Corporate Exercises: Accounting’s games that have no value add

Bonus Issue, Share Split, Share Consolidation, Capital Reduction, Special Dividend Payout (Capital Repayment) and Share Dividend and any other types of corporate exercises have no value add to the shareholders’ value. Even Right Issue with an issue price that is lower than the market price will not have positive impact to the shareholders’ value. If the shareholder who does not want to further pump in more capital into the company by subscribing the additional Right Shares at a discount to its market price, the shareholder’s right will be greatly diluted.

Basically these kind of corporate exercises are transferring the money from the left pocket to the right pocket in disguise to mislead the shareholders that their value in the company has increased. Do you think the value 10 pieces of RM10 would be more than the value 1 piece of RM100?

There are always justifications from analysts about the corporate exercises would bring positive impact to the shareholders’ value, whereby my opinion is “it depends”. So what could be the actual impact of such corporate exercises? Please refer below:-

1) Increase the number of shares will increase the liquidity of the shares will reduce the illiquidity premium and thus share price would increase;

2) Supply of shares increase substantially and this would shift the supply curve right-ward and thus decrease the share price; and

3) Most of the corporate exercises do not change the shareholders’ value of the fund but they engage investment bankers to carry out the corporate exercises, and these investment bankers are not cheap. So the shareholders’ value indeed decreases due to expenses pay investment bankers.

Of course analysts would try to play around the abovementioned points to justify when to “buy and sell”. When the market is in bull run, they would say it’s good to have Bonus Issue as it increases the liquidity of the shares; when the market is in bear mood, they would say Bonus Issue will cause excess of supply which subsequently reduce the share price. Basically I would say these analysts have no view and are bullshitting.

As a conclusion, a company will only increase its shareholders’ value through its daily operating activities, not via some kind of complicated corporate exercises or financial activities. Know how to calculate the basis of the corporate exercises would be the way to discover the trick of the accounting games.

My Update

Previously I have been sharing some investment analysis on certain stock or sharing the experience of attending AGMs, but I realised I'd be either too lazy to write so much on the same stuff and sometimes cannot recall what I have observed during the AGMs. I always can't keep on updating the long stories that I was writting and thus I trully feel sorry to those who were following my blog.

I just started a new job in an investment bank recently, and the work load becomes quite heavy lately and always work long hours, so I can't concentrate on writting long story in the blog. In view of this, from now on, I'll only write something in short and spontaneous to what I can think of. And I would like to say thank you to those friends who would be keep visting my blog once a while in the future.

How to evaluate a company's fair value? I'm puzzling.

Let me share some of my investment experience of analysing a company's fair value.

1st I'll check the company's management, if the quality of the management is good then I'll further check out their intrinsic value. If they are not integrity enough such as the "Berjaya" gang of companies are out of my radar screen.

2nd step is to evaluate a company's fair value. But what methods I should use? It depends on whether we are insider? Are we the substantial shareholder and be able to impose decision making onto the company's management and subsequently affect the distribution of the company cashflow?
1) If you are minority shareholders, maybe Discounted Dividend Model (DDM) is suitable.
2) If you are controlling shareholders, then Discounted Free Cashflow Model (DCF) could be a good tool.

However, these discounted models are too complicated because a lot of the people don't know how to use financial modeling to project future dividends/cashflows and subsequently to use the correct discount rate and constant growth rate to get the accurate PV. A small fault input or assumption could have lead to a disastrous outcome by using these models.

Then people would tend to make life easy by using P/E, P/B or P/S. But these relative valuations have their own weaknesses due to irregualr year of financial results and thus P/E, P/B or P/S could be invalid for certain years. In addition, certain ratios only applicable to certain sectors. For example P/B could be good for banking or property stocks because they rely on their asset to generate value, but it is not a good indicator for knowledge intensive sector such as IT companies since they make business base on human resource, not physical assets.

In order to justify the application of relative valuations, analyst would tend to get a normalised or average ratios for P/E, P/B or P/S by removing some of the outliers. Subsequently they further supplement these ratios by comparing with the Adjusted Net Asset (book value). IMHO, it's stupid to value a company base on NAV, because doing business is forward looking, so we should not evaluate a company based on its historical figures. If a company is making losses but sitting with huge base asset, what's the point we buy a company's at a discount to its NAV knowing a negative retain profit is gradually shrinking the company's NAV?

