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:

RATIONALE FOR THE PROPOSED ROS

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.

UTILISATION OF PROCEEDS FROM THE PROPOSED ROS
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.

EFFECTS 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.

Deciphering FELDA's IPO - really that attractive?

FELDA Global Ventures' (FGVH) IPO (2nd largest in the world this year) is a listing which is creating buzz over the Malaysian media more so for its political reasons rather than valuations. If you read the main media, the ruling government is claiming that the IPO is an exercise which will protect the future of more than 112,000 FELDA households. Whereas the opposition is claiming that it is an exercise purely for the coming election where the government is trying to conjure votes through immediate imbursement (RM15k per family) to the settlers of whatever partially thats raised from IPO. However let's look at how attractive the IPO is especially when the government is pushing through the offering during a period where many companies in the region are postponing theirs.

Let's look at some of the basic fundamentals of the listed entity - FGVH (from the prospectus):

• third largest oil palm plantation operator in the world (344,000 hectares) with significant equity (49%) ownership in the largest CPO producer (3.3 million MT) in the world. As a comparison, Sime Darby has 522,000 hectares while IOI Corporation has 158,000 hectares;
• largest sugar producer in Malaysia through MSM - great;
• several other investments overseas including business segment producing soybean and canola products in Canada (loss making unit), oleochemicals in US - I am wondering why is such a large palm oil producer investing into a soybean and canola producer (not everything is in the name of diversification);
• claimed to have experience and professional management team - frankly, I do not have the ability to vouch this, however I would believe its competitors such as IOI, KLK, Sime are more efficient. For example yield per mature hectare for IOI is around 24MT, while for FELDA, it is around 18 to 19MT. Its ability to improve yield remains to be seen as FELDA is not a new entity after all - it could have achieved a better yield pre-listing, if it could;

Who gets to subscribe

Based on the prospectus, there are 5 parties who will get to subscribe for the IPO:

- settlers (only 2.5% - based on calculation, these settlers will only be allotted 800 shares per family which is insignificant. The question is why are they only allotted 800 shares per family.)
- employees (3%)
- public (2% - another insignificant portion, hence don't bother to apply)
- MITI approved Bumiputera investors (11.5% - apparently it is 17x oversubscribed)
- other institutional investors (41% - among names are Louis Dreyfus, Guoco Group under Quek Leng Chan, state agencies such as Pahang and Sabah, Chua Ma Yu, Qatar Holdings)

Only 7.5% for retail while 11.5% for MITI approved bumiputera

Hence from the list although the total offering is up to RM10 billion, in actual fact the public portion (eventual float) is pretty small. This strategy is probably to protect itself from large scale sale upon listing as what was experienced by Facebook in its recent IPO. From the list, parties that may be interested to sell in the short term are the retail and MITI investors (total 18%) while the other investors (which they called cornerstone investors) may be advised not to sell. Some of the potential investors such as Louis Dreyfus and state agencies are strategic investors anyway.

From that list, it is not difficult for any party to support the share price assuming the price per share is RM4.55.

Valuation

Upon IPO, the market capitalisation is RM16.6 billion assuming its price is RM4.55. What about its Proforma Income Statement.

From the 2011 numbers, historical PE will be around 17.6x - Not cheap for an IPO, hence I am wondering whether it will get a premium of at least RM1 as what many people are speculating. In fact, 2012's first quarter results dropped against its 1st QTR 2011. What about its NA after listing as this is a agricultural company which owns land and cash from the IPO. Not that attractive either - 67% of its listing price.

Achieving a RM1 premium would have caused the company to have a market capitalisation of RM20.2 billion and historical PE to exceed 20x. Considering FGVH's structure where the settlers are working on the land in smaller scale and with follow on sale of the Fresh Fruit Bunches to FGVH for further processing, it will never be able to achieve the scale of much larger commercial entities like IOI Corp, KL Kepong and Sime Darby. As a result of that, one tends to provide a good discount to a less efficient entity. Against its competitors, FGVH's valuation is as below.

