Saturday, July 30, 2011

DCF Can Lead To Large Mistakes!

Saw the following posting on Nakedcapitalism.

Some points to highlight...

  • In calculating this average, some paths turn out to contribute far more than others. In particular, paths that descend into relatively low rates and stay there for many years have a disproportionate effect — a path at 1 percent for 50 years, for instance, counts 20 times as much as a path running along at 7 percent. Change 50 to 500 years, and the difference becomes 10 trillion times.

    This demonstrates how simple thinking about the future can lead to terrific mistakes

Now I had made two postings on    (Discounted Cash Flow) before..

  1. DCF (Discounted Cash Flow) example
  2. Using the DCF
Let me reproduce the postings again...
1.  DCF (Discounted Cash Flow) example

Dedicated to Anon who asked about DCF.

I remembered this Wallstraits write-up on
GHL Systems way back in May 2003.

Here is a snippet of what they wrote back then.

  • Valuation Simulation This is not a forecast or recommendation
    GHL is likely to experience close to 100% growth again in the current year, 2003, and then growth will slow, we will assume to a sustainable 20% annual rate over the next nine years in this simulation. Current year (2003) full-year net cash flow from operations is estimated at RM 0.04 per share (adding RM 3.5m depreciation back to RM 6.5m net earnings-- RM 10m CF / 250m shares = RM 0.04). We will also assume a 5% discount rate (US Treasury risk free rate) and no terminal value of the business after year 10.

  • Given these assumptions (you may want to recalculate this simulation using your own cash flow, growth and discount rate assumptions), GHL’s intrinsic business value based on discounted cash flow expected to be produced from 2003 to 2012 is RM 74.5, which is approximately a 72% discount to the current market share price of around RM 0.21.

    PE check: If GHL does achieve cash flow per share of 8.3 sen in 2007 (5-years forward), and at that time GHL is valued by the market at 10-times cash flow, the share price would need to appreciate from 21 sen today to 83 sen, or an appreciation of nearly 300% in 5-years. Of course, GHL has only been listed on Mesdaq for a month, so our assumptions will likely need refinement as the quarters and years pass.
Firstly, do remember that this was a stimulation only done by

Anyway, I reckon that what interests you is how they did the cash flow table. Below is their table again:

Ok let me share with you my understanding of what is being done by Wallstraits.

1. Cash Flow.
First of all, for 2003, that 4.0 sen cash flow is derived from the following manner according to Wallstraits.
  • Current year (2003) full-year net cash flow from operations is estimated at RM 0.04 per share (adding RM 3.5m depreciation back to RM 6.5m net earnings-- RM 10m CF / 250m shares = RM 0.04).
So they added the 3.5 million depreciation back to their projected earnings of 6.5 million. Which will equal to 10 million. Divide that by 250 million shares, you would get a cash flow per share of 4 sen for 2003.

(What could go wrong here? The projected earnings of 6.5 million. Just for the record GHL did about 6.0 million (see here ))

2. DF or Discount Factor is assumed at 5%.

So a 5% discount of 1 would equal 0.95

(So far, a 5% discount factor still seems to be fair... but if the interest rates
were to increase some more... it would disrupt the whole table)

3. DV or Discounted value

The discounted Value = 4.0 x 0.95 = 3.80

Next column. We need to remember the next assumption made by Wallstraits.
  • we will assume to a sustainable 20% annual rate over the next nine years in this simulation.
1. Cash Flow.
In 2003, the calculated cash flow is at 4 sen. A 20% annual growth rate would see the cash flow increase by 4.0 x 20% = 4.8 sen.

2. DF
The discount factor was set at 5%. So the discount factor for 2004 = 0.95 less 5% = 0.91 (rounded up)

3. DV
The DV equals 4.8 * 0.91 = 4.36 (or 4.4 rounded up).
and so on... and so on...

So what could go wrong in these series of calculations?

the starting point of course. The staring point or the initial projected cash flow is utmost important. Put in an optimistic starting value, and you would get a rather optmistic end result.

the annual growth rate. Here Wallstraits assumes a 20% annual growth rate. Try a different growth rate, and you would get a total different value.

the discount rate. here it is assumed to be 5%. what if there is a drastic change in the midst of this time frame?

hope this helps...


2. Using the DCF

Dedicated to farnaway:

Using the same stimulation done by Wallstraits on GHL.

First of all here is Wallstraits table again.

And here is their interpretation of the table:

  • Given these assumptions (you may want to recalculate this simulation using your own cash flow, growth and discount rate assumptions), GHL’s intrinsic business value based on discounted cash flow expected to be produced from 2003 to 2012 is RM 74.5, which is approximately a 72% discount to the current market share price of around RM 0.21.
The total discounted value is calculated by adding all the sum of the DV from 2003 to 2012. Which they get a value of 74.5 sen per share. And when one compare this value to the market price of GHL in May 2003 of 21 sen, one would see that it is trading at a discount of 72%.

And from a Price earnings perspective, this is what Wallstraits had to say...

  • If GHL does achieve cash flow per share of 8.3 sen in 2007 (5-years forward), and at that time GHL is valued by the market at 10-times cash flow, the share price would need to appreciate from 21 sen today to 83 sen, or an appreciation of nearly 300% in 5-years. Of course, GHL has only been listed on Mesdaq for a month, so our assumptions will likely need refinement as the quarters and years pass.
Sounds fair, right?

now GHL latest quarterly earnings announced in Feb saw it reporting a net profit of 11.656 million. Depreciation was reported to be 6.368 million. Giving GHL a free cash flow of 18.024 million. And if one continued to use Wallstrait numbers, ie number of GHL shares at 250 million, this would equate to a free cash flow of 7.2 sen. And what was Wallstraits numbers? 5.8 sen. How?

And to complicate matters, GHL had a series of 1 for 4 bonus issue and also a 3 for 5 rights issue. All in which bloated the current number of shares to 551.480 million shares. And based on the enlarged share base, GHL free cash flow should be 3.3 sen for its fiscal year 2005.

Now, if i redo the whole table... using 10 million as the starting total cash flow and based on 551.480 million shares, the starting cash flow should be 1.8 sen.

And here is how the table should look like.

Let's look at the 2005 results. The stimulation showed cash flow per share to be at 2.59 sen. Actual? 3.3 sen.

Here's more intresting stuff... create a same table under Excel and play with some numbers...

The above was set using the initial cash flow at 5 sen. End result? total discounted cash flow f rom 2003 to 2012 would work out to 91.85 sen. (compare to 74.5). And at 2007, total cash flow is at 10.4 sen. (compare to wallstraits 8.3 sen).

