Saturday, April 02, 2011

Featured Post: Legg Mason Sold Every Single Share Of Perisai They Had Bought On 23 Mar 2011

Apparently Perisai is getting interesting.

It's not surprising because hot stocks are hot for a reason.

It can really fly up, up and away to the moon!

Seriously, take Perisai. As commented in the posting, A Little Chat With Dali On Perisai , Perisai was 73 sen on 23 Mar and by 31 Mar it hit a high of 93 sen.

Now the date is rather interesting and an announcement posted on Bursa was rather revealing ( I would also say many thanks to Prashan for highlighting it in the posting A Little Chat With Dali On Perisai )

  • From corrosion experts, to marginal fields and now to corporate Kamasutra. What is it with this former MD. Enter new management and the hoopla continues. And then come along the hallowed research houses that lap up dollops of blue sky from management and dribble it on reports. And others too who do their bidding, complicit (front running) or naïve, I wonder. Legg Mason have come and gone too. Did it smell a rat. Something smells rotten in Perisai.

Here's the revealing announcement on Bursa website: Notice of Person Ceasing (29C) - LEGG MASON, INC

Notice the purchase date: 23 Mar 2011.

Notice the disposal date: 31 Mar 2011.

Legg Mason on a short term trade?

WOW! Bursa share market so attractive meh?

And get this, the number of securities disposed: 35,393,700!! wow!!!

Man, they sold everything, yes they sold all the shares they had purchased on 23 Mar 2011.

Are they such a short term trader? Or is they something wrong?? ( Err... I don't think I will use the RHB report as mentioned in the posting A Little Chat With Dali On Perisai )

So how?

Now in a hot market, anything can and will happen. Needless to say, sometimes good rational reasoning and discussion will be ridiculed. As quoted by blogger snowball from the Good Stock Bad Stock, " .. those people that said that this is too theoretical, too non-real world. "Talk so much for what, as long as I make money from Perisai, okay already-lah")

Sadly how true that statement is. When someone is punting on the stock, they would find every which way to discredit any negative whispers on their stocks. Even highlighting the potential risk is a huge sin!

And since it's a hot market, when the stock moves up, they would boldly brag "See, talk so much for what? You are all talk! Do you even know how to make money?" or they will say "Your theory all wrong. If your theory is correct, why did the stock moved higher? Did you see that bloody stock soar so much higher?"

Some will even twist it! Yes, in order to stop your negative comments, they would use this as the perfect opportunity to put you down! Very easy. They will blame you and suggesting they had missed out on making money just because of your posting!


No joke.

You are wrong because the stock says so!

If so, what's the implication? Are they suggesting it's wrong to discuss or to use rational, logical thinking to justify one's investment or even trading?

The fact is the stock market will never ever agree with you ALL the time!


Stocks. They are stocks. Nothing but stocks. Anyone can buy a good or a bad stock. And anyone who has enough financial capital can drive any given stock up or down. Yes, a bad stock can be driven up. And guess what? A 'good' stock can be also driven up or down.

So what are we going to do?

What are you going to do?

What are you going to base you punt/trade/invest on?

Don't you even need strategies? Or don't you even need a rational thinking?

And hey so what if the market don't agree with you? Yes so what? Your own strategy is based on your own logical justifications. And if the market don't agree, so what? Are you going to die because you missed out on a so-called market opportunity? Can you die missing out on opportunities?

Take a look at the casino. Every day there are some huge winners. Are you going to make yourself a miserable just because you consider it a crime to miss out on these opportunities?

Yeah... exactly!

Get real.


Oh back to Perisai. ( LOL! Told you it was a long winded posting. :P)

So Legg Mason has announced that it had dumped all its Perisai shares it had bought on 23 Mar 2011.

Now this brings me to to snowball's posting "Oi Perisai, Apa Macam Lu Punya MOPU Manyak Mahal? Buat Dari Besi Kereta Perisai-ke? - Part 1

It's a very good posting. (Damn! Snowball, I need to retire already. :P )

Before you read it, if you own shares or if you have an open trading position in Perisai, do think for a moment, think from a different perspective.

Err.. yes.

Think for a moment. Imagine Perisai is not a traded entity. And you have zero interest.

Now read the article. ( Why? Sometimes people think differently just because it's a stock!) Here's a section from snowball's posting...


So, here's an attempt from an accounting student from the 98% of the population that are not smart enough to figure out oil and gas trying to talk oil and gas. The following discussion may contain material misstatement of information, but, I am trying my best to reduce the factual error. You may wish to skip the geeky technical term on the discussion. The technical term is just to make sure that I got most of the things correctly.

When I say I can Fly, It Doesn't Mean I Can Really Fly...

When the management said that the MOPU costs USD70 mil and that Nagendren (the seller and ex-shareholder) spent USD40 mil to refurbish it, we just take what they say at face value. Here's the first lesson on "Skepticism 101-Skeptic for Dummies"- When I Say I can Fly, It Doesn't Mean I Can Really Fly. When the management says the thing cost USD 70mil, it doesn't mean that bloody MOPU really cost USD 70mil. We should at least try to look at whether the figure is logical for that particular type of asset.

