I am a shareholder of ICap. So are my family members albeit small shareholdings. I think by now you would already received notice from the management company, under Tan Teng Boo who is asking you to consider long term investment vs short term return.
I am a long term investor by nature. However, the main reason why I have invested into ICap was mainly due to its share price was way underpriced. At the time of my purchase it was at 26% discount. Another reason is that it is a long term fund which suits me.
As mentioned during my purchase, I was not considering dividends either but as long as the fund manager protects the interest of its shareholders. I have read of commentaries that the fund has stocked up with "yes men" in its board, which to a certain extent is true. In fact, ICap has added 2 directors after my purchase - one from the ex-DAP fame (Tunku Aziz), another from UMNO - Dato Dr Noraesah (both whom I do not like). Naturally, most companies do appoint their friendly directors, if they are allowed to and if minorities do not make any demands. ICap's shareholders have never demanded anything, which is why there have not been any share buybacks despite the fund trading at huge discounts, provide dividends, capital return etc.
One of the commentators mentioned that Warren Buffett has never provided any dividends from his trademark Berkshire Hathaway. True. However, recently whenever the company reaches below 110% of its NAV value, he commenced buyback of the company as he deemed that the company was way undervalued. Whenever the share price trades above 110% of NAV, he will stop the buyback.
Now, my mistake as well as Tan Teng Boo's (read one of his quarterly) is that we thought Laxey Partners is there to support the management. It may not seemed to be or is the fund acting as activists fund?
My say is that for those who are going to the AGM, hear both parties out. Having alternative board members in the board may not be a bad thing as it actually allows better corporate governance. Yes, most people are for their own investments. Who aren't? I am, as in protecting my own investment as well.
Tan Teng Boo with Capital Dynamics has done well for iCap, but that is not a license for him to do anything. As I have said, he is paid with a very good fee and last year alone he was paid more than RM5.9 million based on 1.5% x NAV + fund manager's fee.
The right decision to do when the fund was way undervalued was to do share buybacks (if the AA allowed to). Although being a smart investor, he did not do that, and as a shareholder, you should ask him why rather than agreeing to all that is done by the management company.
My say is let's hear all parties out. Do not blindly appoint your directors. Besides 5 seeking elections, there are actually 4 more seeking re-appointments. Just remember, it is not just about the 5 seeking elections.
Monday, November 5, 2012
Saturday, November 3, 2012
Lesson on iCap: How do you attack a Closed-End Fund
Something is definitely brewing for this usually inactive closed end fund, iCapital.biz. Firstly, as in my previous article, this fund has been trading way below its Net Asset Value (NAV) for a while now. While the fund has continually been trading at steep discount, sometimes as high as 29%, Laxey Partners and City of London Investment Management Fund (both UK based) have been slowly but religiously accumulating the stock for more than 8 months now. As at now, both of them have accumulated close to 14% of iCap. Note that the discount between the stock price and NAV has closed its gap, with just last Friday itself iCap rising 6 sen to RM2.38. Its latest NAV is RM2.96 hence still trading at close to 20% discount.
What is the probable reason? Just 2 days ago, Icap announced that Laxey Partners is requesting for 3 board seats in the next AGM on 10 Nov 2012. Read below properly.
Laxey Partners is requesting for 3 board representatives, iCap countered back with 2 others (besides some who are up for reappointment) where one of them is a former CEO of F&N Malaysia (now I can see some links as iCap does hold F&N). iCap currently has 6 directors and the maximum allowed under its Article of Association is only 7. Hence, already there is a small war here as some names will not end up as directors at the end of the voting. And as you can see this war could turn major. It could go to as far as the fund being liquidated.
The question is with the representation from Laxey assuming that it manages to get its representatives into the Board, what could potentially happen. Dividends and even liquidation comes into my mind. As I have mentioned before, the reason why some people are not interested in this closed-end fund is due to no dividends paid by the management. It seems that there are other reasons as well, such as fees.
I am not surprise by the management's decision not to pay dividend as their income are measured by the NAV (x 1.5%) annually consisting of management (0.75%) and investment advisory fees (0.75%). The more dividends it pays, the lesser the NAV. Hence, it is rightly so that it protects its turf by not paying.
Now, the irony is that Laxey Partners under Andrew Pegge did the same thing 5 years ago on Amanah Millenia Fund. Laxey basically accumulated up to 19.41% of Amanah which was then trading at a similar huge discounts to its NAV as well and basically garnered enough friendly votes to liquidate the fund. The only difference was, Amanah was not a well-performing fund. iCap is.
How will the war penned out?
Actually, I don't know. Based on the statistics of shareholders, I am not sure who will support who. The thing is that Capital Dynamics Asset Management and several directors collectively hold around 3% of the fund. They will have friendly parties but I think that the bulk of the shareholders are pure shareholders who basically invest for long term. Nevertheless, I do sense that the situation could be quite dire for Capital Dynamics.
