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 iCapital.biz 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 iCapital.biz 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 iCapital.biz'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 iCapital.biz, 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 iCapital.biz, 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.