well. It was holding too little cash for the 2008 drop. In fact, it held to cash since 2010 which was too early). ICap is a fund that is good at picking stocks. But yet it continued to hold on to cash (1/3 of NAV) until today. By doing some buy back at a very much discounted price from NAV, it is making better use of its cash.
iCap's cash holding
Point 5
“If it is using that cash to buy back its own shares, how can it buy other equities, and thus add value to the fund?” he asked.
Share buyback is adding value no matter how it is termed if the price bought is below the NAV. In this case, it is way below NAV. The only worry for not buying back is that the fear of the funds NAV will deteriorate in the short term future. If that is the case, then one should not buy the fund either. This is where we cannot foresee.
Point 6
On Laxey's statement that the board should concurrently engage advisers to research other methods to permanently remove the substantial discount at which the shares trade, Tan said this would imply that the fund would be liquidated.
“How else do you permanently remove the discount between share price and NAV without liquidating the company?
Not necessary, liquidating is selling out and closing the fund. Share buyback is not selling out. In the share buyback, there is an option to resell back the shares to the market. Anyway the option to buyback is up to 10% (under guidelines by SC) of the total shares. It is not like the call is to buy all the shares or half of the shares.


Malaysia Stock Talk said...

Those who had attended the previous AGM would probably understand better why share buy back does not work for close end fund after listening to the elaborated presentation by the representative.

Share buy back may reduce the NAV discount in short run as it is NAV accretive.

But what is the fund going to do when the share buy back hits the 10% limit? As the market becomes aware that the share buy back has hit the limit and no further share buy back is expected, the discount may start to widen again.

What can a close end fund do with its treasury shares?

Sell back in the market will exert down pressure on the share price. NAV discount will widen.

Canceling the treasury share will reduce the fund size and make the trading of the fund more illiquid. Market will price in a discount on the lack of liquidity and the discount is expected to stay long term.

Can the short-sighted Laxey partner really help? The share price of one of their funds has dropped more than 50% since inception and the NAV discount is even wider than that of Icap's! More worrying is that two of their funds are being wound up and those invested since the fund was launched are suffering huge loss!

It is sometimes good to have new blood in and organisation but definitely not bad blood.

Big Sea said...

I am strongly against share buy back.
I have seen too many examples of undervalued company performing share buyback having no impact on the share price. In fact, I see share buy back as an opportunity for insider to sell high. I would prefer dividen.

Having said that, I feel that the reasons given by TTB on share buyback or dividen are lame excuses.

I don't like TTB but I am not going to vote against him just because of a small discount between share price and NAV. I still see TTB more trustworthy than Laxey.

felicity said...

Respect the opinion. In fact I have written the good side and bad side of buying back shares in my previous articles. Check Jobstreet and Pelikan. But in this case it is clearly a stock that is undervalued to its NAV and the answer to improving the NAV further is share repurchases not dividend.

K C said...

The main aim of investing in equity is to maximize return from our, the shareholders' money. What is wrong that if the big discount persist, liquidate the fund? Let say on 21/6/12, the NAV was 2.94 while icap closed at 2.14 with a discount of 27.2%. I have RM10000 invested in icap. On liquidation and assuming assets sold at NAV, I will have RM13738 to invest in a fund managed by felicity. Assuming the yield gives me a net yield of 10.7% per year. In 5 years my fund size will grow to RM22,900. How much icap share (and its NAV) has to grow a year. That is 18% for 5 years. Which is more likely scenario? felicity giving me a 10.7% return or TTB gives me 18% return for 5 years? I know TTB has done well for icap for the last 7 years. But I highly doubt he can continue to yield that kind of return for another 5 years. The law of probability is against him. Am I short-term?

Bn911 said...

Support TTB !!!

yhtan said...

iCap premium gone after financial crisis, during year 2008.

Let's see what he does during FYE 2009.
Bought - Astro, AirAsia, KLK, Boustead, Poh Kong,
Sold - TMI (Axiata) at huge losses, VADS and Air Asia.

Bought - Suria, MSC, Boustead and Tong Herr
Sold - Astro, KLK, Lion Diversified, Poh Kong, Swee Joo and TM.

Bought - Coastal, MSC and Suria
Sold - Hai-O, Mieco (AFAIK in losses),

Sold partial of its portfolio.

So my opinion is, he was punished by the minority shareholders. As your chart is shown, some of the top 30 shareholders reducing stake and those minority shareholders was lesser year by year.

If he hold KLK and TM by now, iCap would be making much more profit.

Bn911 said...

Can listen to an interesting clip here,

Peter Lim said...

Very well written article, and i totally agree with your point.

I realize one of the possible reason TTB rejects outright share buyback is that he's worried that there are more and more sellers, causing:

a) Fund size shrinks and shrinks (even though NAV per share increase, but that's not his concern, as he owns so little shares in icap), and possibly leaving him little money to manage,

b) CDAM's fees shrinks and shrinks. The fees are tied to SIZE, NOT performance. How is he going to explain to Tengku that the management fee shrinks ?

c) Possibly he doesn't know much about share buyback? Look at his response about KLCI with Dividends answer. Thus, if it's possible he doesn't know about KLCI with dividends as a fair comparison, probably he's also not aware of "what is share buyback".

CrabGrill said...

Hi Felicity,

What do you think about HDBS which the NAV is much higher than the Price? Dividend yield is low. Very much similar to iCAP but the management appear to be the controlling interest, and so not possible to be attacked.

felicity said...

HDBS is entirely not possible to do anything although the stock is undervalued based on NAV.
If you compare the deal involving ECM Libra and OSK, HDBS is definitely attractive but I would rather not bet on this industry at all.

CrabGrill said...

I just wonder as the NAV continue to grow, could it be 80% to 100% dividend payout sometime later? Otherwise ROE will look bad.