I have tried looking at the movement of shareholders. Over the last few years, the number of holders actually consistently decreased, which is not surprising as some are just taking profits while others were not willing to wait. They could have been the weaker and shorter term holders.
In what situation can the fund be terminated? I do not have the Article with me but I am guessing that it will need 75% approval from shareholders through a special resolution. See below.
First things first though, which is the appointment of directors - what will happen in the coming AGM? I don't know, but if the fund is going for liquidation, I think most neutral investors may opt for it as immediate return would just overwhelm long term wait, at least in this case - which means they would be supporting Laxey Partner, the gwailo fund company. Hey! Over the last few years iCap has not been doing much and investors can just take the money and and buy F&N, PDB and Parkson themselves, if they want to.
Another thing, I have a feeling that this presents trading opportunities at this moment, as some people might want to snap up the shares so that they can be strong enough to fend off any decisions to take away the funds. Hence, if Capital Dynamics is really in defense mode, the shares may in fact trade right up to just a slight discount from its NAV. I am actually surprise why Capital Dynamics does not see this earlier though. To me, if it really is terminated, just represents a big blunder on the part of the management. To me, if the existence of the fund is under attack, the management has got to provide more than managing it well - after all they are being paid very well.
What is the probable reason? Just 2 days ago, Icap announced that Laxey Partners is requesting for 3 board seats in the next AGM on 10 Nov 2012. Read below properly.
Laxey Partners is requesting for 3 board representatives, iCap countered back with 2 others (besides some who are up for reappointment) where one of them is a former CEO of F&N Malaysia (now I can see some links as iCap does hold F&N). iCap currently has 6 directors and the maximum allowed under its Article of Association is only 7. Hence, already there is a small war here as some names will not end up as directors at the end of the voting. And as you can see this war could turn major. It could go to as far as the fund being liquidated.
The question is with the representation from Laxey assuming that it manages to get its representatives into the Board, what could potentially happen. Dividends and even liquidation comes into my mind. As I have mentioned before, the reason why some people are not interested in this closed-end fund is due to no dividends paid by the management. It seems that there are other reasons as well, such as fees.
I am not surprise by the management's decision not to pay dividend as their income are measured by the NAV (x 1.5%) annually consisting of management (0.75%) and investment advisory fees (0.75%). The more dividends it pays, the lesser the NAV. Hence, it is rightly so that it protects its turf by not paying.
.png) |
| Management fee of 0.75% per annum |
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| Investment advisory fee |
 |
| Same story re-hatched from Amanah Millenia Fund 5 years ago? |
How will the war penned out?
Actually, I don't know. Based on the statistics of shareholders, I am not sure who will support who. The thing is that Capital Dynamics Asset Management and several directors collectively hold around 3% of the fund. They will have friendly parties but I think that the bulk of the shareholders are pure shareholders who basically invest for long term. Nevertheless, I do sense that the situation could be quite dire for Capital Dynamics.
I have tried looking at the movement of shareholders. Over the last few years, the number of holders actually consistently decreased, which is not surprising as some are just taking profits while others were not willing to wait. They could have been the weaker and shorter term holders.
 |
| No of shareholders as presented in its Annual Report |
 |
| The only thing I can find on the clause for the fund's termination from prospectus |
First things first though, which is the appointment of directors - what will happen in the coming AGM? I don't know, but if the fund is going for liquidation, I think most neutral investors may opt for it as immediate return would just overwhelm long term wait, at least in this case - which means they would be supporting Laxey Partner, the gwailo fund company. Hey! Over the last few years iCap has not been doing much and investors can just take the money and and buy F&N, PDB and Parkson themselves, if they want to.
Another thing, I have a feeling that this presents trading opportunities at this moment, as some people might want to snap up the shares so that they can be strong enough to fend off any decisions to take away the funds. Hence, if Capital Dynamics is really in defense mode, the shares may in fact trade right up to just a slight discount from its NAV. I am actually surprise why Capital Dynamics does not see this earlier though. To me, if it really is terminated, just represents a big blunder on the part of the management. To me, if the existence of the fund is under attack, the management has got to provide more than managing it well - after all they are being paid very well.
Friday, November 2, 2012
I think I'll say "X" to AirAsia X's IPO
The draft to SC just published. I had a quick view to see how this low-cost long haul airline is doing and for the IPO, would it be attractive. Let me provide some of the numbers which I have captured.