Now let me change the starting point to 3 sen. And the below is the end result.

Total cash flow from 2003 to 2012 equals 55.11 (compare t0 74.5 sen) and 2007 cash flow per share is at 6.22 sen (compare to 8,3 sen). See how much difference it makes by changing the starting terminal point?

Ok. How about changing the annual growth rate? remember Wallstraits used 20% per annum.

Here is how the table would look like using a 25% growth rate and using 4 sen as the intial starting point.

The total discounted cash flow from 2003 to 2012 would now total 92.74 (compare to 74.5) and 2007 cash flow would equal 9.77 sen (compare to 8.3 sen)

Or how about just a 12% per annum growth rate instead of 20%?

End result? Total discounted cash flow would now total 51.03 sen (compare to 74.5) and 2007 cash flow per share is only 6.29 sen (compare to 8.3 sen)

See how complicated things get?

Ahhh... I could continue by changing the discounted factor... and the end result would differ greatly.

Hope this posting helps!



And how is GHL System doing?

As you can see, GHL is losing money since 2008.


Here's another good recommended posting:

Friday, July 29, 2011

Maemode's Mind Boggling Q4 Earnings

MaeMode announced its earnings. It looked impressive when you just look at the earnings alone.

Last quarter, Maemode had net profits of some 3.261 million

Last night, MaeMode said it had net profits of 12.499 million for its 2011 Q4.

Sales revenue for the quarter surged to a very impressive 242.183 million

Net profit for the year stands at 18.577 million. Last fiscal year, Maemode only had net earnings of 6.895 million only..

However, if one looks at the bigger picture, it becomes so clear..

Despite the huge jump in revenues, cash at the end of the fiscal year decline to just 20.949 million.

Total borrowings rose to 368.224 million. Look at how total borrowings increase every single year.

And its total receivables soared to a mind boggling 441.227 million!

Sales increasing, cash declining and the total borrowings and receivables soaring each year.

How long can this last?????????????????????????????????????????

Would you dare to invest in such company?

And don't you wonder why the receivables are increasing so much every single year??

What's happening?

Have the auditors review if the receivables are collectible or not?

Worse still, have the auditors checked the validity of the receivables?

What if.............................. ????

Thursday, July 28, 2011

And So OSK Explains It Has Nothing To Do With The NICE Fat Fingers That Crush DRB-CE To Bits

On the Edge Financial:

  • OSK clarifies on DRB-Hicom shares Written by Financial Daily
    Thursday, 28 July 2011 11:15

    KUALA LUMPUR: OSK Investment Bank Bhd said it is not involved in the substantial decline in DRB-Hicom Bhd’s share price on Monday.

    The investment bank’s clarification came amid market talk that the unusual sharp drop in DRB-Hicom’s share price in the final minutes of trading on the day was linked to the conglomerate’s call warrants. OSK Investment Bank is the issuer of the call warrants (DRBHCOM-CE CW).
    “We, the bank, would like to clarify that we were not involved nor did we have any prior knowledge as to the purported ‘trade error’ reported in the article,” OSK Investment Bank said yesterday in a statement in response to a report by The Edge Financial Daily.

    On Monday, DRB-Hicom shares fell 14% or 33 sen to close at RM1.95, making the counter the biggest loser on the local bourse.

    The sharp decline in the stock’s price occurred within 10 minutes prior to the close of trading and involved about three million DRB-Hicom shares transacted at RM1.95. Prior to this, at 4.48pm, the stock had changed hands at RM2.28.

    The call warrants were issued on Feb 2, 2011, at 17 sen each, and are due to expire next Monday. They have a strike price of RM1.95.

    According to the investment bank, the first valuation date for the DRBHCOM-CE CW was on July 25. There are five valuation dates and the settlement price which is used to determine the maturity cash settlement amount is the average of the closing prices of DRB-Hicom shares for the five valuation dates.
    As the closing price of the shares on Monday was RM1.95, OSK said there might “be a direct implication on the determination of the settlement price of the call warrant”.

    Yesterday, the warrants ended unchanged at 12 sen while DRB-Hicom shares added one sen to close at RM2.25.Since the warrants’ listing on Feb 8, they have traded between a high of 29.5 sen on April 8 and a low of 11.5 sen on March 2.

    During the last six months, DRB-Hicom shares had traded between a high of RM2.48 on April 6 and a low of RM1.73 on March 3.

    This article appeared in The Edge Financial Daily, July 28, 2011

So OSK says it is not involved.

Well no matter what's said, this trading error or fat fingers just so happened on the very first valuation date used to calculate DRBHCOM-CE settlement price.

No matter what happens after this fat fingers day or 25 Jul 2011, with the first valuation date price of 1.95, the DRBHCOM is screwed.

It's dead.

Yes, it's dead for those 'investors' who had bet on DRBHCOM-CE prior to 25 Jul 2011.

Think about it....

Just one fat finger day and the game is over for the call warrant.


Well OSK claims it has nothing to do with this trading error.

Let's have faith and believe them.

Ok... no problem.

So what's next?

The fat fingers day has killed the warrant. DRBHCOM-CE is dead and no matter what OSK will benefit from this fat fingers day.

Now since OSK claims it has nothing to do with it, so why can't OSK show good faith to the market and strike out that valuation day? Yes remove 25 Jul as a valuation day. Replace it with the previous day (22 Jul) as the the first valuation day.

After all it's a trading error and after all OSK says it's not involved.

How about it OSK?

Comeon... show us some faith.

Be a gentleman and do the right thing.

I hope this is not asking too much. How can OSK win in this call warrant and everyone else lose?

I hope this is not a lousy suggestion from me. :/

Where's The Enforcement Dude?

He finally did it. :)

A great must read posting: Enforcement is the problem, not the rules - from M.A. Wind on his brand new blog. CG in Malaysia.

Think about it...

You have all these rules and regulations.. which covers 'almost' everything... but then... there is lack of enforcement of the rules.


It won't be effective, yes?

It makes the rules and regulations redundant, yes?

Think about it...

Have a look at these old postings once again.

Compare the crime vs the 'fine' they got. If the fine is so small compared to the 'value' of the crime, what's there to stop future crimes for happening and happening and happening? Slapping the culprits with peanuts when the crime committed is worth million only encourage more wrong doing!

Take the examples mentioned in the posting. (some of the below are just direct copy and paste from the earlier postings)

The case of Well Multi Corp: 

SC said : both executives had furnished RM141 million in fictitious sales in its audited financial statement for the year ended December 2005

The stock: The stock surged from 92.5 sen on May 16 last year to RM3.32 on May 29, a whopping 258%. 