For people with limited knowledge, the easiest way to find out is to find comparables. Are there any similar MOPU that are being constructed recently? Trying to find even a single comparable is pretty hard as most O&G contract normally is being awarded in a package i.e. you have your MOPU, floating production, storage and offloading (FPSO) unit and etc. Even if you find a pure MOPU contract, that MOPU contract may involve chartering, maintenance and others. To find a pure MOPU engineering, procurement and construction and commissioning (EPCC) is a rather difficult job. In fact, if this deal were to be announced a month earlier, we do not even have a comparable.

However, some pure timing coincidence sees Kencana(KHL) being awarded an EPCC contract for MOPU at a cost of RM115 mil! Here' the link to the article and the relevant excerpt:

  • Under the Contract, KHL is to undertake the engineering, procurement, construction and commissioning (“EPCC”) of MOPU and WHSS for Sepat Early Production System off the coast of Terengganu. The total value of the Contract is estimated at RM115 million. It is a one-off EPCC contract and is expected to be delivered to the ultimate client, Petronas Carigali Sdn. Bhd. within the third quarter of calendar year 2011.
The contract awarded to Kencana is actually part of a bigger contract awarded to Petrofac under an open tender system. The MOPU portion is being sub-contracted to Kencana. The ultimate customer of this project is actually Petronas Carigali. Here's the link to another relevant article that state that only Kencana is responsible for the MOPU part and no one else.

  • Local partners supporting Petrofac on this project are Kencana HL, which will add all the processing equipment to the MOPU, and BumiArmada which will supply and install the FSO. The Front End Engineering and Design (FEED) work for the project was carried out in Petrofac's specialist FEED office in Woking, UK.

For those who are interested on the technical term FEED, here's the link to wikipedia description of FEED. It is basically a pre-project phase where engineers plan for the project. So, it is a very low cost phase and if part of the cost should added onto the final RM115 million cost, it would not be substantial. Plus, Kencana actually builds two things for RM115mil, they are not building the MOPU only.

Another technical term is Early Production System (EPS), people may mistaken Kencana contract as for EPS rather than for a MOPU, but, here's the definition of EPS by Petrobras - "installations which permit the entrance in operation of wells or areas, in a short space of time, to attain certain objectives which do not justify (technically or economically) the use of fixed or permanent installations." Basically the MOPU is part of the EPS. In certain instances such as marginal oil field, as stated in this article, EPS may be sufficient to drill for oil without the need of using a fixed or permanent platform in the marginal oil fields.

With all that technical stuff being clear up, I think I can be pretty certain that Kencana is also building a MOPU for production in marginal oil fields in Malaysia. Kencana build it for RM115mil while our friends in Perisai said that their MOPU cost RM210 mil (taken directly from filings, without adjusting the discount in value of the share component of the acquisition), almost 83% more than Kencana.

It is possible that Kencana MOPU is a "Proton" and Perisai MOPU is a "BMW". But, why you need a BMW when Petronas says a Proton is sufficient? It is like driving a Ferrari in a bad traffic jam in KL, the extra horsepower of the Ferrari is basically useless. Does the geological condition within Malaysia changes so much that in one area, the specification of a MOPU require to drill for oil in one area is RM115mil while in another area it cost RM210 mil ? It kinda defeat the purpose of the "M" in MOPU which stands for Mobile right? These MOPUs are supposed to be usable in any part of the country. Assume that in certain parts of the country really need a BMW-like MOPU, why on earth would Petronas want to drill for oil in an area that the CAPEX costs twice as much while the oil being drill from those area basically sells for the same price as oil from a low CAPEX area? Lol..I don't know. We can ask the "expert" at Perisai why their MOPU cost 83% more...

Rational Pricing and Brainless Pricing

To be fair to our friends in Perisai, let's assume that they indeed purchase a BMW-like MOPU. Let's assume that their MOPU indeed cost RM210 mil. Now, we move on to another area, the pricing of the entire deal itself, not just the cost of the MOPU. Perisai has been very sneaky, it tells the whole world that the cost of the equity portion is RM210 mil (same as the cost of the MOPU). What they do not tell us, at least not in a direct manner, is that, they will take on RM120mil of debt as well. Very smart, place the debt part in the footnotes.

  • (1) The increase in total borrowings assuming the consolidation of the assumed borrowings of (i) the Target Company of RM120 million and (ii) an additional of RM150 million raised via external borrowings to fund the cash consideration for the acquisition of the Target Company.

This is taken on the footnote of their reply to Bursa query. They assume RM120mil of debt on top of the RM210mil paid to Nagendren. Since when does debt is not an important part in an acquisition? There is not a need to tell shareholder on how much debt you have taken? To hide in under the footnotes seems to indicate that Perisai do not want the shareholders to know.