Notice the tapering off in revenue especially for FY2012. This could be perhaps due to the moving of routes from London, Paris, Christchurch to other shorter lower priced destinations like Sydney, Osaka and Beijing. It seems that competition is different for Airasia X. Airasia, the parent had a good headstart of competing against a poorer and weaker MAS. However, probably for the long haul, competition is different. It could be against many other airlines which uses Malaysia as hub. They could also be of much stronger competitors as compared to MAS. AirAsia X additionally could be selling more discounted price seats as compared to short haul flights.
One example, anyone who flies to Sydney, may opt for connecting via Singapore and uses SIA. In a short haul flight, if I am to fly to Bangkok, my options are lesser. No stopover for sure, hence the short haul Airasia is a very good point to point airline. In a short haul flight, a 30% lower in air-ticket price is an important decision making factor for someone to choose.
For a longer haul flight, it will be harder for AirAsia X to reduce costs as the major cost, it seems is fuel costs - up to 60%, which is a major problem for a low costs airline as it is much harder to reduce that part of the costs. Ancillary revenue does not seem to be a major factor than I thought it would. As much as Airasia X is trying to sell the extras, I think it does not translate to enough income yet for it to turn into good profits.
On its major costs, See below.
Balance Sheet
For Airasia X's balance sheet, it will be looking for immediate cash (similar to the IHH's IPO symptom) to beef up its balance sheet. In fact, more than 55% of the funds to be raised will be for debt repayment. Also look at the cash level. Remember, a huge sum of Airasia's model is based on early cash collection. Hence, it is collecting upfront ahead of its flights which would be scheduled later on. Look at the accounts payable as well as sales in advance figure (a whopping RM271.5 million against cash of just RM24.8 million as at 30 June 2012). Those upfront collected cash are parked under the sales in advance until the flights take off. The more it is in this situation, the more dire it needs to sell early and at very cheap price.
Shares on offer
AirAsia X is offering 790,123,500 shares out of which 197,530,900 are offer shares from current shareholders. According to reports from Bernama via MalaysianInsider.com, it is trying to raise RM760 million. An updated report says that Airasia X is trying to price the shares at between RM1.20 to RM1.40. Assuming it is priced at the low end of RM1.20, hence could potentially be valuing AirAsia X a whopping RM2.844 billion. That's very expensive for an airlines which is still small although riding on Airasia's branding.
Enlarged share capital upon listing
As in other IPOs of recent, the shares are being offered to again mostly institutions. There are only 3% on offer to retail investors. After Astro's IPO which I think most of them are still underwater, I wonder how many will pick up - especially the MITI's portion. Hence, people will learn that there are no free lunches in IPOs.
With the limited routes and just 11 planes in the balance sheet, I think I'll give this a pass especially with the assumingly high price for still a loss making company.
For any potential investors, it is a high price for purchasing hope. From here, I can say that a low costs long haul may be a different ball game. I like Airasia, but not this one although I myself like the cheap flights.
For update on Airasia X's IPO, please read here.
 |
| Still loss making despite profits in FY2010. Seems like FY2012 will not be a good year either. Note the deferred taxation in earlier years of FY2009 and FY2010 |
One example, anyone who flies to Sydney, may opt for connecting via Singapore and uses SIA. In a short haul flight, if I am to fly to Bangkok, my options are lesser. No stopover for sure, hence the short haul Airasia is a very good point to point airline. In a short haul flight, a 30% lower in air-ticket price is an important decision making factor for someone to choose.
For a longer haul flight, it will be harder for AirAsia X to reduce costs as the major cost, it seems is fuel costs - up to 60%, which is a major problem for a low costs airline as it is much harder to reduce that part of the costs. Ancillary revenue does not seem to be a major factor than I thought it would. As much as Airasia X is trying to sell the extras, I think it does not translate to enough income yet for it to turn into good profits.
On its major costs, See below.
Balance Sheet
For Airasia X's balance sheet, it will be looking for immediate cash (similar to the IHH's IPO symptom) to beef up its balance sheet. In fact, more than 55% of the funds to be raised will be for debt repayment. Also look at the cash level. Remember, a huge sum of Airasia's model is based on early cash collection. Hence, it is collecting upfront ahead of its flights which would be scheduled later on. Look at the accounts payable as well as sales in advance figure (a whopping RM271.5 million against cash of just RM24.8 million as at 30 June 2012). Those upfront collected cash are parked under the sales in advance until the flights take off. The more it is in this situation, the more dire it needs to sell early and at very cheap price.
 |
| AirAsia X's Balance Sheet is obviously not strong which is why it needs funds quick. Look at the cash level while long term debt is almost RM1 billion. |
Shares on offer
AirAsia X is offering 790,123,500 shares out of which 197,530,900 are offer shares from current shareholders. According to reports from Bernama via MalaysianInsider.com, it is trying to raise RM760 million. An updated report says that Airasia X is trying to price the shares at between RM1.20 to RM1.40. Assuming it is priced at the low end of RM1.20, hence could potentially be valuing AirAsia X a whopping RM2.844 billion. That's very expensive for an airlines which is still small although riding on Airasia's branding.