The punishment:  Each of the accused to one day’s jail and a fine of RM400,000 in default of one-year imprisonment

And from a Star Biz article: The lack of deterrent sentencing

Saturday October 30, 2010

The lack of deterrent sentencing


Pancaran Ikrab Bhd

Earlier this month, the construction outfit’s former managing director Ngu Tieng Ung was given a custodial sentence of one day and a fine of RM2mil for committing two counts of financial fraud involving RM15.5mil 13 years ago. Sessions court judge S.M. Komathy Suppiah allowed Ngu, 43, to pay the fine in 12 instalments starting next month, to be paid by the fifth of each month or a 30-day jail sentence if he fails. Ngu was charged with causing the transfer of RM15.5mil from Pancaran Ikrab’s bank account for the purchase of shares when the money was not meant for that purpose. The offences were committed in October 1997 and Ngu was charged in May 2005.

The Securities Commission (SC) said that under Ngu’s watch, a total of RM37mil was transferred out of Pancaran Ikrab. The money was never recovered and was written off in the company’s accounts.

Granasia Corp Bhd

In March, the Kuala Lumpur Sessions Court convicted Chan Kok Suan, the former managing director of Granasia for submitting false statements to the SC, namely the revenue and profit after tax of the company for the year ended Dec 31, 2002. The information was submitted in connection with Granasia’s proposal to list on the main board of the stock exchange. Chan was convicted under section 32B(4) of the Securities Commission Act and imposed a fine of RM500,000 in default, 10 months imprisonment, according to the SC. He was charged on Feb 9, 2006 and pleaded guilty on March 1, 2010. Prosecution has filed an appeal against the sentence to the High Court.

MEMS Technology Bhd

In February, the Kuala Lumpur Sessions Court convicted director and substantial shareholder Ooi Boon Leong and former director and chief financial officer Tan Yeow Teck for knowingly authorising the furnishing of a misleading statement by MEMS, listed on the then Mesdaq market, to Bursa Malaysia. The misleading statement is in relation to MEMS’ group revenue for the year ended July 31, 2007 contained in the condensed consolidated income statements. The Sessions Court sentenced each accused to a fine of RM300,000 (in default two years imprisonment). Ooi and Tan were charged on April 16, 2009 and pleaded guilty on Feb 25, 2010. Prosecution has filed an appeal against the two sentences to the High Court.

Fountain View Development Bhd

The Sessions Court sentenced the company’s former director Datuk Chin Chan Leong to a fine of RM1.3mil (in default 13 months imprisonment) and a one-day imprisonment for share manipulation in February. Chin was charged with creating a misleading appearance of active trading in Fountain View shares through transactions that did not involve any change in ownership on Bursa Malaysia through 20 central depository securities accounts. Avenue Securities Sdn Bhd former remisier Hiew Yoke Lan was fined RM1mil (in default 10 months imprisonment) for abetting Chin in the said offence. Both were charged on June 27, 2005 and pleaded guilty on Feb 5, 2010. Prosecution has filed an appeal against the sentence to the High Court.

Kiara Emas Asia Industries Bhd

Last November, the SC secured a conviction against director Datuk Tan Hooi Chong for abetting Kiara Emas in the misappropriation of the rights issue proceeds amounting to almost RM17mil between Dec 16 and Dec 31, 1996. Tan pleaded guilty to the offence under Section 32(6) of the SCA 1993 read together with Section 40 and Section 109 of the Penal Code. Tan had also admitted to misutilising the rights issue proceeds for his personal benefit. He was fined RM600,000.


Idris Hydraulic (M) Bhd

According to the SC website, in 2001, former Idris Hydraulic managing director Datuk Ishak Ismail was convicted by the courts for disclosing false information to the SC in a proposal by Idris Hydraulic to the SC that stated he did not hold any shares in KFC Holdings Bhd (KFC). The information submitted was in connection with a proposal for the acquisition of an asset of KFC by Idris Hydraulic. Ishak pleaded guilty and was convicted on Aug 23, 2001.

He was fined RM400,000, in default six months imprisonment. In 2003, Ishak, as a director of Idris Hydraulic, was also compounded RM400,000 by the SC for misusing RM50mil of the proceeds raised from the disposal of Kewangan Bersatu Bhd.

As a result of the compound, the charge was withdrawn.

Aokam Perdana Bhd

Teh Soon Seng, former managing director of Aokam Perdana was suspected of being involved in short-selling the company’s shares. The SC subsequently investigated him for “possible breach of securities law”. They interviewed Teh for two days in Kuala Lumpur in 2003. Teh, however, has maintained his innocence to this day. It was reported that the SC said it had previously conducted an investigation involving Teh for possible breach of the securities law. However, the investigation revealed no evidence for action to be taken against him. Teh eventually sold Aokam and resigned as its managing director on March 8, 1997 before the Asian Financial Crisis became full blown. He subsequently left Malaysia for good. Nine months later, it was reported that the Malaysian police were seeking his help in connection with the alleged theft of logs and misappropriation of funds of about RM55mil belonging to Aokam. In 1998, Aokam declared it was insolvent and could not pay some RM33.3mil in debts.

Omega Securities Sdn Bhd

On Aug 5, 1999, Omega Securities co-founder Datuk Tony Tiah Thee Kian and businessman Datuk Soh Chee Wen were charged in the Sessions court with defrauding Omega Securities of RM424.9mil. Tiah was fined a maximum RM3mil in default 30 months’ imprisonment on May 10, 2002, after he pleaded guilty to a charge of allowing a false report to be furnished to the Kuala Lumpur Stock Exchange (KLSE). On May 11, 2002, Tiah resigned as executive chairman of TA Enterprise and his wife took over the stewardship of the company. He returned to the post in August 2007. On June 14, 2007, Soh was fined RM6mil after pleading guilty to two charges of abetting in the submission of false statements to the KLSE relating to 44,592,000 Omega Holdings Bhd shares.

Sessions Court judge Azimah Omar fined Soh RM3mil in default 30 months’ jail on each of the two charges.

Ekran Bhd

In November 2009, Tan Sri Ting Pek Khiing and six other directors of Ekran were handed total fines of RM630,000 for breaching Bursa Malaysia’s listing requirements pertaining to a related-party transaction. The penalty for Ting, the company’s executive chairman, was RM500,000. Four directors were fined RM25,000 each and the remaining two RM15,000 each. The breaches relate to the company’s failure to disclose the change in the terms of Ting’s settlement of the remaining amount owing to Ekran. To recap, Ting took some RM712.9mil from the company as an advance in return for the injection of some of his private assets in 1996/97. The amount has been long overdue – for more than 10 years.