With all these absolute and relative valuation models, oh hell! they still cannot get us the exact valuation. So there are another value investing strategy comes to play that we should buy a company with a margin of safety to it's intrinsic value. At the end of the day, all we can see that we don't have some rocket science tools to get us the actual value but a vague range of valuation.

In order to understand a company's valuation, it all depends on how good is our business sense or instinct, how well we can understand the business model and how far we can look beyond the business prospect. It's not necessary to become well equipped in academic theory and historical numbers in order to be a good investor or else there would be a lot mathematicians, statisticians and historians become success in investment.

I like the quote from John Maynard Keynes as he had once said "It is better to be roughly right than precisely wrong”. The same quote does apply to value an investment because it's an art, not a science or mathematics.

ICAP's 6th Annual General Meeting (Part 5)

About the discussion of the discount to NAV, I have missed one very important part that mentioned by TTB. TTB said in the AGM that he was puzzled about the discounting situation in ICAP. He suggested that the discount could be due to investors in Bursa Malaysia still has long way to pick up their confidence to invest in the share market, and thus there are still quite a number of companies traded in discount to their net asset values or net book values and ICAP is one of them. Moreover, majority of close-end funds are typically traded in discount, either be those funds are local fund or foreign fund. However, according to TTB’s view, he believes that ICAP would be back to trade in premium due to cost awareness, no derivatives, no leveraging and more important is value investing philosophy.

TTB further argued that why investors should not take the share price too heavily when making investment decision. Indeed he always encourages investors to look into value, and for the case of ICAP, the yardstick to evaluate its value is to refer to its NAV. Since ICAP is currently trading in discount, it’s a very good period for investors to buy ICAP now. Because TTB believes that ICAP is well managed and thus its future NAV will be higher than the current NAV. So it’s better to have a discount to a rising NAV rather than to have an NAV that is falling. He further provided an example at February 2009, ICAP’s NAV was about RM1.5 and it was then traded in a huge discount at a price roughly of RM1.2. Subsequently the ICAP’s NAV recovered during the share market rally and stand at about RM2.2, the market price of ICAP also increased along side with the NAV as well to RM1.9. He further told the shareholders if any investor who bought ICAP shares at February 2009 and hold those shares until today, the investor would have made more than 50% of return within 1.5 years even thought the share price is still traded in discount to its NAV today.

Anyway, TTB stressed that he is working his best efforts to close the gap of the share price and NAV. Holding the “Investor Day” seminar after the ICAP’s AGM is one of the efforts that he is taking. The share buy back scheme would be another solution to solve the discount issue, though TTB mentioned he will only consider share buy back if the discount is deep enough.

(to be continued)

ICAP's 6th Annual General Meeting (Part 4)

Finally it came to the voting session to approve those proposed agenda. However, there was an incident happened during the voting process. The company secretary wanted voters to raise their hand with the ‘shareholder card’ given in order to indicate they approve the said agenda. However, we were confused at that moment because we did not receive any ‘shareholder card’ from the organiser. So the voting process was becoming chaos and shareholders inquired why we need to show the ‘shareholder card’ then only we can vote and we were not given with the card. The company secretary explained to us that some shareholders might assign proxies to attend the AGM, and it was possible a shareholder could assign two proxies. In order to limit one shareholder only have 1 vote, so one of the two proxies, who were assigned from the same delegation, can vote if he has the card. Later the company secretary apologised to us that she made a mistake because the rule of voting with the card had been cancelled and thus every shareholders or proxies can vote. I was not quite pleasure to this announcement made by the lady because she should not make this kind of mistake and confuse the shareholders. Some more she was doing a right move initially because there was only one proxy can vote with the delegation of voting right from the shareholder. And now everyone can votes will lead to a situation that two proxies can vote from the same delegation and thus it is unfair to those shareholders who do not assign two proxies to vote. Luckily the shareholders had no different opinion or dispute over the 6 agenda and approved the agenda unanimously or else the voting result can be challenged in the court. I hope this kind of mistake will not repeat in the next AGM.