Enlarged share capital upon listing
As in other IPOs of recent, the shares are being offered to again mostly institutions. There are only 3% on offer to retail investors. After Astro's IPO which I think most of them are still underwater, I wonder how many will pick up - especially the MITI's portion. Hence, people will learn that there are no free lunches in IPOs.
With the limited routes and just 11 planes in the balance sheet, I think I'll give this a pass especially with the assumingly high price for still a loss making company.
 |
| Purchased aircraft |
For any potential investors, it is a high price for purchasing hope. From here, I can say that a low costs long haul may be a different ball game. I like Airasia, but not this one although I myself like the cheap flights.
For update on Airasia X's IPO, please read here.
Is Johor Corp underpricing KFC in its delisting?
Nobody will overprice a delisting, if they can. Johor Corp and partners are proposing a buyback exercise for KFC Malaysia at RM4.00 per share hence the entire exercise pricing KFC at RM3.3 billion. As a shareholder, I am trying to look at it realistically. The points raised by minority shareholders are very valid as KFC's share price has not risen much whereas over the last 12 months, other good quality consumer stocks were having sort of a run. To add to that, as a double whammy, KFC did not pay any dividends due to the prolonged delisting exercise.
Hence, shareholders of KFC are holding the shares without getting any payback for a longer period than expected while seeing other shares in the same space increased in value. Nevertheless, let's look at the company objectively besides KFC being just the strong franchise name over the years.
As you can see from above, while revenue, net cash from operations and net profits have been growing steadily, KFC Malaysia has been reinvesting as well. As a result, its free cashflow is not something to shout about. The debt situation faced by Johor Corp has caused it to declare dividends to reduce the burden of KFC Malaysia's ultimate parent. As a result, dividends have increased steadily as well while its borrowings at the same time increased as well. The multiple for cash / borrowings has deteriorated from 0.69x in 2008, the time when Johor Corp just managed to control KFC to 0.40x in 2011.
While the KFC brand name is good and still has room to grow, I think the comparison against other consumer stocks currently is not justified. Competition is greater today and it is not that its growth will be fantastic. The pricing provided for KFC is around 22.5x PE for 2011's income. Even if I think it is slightly underpriced, as a shareholder, I would be agreeing to the delisting. Remember, KFC Malaysia at the end of the day is still a franchisee.
Hence, shareholders of KFC are holding the shares without getting any payback for a longer period than expected while seeing other shares in the same space increased in value. Nevertheless, let's look at the company objectively besides KFC being just the strong franchise name over the years.
As you can see from above, while revenue, net cash from operations and net profits have been growing steadily, KFC Malaysia has been reinvesting as well. As a result, its free cashflow is not something to shout about. The debt situation faced by Johor Corp has caused it to declare dividends to reduce the burden of KFC Malaysia's ultimate parent. As a result, dividends have increased steadily as well while its borrowings at the same time increased as well. The multiple for cash / borrowings has deteriorated from 0.69x in 2008, the time when Johor Corp just managed to control KFC to 0.40x in 2011.
While the KFC brand name is good and still has room to grow, I think the comparison against other consumer stocks currently is not justified. Competition is greater today and it is not that its growth will be fantastic. The pricing provided for KFC is around 22.5x PE for 2011's income. Even if I think it is slightly underpriced, as a shareholder, I would be agreeing to the delisting. Remember, KFC Malaysia at the end of the day is still a franchisee.
AEON: It is not right
The decision to manage the purchased Carrefour Malaysia separately from AEON Malaysia is not a good decision. As a shareholder, how do we see it...
Firstly, there is a 51% owned AEON Malaysia managing the supermarket. And then the 100% owned AEON Big (now that it is going to be called) will be managed from AEON Ltd, Japan.
Synergy in terms of purchasing power is one thing. Competing against its own chain where there are nearby locations is a whammy. Just a scenario, what do you think the staffs and management of AEON Malaysia will feel and do? What do you think the shareholders will feel?
It does not go well with transparent decision making as well.
I have overlooked this matter and because of today's decision have decided to sell all the AEON shares.
Thanks to readers for highlighting.
Firstly, there is a 51% owned AEON Malaysia managing the supermarket. And then the 100% owned AEON Big (now that it is going to be called) will be managed from AEON Ltd, Japan.
Synergy in terms of purchasing power is one thing. Competing against its own chain where there are nearby locations is a whammy. Just a scenario, what do you think the staffs and management of AEON Malaysia will feel and do? What do you think the shareholders will feel?
It does not go well with transparent decision making as well.
I have overlooked this matter and because of today's decision have decided to sell all the AEON shares.
Thanks to readers for highlighting.
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