Renong Bhd

The deal involving United Engineers (M) Bhd’s (UEM) put-and-call option raised many unanswered questions. In November 1997, United Engineers (M) Bhd (UEM) purchased a 32.6% block in Renong, its parent company, from the market at RM3.24 per share. The total cost came to about RM2.34bil. Former Renong executive chairman Tan Sri Halim Saad entered into a put-and-call option, giving an undertaking to buy back the shares from UEM at RM3.24, inclusive of the holding cost to appease UEM’s minority shareholders and the regulator. The entire amount would come up to RM3.2bil on Feb 14, 2001, when the option was due. When the put option expired, there was however no settlement. In fact, Halim resigned from the Renong/UEM group in October 2001. Khazanah Nasional Bhd took UEM private in 2001 and later cancelled the option.

Pending cases

Kenmark Industrial Co (M) Bhd

On June 16, 2010 the SC obtained an injunction against Datuk Ishak Ismail, restraining him from dealing with RM10.2mil being proceeds from his disposal of 58.7 million shares of Kenmark. These monies will be quarantined pending the outcome of a civil suit the SC has filed against Ishak alleging that he committed the offence of insider trading and market manipulation when he purchased Kenmark shares on June 9.

Linear Corp Bhd

On Dec 29 last year, Linear was awarded a massive RM1.67bil contract to build a district cooling plant, also known as the “King Dome” project in Manjung, Perak by Seychelles-based company Global Investment Group Inc. Linear’s former director Alan Rajendram paid out its entire cash hoard of RM36mil without board approval. In June, it was found that there was no evidence of any significant progress towards the execution of the contract, and no documentary evidence to demonstrate the overall viability of the King Dome project. Linear has since been classified as a PN17 company.

A special auditor was appointed in August to look into the company’s financials and any potential irregularities. It is being investigated by the SC and the stock exchange.

Axis Inc Bhd

Axis has been embroiled in some corporate scandals over the last two years, ranging from default on loans and uncollected receivables to more unusual ones involving missing documents and even stolen machinery. The latest is that a whole load of documents, including purchase and delivery orders, bank statements and cheque butts, some dating back to 2004, had gone missing, prompting it to make massive write-offs.

Most of these documents were related to its dealings with questionable contract manfacturers. This prompted the SC to issue a “stern reminder” to public listed companies about the preservation of documents and obstruction of investigations.

Wednesday, July 27, 2011

Just Another Feedback On Corporate Governance

Claire Barnes of Apollo Investment Management has given her feedback on the Corporate Governance Blueprint 2011. Her article is here: Open letter to Securities Commission Malaysia: Feedback on Corporate Governance Blueprint 2011

Do give it a read.

As mentioned before, SC welcomes feedback from everyone on the Blueprint issue. Yes, everyone!

So please, if you some bright ideas or strong criticism, just send your feedback or email your opinions and views to You need to do this by 15 September 2011.

Or if you prefer to send in writing, mail it to:

CG Blueprint Team
Securities Commission Malaysia
3, Persiaran Bukit Kiara, Bukit Kiara
50490 Kuala Lumpur, Malaysia


Here are some small views from me.
I like to see a more independent MSWG. MSWG should not be funded/sponsored by any corporations at all. It must be truly independent. And none of the board of directors should have any links to any listed companies.
I like to see more protection for the minority shareholders. The minority shareholders is still a business partner of the company. They deserve more respect and they are certainly not there as OPM (other people's money) waiting to be screwed!

For example. The privatisation of a listed company. I am not suggesting that privatisation should be banned but I really wish minorities needs to be better protected and most of all I would like to see a much fairer deal. Premium over share price is simply not enough because in the bearish market conditions, share prices generally tank and for the majority shareholder to take advantage of the market conditions and offer the minorities a premium during these times is meaningless. Really. If the minorities are willing to stick with the company thru the bad times, then is it asking too much for the majority shareholders to do the same?

And why are privatisations often offered with price valuations based on current earnings? Isn't it absurb when the flipside of privatisation, a stock is valued based on future earnings?

And it gets even ludicrous when the the same company relist back at a much higher valuation or minus some key assets.

Have we not seen a stock taken private a few years back based on a currents earnings multiple of 7x? And have we not seen the same stock being relisted recently based on a earnings multiple of 25x?

Doesn't this make the stock exchange irrelevant?

Me say? Allow the delisting. There's nothing we can do but there's so much we can do when it comes to the relisting of the same company. Make them relist based on the very same valuation they were delisted.

And do make sure no crafty underhand is done like listing the same company minus some key asset.

Yes, make relisting a much harder process.

Don't allow Bursa Malaysia to be a bloody cheap stock exchange where companies can waltz in and out, list and delist anyhow and anyway they like!

And then Bursa being a listed entity. This is a huge hamper against progress. Why? When the company is a listed entity, profitability will be an issue.


And with profitability an issue, certain decision will be hampered because Bursa Malaysia will have to address the profitability perspective!

And I want to see more done on the issue of related party transactions ( RPT ). Nowadays, related party transactions seems to be increasing more and more. It's rather shocking and sometimes I wonder how the company manage to get the votes of approval for all these transactions. I have seen so many listed companies with so many RPTs that it so unreal. Why do these major shareholders have links to almost most of the transactions done by the company? For example, I looked at a retail business. The company rent shop lots. Understandable. But why are most of the shop lots rented from related party? Why? Know the implications?
Private placements. I seriously think what we have is lacking. Share placements ultimately means more share in a company or more slices to a cake and ultimately, the minority shareholder will see their earnings per share being diluted with all these placements.

However, what irks me most about share placements is private placements is privileged placements!!!!

Exactly! Who are the lucky privileged party being offered these new shares at the discounted prices? And talking about discounted prices, why are the some placement made with such huge discounts?

Yes, I would like to see control over the placement prices.

And I would also like to see control over the percentage of placement shares being offered. I would like to see the limit set at 10 percent placement. Anything more than 10%, it's ludicrous. It's sinful. The minorities would be screwed big time from the dilution in earnings with all these new shares being offered.


Got some feedback to give?

Don't be shy... just do it.... and send your feedback to SC.