So, this is not a RM210 mil deal, this is RM320mil deal. A 57% increase. What did Perisai buy for RM320mil. Well, they say that the MOPU cost USD60-70mil, so let's take the top range of USD70mil to be conservative. So, they pay RM210mil for the MOPU. The debt that is assumed is actually used to pay for : (i) an earlier start in income generation as building a new one actually took 6 months only and (ii) the 2+1+1 Charter contract. For this two perks, Perisai is paying 1.6x of revenue and 3x earnings, just to have that MOPU earlier. sounds like those people that pay a huge premium to buy the latest IPhone from the black market because it is not being launch in their country yet. Let's give Perisai a benefit of doubt and see whether paying RM120mil for the 2 perks is a rational decision or not.

Let's assume that it actually took another 6 months to design, negotiate and seal a deal to construct a MOPU on top of 6 months to construct the MOPU. So, it take one year to design and build a new MOPU from scratch. Based on earnings estimate of RM40mil per year, the maximum you would pay for a one year of head start is RM 40 mil because if it cost more than that, it is better to construct a new one. Then, there is a charter contract, Perisai is basically paying RM80mil (120-40) for that Charter contract. The charter contract is a 2+1+1 year contract, so, Perisai is paying another 50% of the potential earnings from this contract. In addition, it is a 2+1+1 year contract, it is not a direct 4 year contract. The "+1+1" in most contract is basically a renewal option, if both sides agree, then only the contract is extended. So, if their customer do not agree in the third year, the contract will not be renewed. means that Perisai is paying RM80mil for a chance to earn the contract is not renewed in year 3, they will lose RM40mil [80mil from 2 years of earnings- RM120mil (cost of early headstart +cost of charter contract)]. Seems like a pretty brainless decision, don't you think? You pay RM120mil for the option to lose RM40mil...The current MD is actually an actuarial science grad, aren't actuarist suppose to be good in numbers?

I don't know what to say. But, if any CEO of the companies I invested in actually get into such a blatantly disadvantaged contract, I would faster run away.


Me: How? What do you think of snowball's set of reasoning? Is there any justifications?

Seriously, if Perisai is not a stock and if there is absolutely zero money making opportunities, ask yourself, what do you think of all this?


And do take into consideration the Legg Mason trading issue.

Ah... why did Legg Mason dump all their shares they had bought?

Seriously, are Legg Mason fund stock market philosophy based on such short term?

What if... yeah... what if Legg Mason saw something it didn't like?

And snowball ends with a couple of ps (ds give his posting a read. It's much longer than what I had pasted here)

P.S: The deal is valued at around RM330mil, Perisai market cap is RM581 mil and its latest equity is RM233.5 mil. It is 57% of market cap and 141% of equity. To ignore this huge transaction and keep on buying regardless of the risk you are taking is irresponsible.

P.P.S: The whole MOPU inclusive of the jack up rig cost USD75mil (RM225mil), assuming all the money has already been paid up, which is not really a sure case, Nagendren fork out RM105 mil, while borrows the remaining RM120mil. For the risk that he is assuming for less than a year, Nagendren makes exactly 100% returns on his investment ([330-225]/105), a pretty decent return by any standards. It is so good that, even Buffett would be envious of his return.

( hey snowball, do not bother with those who thinks you talk too much. It's like this one la. Once they have a vested interest in the stock, they will find every which way to stop you from talking. Just tell them your talk is cheap and you have plenty more of it. :) )

Recent postings on Perisai:


snowball said...

Hi Moolah,

Thanks for highlighting. LOL..don't retire-leh, I actually search your site before buying any stock in Bursa in case you found something funny in that stock.

Moolah said...


I heard that it's fun to retire.


solomon said...

Moolah, u better retire late.....haha

In a normal circumstance, Legg mason special trust fund would not unwind so soon. They only have jcy and sap crest in their Malaysia portfolio. Just that they don't intend to be wrong spotlight??

Oil and gas, it is not a straightforward biz. A lot of other perisai not successful in the bid of the. MOPSU if another party flourish with it, then how leh?

Another thing MOPU by KEncana and MOPSU by perisai, one may miss out the storage and processing part. Technical specification difference and client requirement also can varies the contract pricing.

Ok then, back to my angry bird rio game.
I think u r rite in corporate governance issue. MOPU

elizabeth said...

Somebody once came with a similar 'too good to be true' proposal. Invest x amount of money to purchase an equipment, and you can get it back in 4 to 5 years. Some more, got ready customer tied down by a 'no way out' contract to rent this equipment. My immediate response was, where got such good deal? In the end, it turned out, the customer who is supposed to rent the equipment was part of the scam to deceive. After buying the equipment, no customer!!!! Like the chinese saying goes, you will not find a fat female pigeon hopping on the street!!

snowball said...


Yup, the initial plan, while the jack up rig is still at Perisai hands is to covert it to a MOPSU, but, the current one that they are buying back, based on the Bursa filings, is a MOPU.

But have to agree with you that, client specifications may cause the price differential. For that, we will never know.