The second half of the AGM was the presentation of investment portfolio of ICAP by TTB. I divide the presentation into two parts: presentations of the investment portfolio and of the economic outlooks.

The following information is the listed companies that the fund held as at 16-June-2010 (refer to the 2010 annual report):-
1) Parkson Holdings;
2) F & N Holdings;
3) Boustead;
4) Petronas Dagangan;
5) Padini Holdings Bhd;
6) PIE;
7) Suria Capital;
8) Integrax;
9) Tong Herr Resources;
10) Malaysia Smelting Corp;
11) Mieco Chipboard; and
12) Hai-O Enterprise.

TTB also explained to shareholders why the fund disposed the share of the following companies as stated below:-
1) Astro All Asia Network plc;
2) Kuala Lumpur Kepong Berhad;
3) Lion Diversified Holdings Berhad;
4) Poh Kong Holdings Berhad;
5) Swee Joo Berhad;
6) Telekom Malaysia Berhad; and
7) Hai-O Enterprise.

(to be continued)

ICAP's 6th Annual General Meeting (Part 3)

I still recalled the ICAP’s extraordinary general meeting holding at last year of which the motion of investing overseas was rejected by most of the shareholders. In view of this, the management of ICAP mentioned that the board and fund manager was proposing another plan to invest overseas and they were waiting for the approval from the relevant authorities. However, after so many months, there is no any feedback from the relevant authorities as told by the Board. Though they kept telling us that once they received any new update from the authorities, they will let the shareholders know about the latest update via announcement. Even TTB once almost want to tell the shareholders what is the proposal they are working on hardly to get the authorities approve, as TTB told us his hair growing grayer and grayer during these few months as a result of this issue, but he just stopped telling almost us more due to the confidential of the proposal and probably the company is barred from disclosing any immaterialised proposal to the public.Anyway, TTB said there are still a lot of opportunities in Bursa as the fund is still able to achieve a remarkable return by just investing in Bursa. He pointed out that investing overseas is no rocket science that can guarantee us a higher return. He further provided more evidence to prove that even investing in Bursa can have a return that equal or bit a lot of overseas counters such as DBS, Cheong Kong and even Berkshire Harthaway. The return of the fund of also at least equal or more than a lot of local famous stocks like Genting and Maybank (interesting to know that Maybank’s share price still lower than its pre-Lehman crisis price) of which a lot of investors might not aware of.

The next issue to be discussed is the share price of ICAP is traded in discount to its net asset value (“NAV”). As a shareholder stated that ICAP’s share price has traded in discount since the Lehman crisis. He hoped the management can take the discount seriously and make some effort to close the gap in between share price and NAV. Because his concern was that if he invests ICAP for short term and would like to dispose it in the nearcoming future, he might just liquidate the position in ICAP for a loss. TTB immediately rebuff that he would not take a short term investment decision into consideration to solve the discount issue, as he explained the fund ‘s objective has stated clearly in the IPO prospectus that it is a fund aims to achieve capital appreciation in long-term period. So he will not let any individual short term investors to influence the fund not to comply with its mandate. So I interpreted that TTB just indirectly told the shareholder that it is his own mistake to make losses by investing ICAP due to his short-term tenure, instead he should not have invested into the fund from the beginning.

Some shareholders also proposed that the fund to distribute dividend with a yield rate to be par with the fixed deposit rate or the fund can initiate a share buy back scheme and distribute those treasury shares as share dividend. While I’m quite interesting to the proposal of share buy back, I totally object the distribution of dividend. As I have mentioned in many elsewhere before that the objective of setting up the ICAP fund is to make capital appreciation in long run. So what is the purpose of distributing cash back to shareholers? What is the purpose we invest capital into a fund and later want to take back the cash before it is long enough for the capital to appreciate, and end up need to put the cash back to the fund again?