Tuesday, July 26, 2011

OMG! They Tried To Explain The DRB Meltdown

In reference to this morning's posting: And DRB Went Into A Meltdown During Trading At Close.. Guess Who Came For Dinner, the financial edge carried the following explanation : here

  • Sources said the substantial decline in the stock’s price within 10 minutes prior to the close of trading happened when transaction instructions for three million DRB-Hicom shares by an institutional investor were keyed in wrongly by the brokerage. “It is believed that institutional investors had wanted to buy the shares (at the lower price of RM1.95). But the transaction was keyed in as a sell order instead,” the source told The Edge Financial Daily yesterday.
    The error, which occurred at about 4.50pm, had seen the three million shares transacted at RM1.95 until the closing bell. Prior to this at 4.48pm, the stock had changed hands at RM2.28, unchanged for the day.

Let's get this straight.

First the evidence once more.

Look at the data.

DRB was trading between 2.28 and 2.27.

So according to this source, the said institutional buyer wanted to key in buy. But apparently a mistake was made.

Ooopsy daisy me... the buyer keyed in sell instead.

Now let me be generous... and understanding... and trust for a moment that .... mistakes can indeed be made.

Is this ok?

Is not a problem for me.

Let's believe it is so.

Now let's think about the action again.

This is said to be an institutional investor. ( Hmm.. how I wish the name is given! )

Institutional investor, my friends.

Not any ordinary koptiam share market player hor.

So this INSTITUTIONAL INVESTOR wants to buy.... but the stock had been trading in a tight range all day... mostly between 2.27 and 2.28.

And this INSTITUTIONAL INVESTOR suddenly can come up with the brilliant idea to buy DRB at 1.95? (some 33 bids lower??)

And the order was keyed in at 4.50 pm... just when trading at last starts, just when no subsequent buy/sell transaction can alter this transaction price. ( Which means that this transaction will then become the closing day price! )

My say?

What a load of ketam!!!!!! 

Can anyone give me a 14 million reason why it just so happen that yesterday closing price of DRB is so important?

Johor Port: Related Party Transaction, Underwater land And Privatisation

Flashback.... 13 Nov 2004.

  • Johor Port diversifies into property

    November 13 2004

    JOHOR Port Bhd, controlled by Tan Sri Syed Mokhtar Al-Bukhary, is diversifying into property development to broaden its earnings base.

    The company has proposed to buy land in Pontian, Johor, for RM403 million cash.

    The five parcels of leasehold land of about 890ha are designated for petrochemical and maritime industry use. The land is located opposite the Port of Tanjung Pelepas.

    Johor Port is also buying the entire stake in Seaport Worldwide Sdn Bhd, which owns the land, from Indra Cita Sdn Bhd, also controlled by Syed Mokhtar.
    “The development of the land into a petrochemical and maritime industry centre is expected to contribute positively to the existing business of the group as shipping, warehousing and other logistic and distribution activities are expected to rise in tandem with such development,” Johor Port announced on Wednesday.

    However, the company said it has no operating history in property development.

    “Therefore, there is uncertainty as to whether this new business would be successful or the cost of investment in Seaport would be recovered,” it added.

    “Nevertheless, Seaport may leverage on Johor Port’s vast experience and skills in maritime-related activities, which are inherent in the existing business of the group,” it said.

    Johor Port also said that it had entered a conditional subscription agreement with Indra Cita and Seaport to buy one million new shares of RM1 each in Seaport at RM403 per share.

    Under the terms of the agreement, Johor Port will subscribe for the Seaport shares in three portions. It will pay RM141.05 million for the first two portions in the first quarter of next year and RM120.9 million for the third portion in the first quarter of 2006.

    Johor Port said it will finance the acquisition with internally-generated funds.

    Upon completion of the proposed acquisition, Johor Port’s consolidated net earnings per share (EPS) will be reduced by about 4.48 sen per year arising from the settlement of the interest- bearing debt owed by Seaport Terminal and the reduction in interest income to the company due to the payment of the purchase consideration.

    For the six months ended June 30 2004, Johor Port reported a net profit of RM44.9 million on the back of a revenue of RM160.2 million. EPS was at 13.62 sen.
Johor Port was trading at 2.49 then.

And Johor Port is what one would call a clean cash company, flush with cash and no debt.

Now if one checked on the quarterly earnings (note the importance of quarterly earnings) , one would note that Johor Port had 266 million net cash. BUT it also has an existing 178 million owing from holding company. (*cough*) How much is that worth? Well, 178 million would equate to around 53.9 sen cash per share. So instead of the holding company owing money to Johor Port, why can't Johor Port get the money back from the holding company and return the cash back to the minorities?

And out of the blue, Johor Port announces they are investing into property. A business with they has no experience in. A business which one of the majority shareholder has vested interest in. The left hand sell to the right hand, the right hand sells to the public.

( Isn't this yet another highlight proving yet again one cannot rely SOLELY on cash per share yardstick. Yes, it is very good to know that the company u want to invest in is in a nett cash position BUT this should NOT be the main reason why one invest into the stock. Because the owner can just do anything they want with the cash!! )

The market wasn't impressed and RHB Research came out strongly opposing the deal.


17 November, 2004

RHB Highlights

Johor Port Bhd (RM2.46) : Acquiring 2,256 Acres Of Land From Controlling Shareholder For RM403m Downgrade to UNDERPERFORM

Johor Port has proposed to acquire from ultimate controlling shareholder Indra Cita Sdn Bhd (Indra Cita) five parcels of leasehold land measuring a total of 2,255.5 acres in Mukims of Serkat and Sungai Karang, Pontian District, Johor, at the south western tip of Peninsular Malaysia, for RM403m. Designated for petrochemical and maritime industry use, the land is located at the river mouth of Sungai Pulai and opposite of the Port of Tanjung Pelepas. The southern part of the land adjoins to the project site for the Tanjung Bin power plant.

Indra Cita holds a 100% stake in Johor Port’s parent Seaport Terminal (Johore) Sdn Bhd (Seaport Terminal) which in turn owns a 51.7% stake in Johor Port.

As the deal will be bundled together with the settlement of the RM182.1m inter-company loan owed by Seaport Terminal to Johor Port, Johor Port will effectively only fork out RM220.9m for the acquisition.

Independent valuer Henry Butcher puts a market value of RM540m to the land. After accounting for "estimated deferred taxation attributable to the fair value of the land" amounting to RM137m, the net value is assessed to be RM403m or about RM179,000/acre or RM4.10/sf. Indra Cita has invested or incurred a total sum of RM50.7m (including payment of land premium) in relation to the land. This means Indra Cita will walk away with RM352.3m profits.

Rationale for the proposed acquisition, according to Johor Port, is to "diversify its business portfolio to include property development activities". Johor Port also believes its existing businesses, i.e. shipping, warehousing, and logistics and distribution activities will rise in tandem with the development of the land into a petrochemical and maritime industry centre. Johor Port estimates that the acquisition will erode its EPS by 4.5sen due to interest income foregone.