Let's assume that upon listing, FGVH will be able to reduce its debt and increase its production, hence providing better profits to its shareholders - how much better could it conjure up? Considering the controversies surrounding the structure and its political struggle, FGVH's IPO cannot afford any failure especially to the government. As a result of that, I am suspecting its share price to be supported in the short to medium term, but in the longer run (say after 1 to 2 years) - who knows how it will turn out to be?

As a longer term investor, I probably am better off buying Sime or IOI.

I am also reading from analysis (probably they got it from FELDA's analysts' briefings) that with the IPO fund raised, FGVH will be aggressively acquiring assets in Africa and Indonesia. Question - is it really that easy? 

My question is how do we value "aggressiveness". Do we put a higher premium if FGVH says that they are going to be aggressively expand its business downstream? If this is case then we should not put a high valuation for companies that pays high dividend as by paying dividend, they are not being aggressive. Are we contradicting statements?


Latest: Louis Dreyfus has pulled out from participating in the IPO.

You may also be interested on:
Will EPF buys into FELDA now that its CIO is a director?

Is there anything wrong if EPF's CIO trades the same stock for himself and you?

After the findings of FELDA directorship and shareholdings, I looked through Annual Reports of MRCB, a company where Dato Shahril Ridza is a director and EPF acts as the controlling shareholder. I found out something which to me is not right and worrying. Acting as the Chief Investment Officer (CIO) of EPF and director of MRCB, he trades on both sides - which means as an individual shareholder of MRCB and CIO of EPF, he trades MRCB stocks for himself and EPF. See below where I have summarised his holdings from MRCB's Annual Report.

EPF is the controlling shareholder of MRCB.

Notice that from the chart below when he purchased shares of MRCB on his personal capacity, MRCB's share performance was at its low and he started to sell down, the shares of MRCB was at its high.

This is not an attempt to attack any person, however I feel that as the CIO who is in charge of more than RM470 billion (one of the most powerful person in the world in terms of money management), he should not hold any shares that EPF invests into. It is important for a person who holds such a position to have strong discipline in what he is doing especially how fund owners perceive him to be. Already, the ever growing EPF fund is holding more than 35% of its total fund in equity - and it is growing. As the CIO of EPF, he is representing all working Malaysians in terms of our retirement funds. The misnomer of trading MRCB shares on his personal capacity while double acting as the leading investment officer of the largest fund in Malaysia is just plain wrong.

I do not hold any trust funds, as I am one who does thorough checking on anything I own whenever I decide on having it especially investments, however with EPF I have no choice - and to see this is saddening. Frankly, I am sickened by it.

Related article:
Reply from the Deputy CEO / CIO of EPF

Will EPF buy into FELDA now that its CIO is a director / shareholder post IPO

I am not interested in FELDA's IPO, but I am interested in protecting my money in EPF. You know what, after browsing through FELDA's prospectus I noticed something - the current Deputy CEO and co-acting as Chief Investment Officer (CIO) of EPF is also a director of FELDA.

As a director of FELDA, he is to be provided some shares - 150,000 to be exact (see below). With the retail pricing at RM4.55, that 150,000 shares is to be worth RM682,500.

I am still not interested in FELDA but my question is that will he as the CIO who can use his position to invest on behalf of all the EPF contributors be buying FELDA's shares. If he is, will that be considered as conflict of interest? Can someone let me know or SC check this if happens that EPF is taking up some stocks?

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I have the hunch the government will get EPF to buy into FELDA as it needs those funds to provide better support for FELDA's stock price. Anyway EPF is into most KLCI stocks after all and FELDA is a very large listing - I am quite sure EPF will be in there.

If EPF is putting its money into Felda, then Shahril should resign from one of the position - either EPF or FELDA. Don't tell me he overlooked this being a person of such high position - or is it that he doesn't care with his potential immunities.

Related article

Deciphering FELDA's IPO attractiveness 

Reply from the Deputy CEO of EPF on him being offered IPO shares in FGVH