Don’t forget that ICAP is a close-end (“CE”) fund, it is not like the open-end Unit Trust (“UT”) fund that can issue new units to get fresh proceed if those unit holders re-invest the dividend. For a CE fund, once it distributed cash, it has less proceed to invest and whatever the re-investment decision made by unit holders has nothing to do with the CE fund, and thus the dividend policy greatly reduce the speed to accumulate wealth through the fund and thus defeat the objective of setting up the fund. ICAP’s another objective is to implement value investing strategy, which means it always need to sits with a lot of cash and wait to buy stocks at a price that discount to their valuation at a right time. So after distribute cash back to shareholders, then how the hell ICAP going to buy cheap stocks? Sometimes I just dislike why there are lot of old man buying ICAP shares (as I observed that a lot of aged fellows who attended the AGM and year by year keep asking the fund the pay dividend) and not the young people be the majority shareholders of ICAP? So old people with age retiring mind please leave ICAP alone and pick other dividend stocks instead (for those people who are old but with young mind you are still welcome). And as usual, TTB just took the dividend proposal back to the shareholders that it is up to the shareholders to decide. If in the next AGM the shareholders decide to have dividend to be distributed, the fund will then deviate from its long term value investing objective, I’m sure I’ll be the first one to dispose its shares and other value investors may follow so, then we will see if the price discount issue will be solved or becoming wider.

Regarding the share buy back scheme, TTB mentioned that he will consider to advise the fund to work on the scheme if the market price of ICAP is deeply traded discount to its NAV, for example a 50% discount. Whereby my opinion is not to reject share buy back scheme, but we first need to consider some of its disadvantages and whether could it really solve the discount issue. First, share buy back will reduce the free-float number of ICAP shares and liquidity will reduce subsequently, thus it may not narrow the discount and instead it could make an even wider discount. Second, ICAP may use the cash to invest some potential investments that give a very attractive return which could outperform the discount. Currently the discount of ICAP’s price to its NAV range from a 10% to 19%, so we assume as ICAP could buy back its own shares at an average price of 15% to its NAV, however it can also invest the cash to buy other more potential stocks that achieve a return that higher than 15%, so which one is a better choice?

(to be continued)

ICAP's 6th Annual General Meeting (Part 2)

The shareholders continually stood out to inquire more questions during the agenda session. One of the shareholders asked what is the rational that the fund is holding so much of cash as reported by the annual report. TTB was not pleased that the shareholder was asking this question due to he not reading the annual report of which at page 3 has stated that “…your Fund sold all of them before 15 April 2010 as it wanted to raise its cash holdings It was extremely worried over a full-scale currency and trade war breaking out between the US and China. Such an outbreak would be extremely harmful to the global economy.” He asked the shareholder goes to read the page himself about the reason why the fund is holding cash.


Another shareholder further request TTB should reduce the cash holding at a high level at RM103million, and he wants the fund to utilise the cash efficiently rather sitting it in the fixed deposit account. TTB then said as the US unemployment is still high at around 9% and he is troubled by the US politicians might try to convince the US voters that the high unemployment rate is caused by the Chinese’s manipulation of the yuan currency and thus the threat of trade war due to the friction in between the US and China still exists, especially during the period that the US is going to have a state election at end of this year. Anyhow, TTB mentioned that if the threat of the trade war fades away, he will try to seek opportunities with good bargain prices and invest the excessive cash.


One of the interesting questions being raised by the shareholders was that why the Company hires Harun Bin Halim Rasip (“Harun”), who is the co-chief executive officer of Integrax Berhad (“Integrax”), as the independent non-executive director. As the shareholders are concerned about the conflict of interest in between Integrax and ICAP since ICAP has substantial investment at Integrax. The shareholder further pointed out that to have an Integrax’s CEO in the board of ICAP, it may cause a perception that ICAP could be using insider news of Integrax to trade. For my opinion, conflict of interest happens not only possible that ICAP to take advantage of Integrax by using insider news to trade, it could happen the other way that the related party to Integrax might also try to influence ICAP to invest more into Intregrax. Though TTB and Harun tried to explain that the fund manager’s investment decision would not be affected by the Board of ICAP and they further provided other reasons to justify the conflict of interest is minimal, I was not convinced by the justification. Anyway, it’s a norm that a person can be directors for multiple companies due to Bursa Listing Requirement of which allows him to do so. Hope Bursa can amend such requirement to curb the conflict of interest incident.


Before the agenda session was going to through the voting process, there were 3 more issues being raised by shareholders of which I was also quite interested to. The 3 issues were the update of the approval of the relevant authorities to ICAP’s proposal to invest overseas, the discount of market price to net asset value and the dividend policy.


(to be continue)