We find Johor Port’s rationale for the acquisition lame. We do not think the acquisition makes commercial sense to Johor Port based on the following reasons:

1. Given the defensive nature of the port business, we find it unnecessary for Johor Port to "diversify" its earnings base in order to counter sector-specific cyclical downturns, more so, to diversify into property development that is totally unrelated and provides no synergy to the port business;

2. While Johor Port did have cash balances of RM266m as at 30 June 2004 that it can spend, there are other top priorities. Johor Port Corporate Affairs Director Dr. Lim Meng Soon was quoted by the press on 7 October 2004 as saying that Johor Port has plans to invest RM200m over the next two years to build five new warehouses and upgrade wharfs, jetties, equipment, warehouse infrastructure and computerised systems, in anticipation of a significant rise in throughput. In addition, Johor Port’s outstanding long-term loans amounting to a total of RM200m are due for repayment by instalment from now to July 2008, including a bullet payment of RM70m in January 2006;

3. The acquisition will turn Johor Port from an asset-light-cash-rich company into an asset-rich-cash-strapped company.   In consideration for the land, Johor Port will not only forego some RM182m inter-company loan owed to it by Seaport Terminal, it will also part with some additional RM221m. This will almost deplete its cash balances of RM266m that are earmarked for capital expenditure over the next two years and loan repayment over the next four years. Johor Port will turn from a net cash of RM66m as at 30 June 2004, to a net debt of RM154m, translating into a net gearing of 0.2x after the acquisition;

4. We doubt if the industrial plots/properties at the proposed "petrochemical industrial centre" on the land will be selling like hot cakes, given the already crowded playing field. There are now already three designated petrochemial centres in Malaysia, i.e. Kertih in Terengganu, Gebeng in Pahang, and closer to home, Pasir Gudang/Tanjung Langsat in Johor;

5. Assuming the petrochemical centre project on the land is indeed viable, Johor Port’s immediate upside potential is nonetheless fully exhausted. This is because the land will be acquired in its converted form and at the market rate for converted land in the Pontian area. Assuming an efficiency of 90%, i.e. 90% of the land area is saleable after providing for infrastructure, the adjusted cost of the land to Johor Port will be about RM198,500/acre or RM4.55/sf. Several small plots of industrial land of less than 10 acres in the Pontian area have changed hands at about RM200,000/acre or RM4.60/sf in recent years.

As an aspiring first-time property developer, we find Johor Port extraordinary gung-ho by committing itself to 2,255.5 acres of land (equivalent to the size of two self-contained townships that take at least 14 years to complete, even at Klang Valley’s pace) at the market rate for converted land. The annual holding cost alone will be RM12m (based on interest income foregone at 3% p.a.) to RM24m (based on borrowing cost of 6% p.a.) that will erode Johor Port’s FY12/05 pretax profit by 8-16%.

Seasoned conventional developers do it differently. They buy agriculture land at cheap prices, convert the land themselves and probably in phases in order to minimise cash outflow (payment of land premium). They do buy converted land sometimes, but only if they are confident of flipping it, i.e. launching and selling the property, almost immediately to manage cashflow.

We view the latest corporate move of Johor Port negatively. We are downgrading Johor Port to UNDERPERFORM from Outperform with a view to cease coverage altogether. While the minority shareholders of Johor Port may still stand a chance of defeating the proposal at the EGM (Seaport Terminal will abstain from voting as it is a related party), we believe irrespective of the outcome of the EGM, the damage is already done!


Yeah, with this RELATED PARTY TRANSACTION, Johor Port soon traded below 2.00! If not mistaken, Johor Port soon sank to a low of 1.90. ( Remember it was trading at 2.49 before this)


Now the Edge Weekly came out with the following article.

Corporate: Johor Port's plan draws flak

By Lim Ai Leen

It reeks of a bailout."
This statement comes from one fund manager, but it seems to reflect what most of the investing community thinks of Johor Port Bhd's plan to pay RM403 million for 2,255.5 acres of land in Pontian, Johor.
On Nov 10, Johor Port announced that it had entered into a conditional agreement with Indra Cita Sdn Bhd (IC) and Seaport Worldwide Sdn Bhd (SW) to acquire the entire equity interest in SW for RM403 million. SW owns five parcels of 99-year leasehold land measuring 2,255 acres, which has been designated as a petrochemical centre and for the maritime industry. This land is located opposite the Port of Tanjung Pelepas.

Two factors irk these fund managers.

First, this is a related-party transaction. IC is the majority shareholder of Johor Port, via its wholly owned subsidiary Seaport Terminal (Johore) Sdn Bhd (ST). ST, in turn, has a 51.7% stake in Johor Port. SW is another of IC's wholly owned subsidiaries. Business tycoon Tan Sri Syed Mokhtar Al-Bukhary sits at the top of this hierarchy of companies, as the ultimate owner of IC.

ST also owes Johor Port RM182.1 million as at Oct 31, this year. This debt will be settled by IC from the RM403 million, hence the bailout allegations. It is understood that this inter-company advance was first given to ST in 1999, when Johor Port had hopes of buying a 30% stake in Pelabuhan Tanjung Pelepas Sdn Bhd (PTP), which operates Port of Tanjung Pelepas. This plan was aborted subsequently, but the money remained at ST. PTP is now controlled by Malaysia Mining Corp Bhd, Syed Mokhtar's flagship company.

David Ng, portfolio manager at Hwang-DBS Asset Management, says Johor Port has been in his portfolio of stocks for the last six months, due to its low valuations. "The stock has always traded at a discount because of the outstanding loan. So it's been priced in. But the company was earning good interest in the books and we were hoping that some resolution would come through. But this is not the way we expected [the loan to be resolved]," he says.

Second, the RM403 million price tag seems a tad high, especially when compared with the RM50.7 million SW incurred to settle the land premium and registration fees with the state government. "There are no hints on what value IC has added since its acquisition [less than seven months ago]," says Hwang-DBS Vickers' research report dated Nov 17.

According to Hwang-DBS Vickers, the buy works out to RM4.10 psf, which, says a professional valuer, is expensive.

"Much of the land is under water. So whether the price is fair depends on who's paying for the reclamation costs and how much earth is needed," he says. According to Johor Port's announcement, there will be further capital expenditure required for the planning and development of the land such as soil reclamation and infrastructure works.

Which means that Johor Port will bear the cost.

"Reclamation will cost between RM6 to RM8 psf. Even assuming a conservative reclamation cost of RM6 psf, and assuming that only 50% of the land is used, this will translate into a net land value of RM20 psf [RM6 plus RM4, divided by half]," he estimates. He says this is double the net value for Tanjung Langsat, a petrochemical zone built on solid soil in Pasir Gudang, Johor.

However, Johor Port's independent valuation, conducted by property consultant, Henry Butcher Malaysia (Johor) Sdn Bhd, estimates the market value of the land at RM540 million. This means that at RM403 million, Johor Port is getting the land at 25% below market value.

Good cash flow

In any event, it appears that Johor Port is looking beyond the immediate horizon. It believes that the land is strategically positioned for the future. "Its location… is another added advantage in terms of its possible linkage to the transportation infrastructure put in place by the Johor state government in an attempt to make Senai Airport [a regional cargo centre], Port of Tanjung Pelepas and Johor Port [both to function as major international shipping cargo centres], into a regional transportation hub…", it states in the announcement.

The fund managers, however, are not taken by the view. "Investors are concerned because the company is buying land from a private entity belonging to a major shareholder. And they are wary because of the price that's being paid," surmises Ng.

He believes that this purchase, to be paid for from internal funds, is not in the best interest of a company that currently trades at decent valuations and generates strong cash flows.

According to a shipping analyst, Johor Port generates between RM90 million and RM100 million free cash flow per annum. It is also sitting on a RM266 million cash pile (as at June this year), which will be reduced once it forks out RM221 million (RM403 million less RM182 million loan set-off) for this venture.

"It is making good profits even though it charges the cheapest port rates in Malaysia. And now that there is talk that the tariffs will be revised upwards across the board, it stands to make even better profits," says Ng.

This won't happen, though, if the cash is sucked up in infrastructure and reclamation costs. And as yet, there is no indication of how long the project will take to give returns, or whether a port services company can turn itself into a successful property developer. Even Johor Port acknowledges the uncertainty.

It states in the announcement: "The Johor Port group has no operating history in the property development business. Therefore, there is uncertainty as to whether this new business would be successful or the cost of investment in SW would be recovered. Nevertheless, SW may leverage on Johor Port's vast experience and skills in maritime-related activities, which is inherent in the existing business of the group which consists of shipping, warehousing and other logistics and distribution activities."

For the immediate term, the market is reacting negatively. The company stock fell from its six-month high of RM2.46 on Nov 10, to close at RM2.17 last Friday.

A local research house says its sensitivity analysis shows that earnings per share (EPS) for financial years ending Dec 31, 2004, to 2006, could fall by between 3% and 5% upon the completion of the deal. "This is mostly from the reduced inter-company loan interest and lower interest income from the net cash outflow," it states.

In the announcement, Johor Port states that the proposed acquisition is expected to decrease the consolidated net EPS of the company by approximately 4.48 sen.

It is early days yet, as Johor Port is still waiting for a feasibility study and due diligence review to be completed. Then the proposal has to pass muster with the regulatory authorities and the Minister of Finance Inc, who is Johor Port's special shareholder. On top of these approvals, the deal has to go before the 48.3% of shareholders who are not conflicted on the issue.

The dissenting voice is already getting louder. Ng believes that the minorities' ability to vote down the idea is "quite strong". He says: "The minority shareholders have to show that shareholder activism is growing in Malaysia. The days of minority shareholders just accepting their fate are gone."

The management of Johor Port declined to answer questions from The Edge, stating: "We trust that the information as provided in the announcement will address all the queries…"


Ah... the minorities ability to vote down the idea.... let's see what happens next as time goes by.... hmm... is time the friend or enemy of mine?


Analysts: 'No' vote may boost Johor Port stock


August 3 2005

JOHOR Port Bhd's share price will likely return to its previous record of RM2.49 last year if its shareholders vote against its proposal to buy Seaport Worldwide Sdn Bhd at the company's extraordinary general meeting on August 15, analysts say.

The share price has dropped 25 per cent since it announced plans to acquire Seaport Worldwide from Indra Citra Sdn Bhd for RM403 million last November. The stock closed yesterday at RM1.90 per share, up 0.01 sen from Monday.

Seaport Worldwide owns five parcels of 99-year leasehold land measuring 913ha in Pontian, Johor, opposite Port of Tanjung Pelepas. The land is designated for petrochemical and maritime industry use.

Avenue Securities Sdn Bhd head of research Noor Azwa Mohammad Noor said analysts and investors did not like the deal and they made their feelings known through Johor Port's share price performance after announcement on the proposed deal was made.

"So, probably if the deal did not go through, the share price could even go back to the pre-announcement level which was between RM2.15 and RM2.50 per share," he told Business Times yesterday.

Noor Azwa reiterates an "outperform" rating on Johor Port's stock as he feels the negative news with regards to the controversial deal has been reflected in the share price given current undemanding valuation, which is even below historical lows.

"But if the deal goes through, I see no impact (on the company's earnings) for the financial years ending December 31 2005 and 2006," he added. ( Moolah: huh? No impact? But what about all the cash? Where will it go if the deal goes thru? )

Hwang-DBS Vickers Research Sdn Bhd senior analyst Wong Ming Tek also predicts that Johor Port's share price will return to pre-announcement price levels if shareholders were to reject the proposal.

He said the near-term earnings dilution and long-term uncertainty make it difficult to justify the acquisition cost of RM403 million over Seaport Worldwide's original cost of the land of RM51 million incurred seven months before Johor Port's proposal. The premium over Seaport Worldwide's cost is 18 times the dividend Johor Port will pay for 2004.

"Until there is new information, we maintain our view that the proposed acquisition of Seaport Worldwide will result in near-term earnings deterioration (for Johor Port). In the longer term, there is too much uncertainty for us to be convinced of the acquisition's feasibility," Wong said, maintaining a "fully valued" recommendation on the stock with a RM2 price target, based on six times the financial year 2006 earnings per share of 32 sen.

OSK Research Sdn Bhd manager Chris Eng said he remains positive of the company's management and operational capability, but views the proposed acquisition negatively.

"If the deal is voted out, we expect Johor Port's share price to move," he said, maintaining a "buy" rating and fair value of RM2.50 for the stock


And then... comes the shocker....

Watchdog group now advises minorities to approve Johor Port proposal

August 9 2005

THE Minority Shareholder Watchdog Group (MSWG), in an about- turn, is advising minority shareholders of Johor Port Bhd to vote for its proposal to buy Seaport Worldwide Sdn Bhd for RM403 million.

"Although there are risks associated with venturing into port-related property development, the proposed acquisition would present good potential for enhancing Johor Port's profitability, hence shareholder value," MSWG chief executive officer Abdul Wahab Jaafar Sidek said in a statement yesterday.

He said its latest view was derived from Johor Port's recent circular to its shareholders as well as the watchdog's observation during a site visit to the port and Johor Port's management representations last Wednesday.

"We learnt that Johor Port is unable to expand its activities as there is no additional space for expansion in its current site in Pasir Gudang. In this regard, the proposed acquisition will provide an alternative site for Johor Port's future expansion," said Abdul Wahab.

In late February, the MSWG urged Johor Port's minority shareholders to vote against the proposal as it saw the plan as an attempt to settle an interest-bearing inter-company loan amounting to RM182.1 million as at October 31 2004.

No additional space to expand? So expand at the cost of the minorities? And we are talking about UNDER WATER land! Oh my! And that was MSWG sole reasoning to flip its earlier objection?

Let's read what MSWG said on Feb 2005!
New Watchdog showing its teeth again!

’No’ to JPort

By Yap Lih Huey

Minority shareholders of Johor Port Bhd have been urged to vote against the company’s proposal to diversify into property development at a shareholders’ meeting to be convened later.

In making the call, the Minority Shareholders Watchdog Group (MSWG) sees Johor Port’s plan as an attempt to settle an interest-bearing inter-company loan amounting to RM182.1 million as at Oct 31, 2004.

“MSWG would like to advise minority shareholders that the proposed acquisition is not in their best interests and in that they are encouraged to vote against the proposed acquisition,” its chief executive officer Abdul Wahab Jaafar Sidek tells FinancialDaily.

“The proposed acquisition is a scheme to settle in full the inter-company loans owed by Seaport Terminal (Johor) Sdn Bhd (ST) to Johor Port,” he adds.

MSWG says the proposed acquisition is expected to reduce Johor Port’s free cash flow, its capacity to maintain an average dividend payout of 5% to 6% per annum, and reduce its earnings per share.

Johor Port has performed profitably, generating free cash flows of between RM90 million and RM110 million per annum and is cash rich, having fixed deposits totalling over RM231.2 million as of Sept 30, 2004.

Besides its consistent dividend, it posted an earnings per share of 21.39 sen for the nine months to Sept 30, 2004. The counter closed at RM1.99 on Feb 24.

On Nov 10, 2004, Johor Port announced that it had entered into a conditional agreement with Indra Cita Sdn Bhd and Seaport Worldwide Sdn Bhd (SW) to acquire the entire interest in SW for RM403 million to diversify into property development as an objective to broaden its earnings base.

SW has five parcels of leasehold land measuring 902ha at the river mouth of Sungai Pulai and opposite Port of Tanjung Pelepas, which are designated for petrochemical and maritime industry use.

Johor Port’s proposed acquisition is a related-party transaction. Indra Cita is the majority shareholder of Johor Port, via its wholly owned subsidiary, Seaport Terminal (Johore) Sdn Bhd, which in turn has a 51% stake in Johor Port. SW is Indra Cita’s subsidiary.

Tan Sri Syed Mokhtar Al-Bukhary is the ultimate owner of these companies via his ownership in Indra Cita.

Abdul Wahab says although the land is acquired at 25% below market value of RM540 million, the additional capital and reclamation expenditure of between RM6 and RM8 per square feet will likely make the land more expensive.

“Taking these costs into account, the total cash consideration for the proposed acquisition would amount to more than RM20 per square foot. The market sentiment is going to be negative in view of the above factors,” he adds.

MSWG expects Johor Port to register an improved performance due to higher revenue for its financial year ended Dec 31, 2004.

Last year, Johor Port was given the certification by London Metal Exchange, which allows the port operator to handle more non-ferrous metal containers and consignments passing through its port.


Sigh! First he say NO giving all the valid reasoning and then he changed it by saying YES!

Needless to say.... guess the outcome of the voting?

Do you reckon the minorities stand a chance with the MWSG changing its opinion just like that?


Johor Port gets 5% discount for SWW acquisition

By Tamimi Omar

Johor Port Bhd has successfully negotiated for a 5% discount to the RM403 million purchase price for its proposed acquisition of Seaport Worldwide Sdn Bhd (SWW) through the subscription of new shares in SWW.

“In addition, the payment terms for the consideration are proposed to be staggered over two years” Johor Port said on Aug 15.

On Nov 10, 2004, Johor Port entered into a conditional subscription agreement with Indra Cita Sdn Bhd (IC) and SWW to effectively acquire the entire equity interest in SWW.

It said the acquisition would enable JPB to diversify its business portfolio to include property development activities in order to broaden the future earnings sources of the group.



a 5% discount for underwater land????? :(

And RHB had this to say.....

16 August, 2005

RHB Highlights

􀁘 Johor Port Berhad (rm1.89) : EGM Approves Controversial Land Deal, FY12/06-07 Earnings Downgraded UNDERPERFORM

􀁘 Johor Port’s minority shareholders at yesterday’s EGM gave the company go-ahead to acquire from ultimate controlling shareholder Indra Cita Sdn Bhd (Indra Cita) five parcels of leasehold mangrove land measuring a total of 2,255.5 acres in Pontian, Johor. Johor Port also announced that it has successfully negotiated for a 5% reduction in price from RM403m to RM382.9m and that the payment will be staggered over two years. Indra Cita holds a 100% stake in Johor Port’s parent Seaport Terminal (Johore) Sdn Bhd (Seaport Terminal) which in turn owns a 51.7% stake in Johor Port.

􀁘 Recall, we are against the deal due to the steep pricing which means Johor Port’s upside is exhausted. The land will be acquired in its converted form and at the market rate for converted land in the Pontian area. Assuming an efficiency of 90%, i.e. 90% of the land area is saleable after providing for infrastructure, the adjusted cost of the land to Johor Port will be about RM188,600/acre or RM4.35/sf (after accounting for the latest 5% discount in price). Several small plots of industrial land of less than ten acres in the Pontian area changed hands at about RM200,000/acre or RM4.60/sf in recent years.

􀁘 We are also against the deal because we do not think the acquisition makes commercial sense to Johor Port. Given the defensive nature of the port business, we find it unnecessary for Johor Port to “diversify” its earnings base in order to counter sector-specific cyclical downturns, more so, to diversify into property development that is totally unrelated and provides little synergy to the port business.

􀁘 Also, in consideration for the land, Johor Port will not only forego some RM186.9m inter-company loan owed to it by Seaport Terminal, it will also part with some additional RM196m cash. This will almost deplete its cash balances of RM242.2m that are earmarked for capital expenditure such as for the construction of five new warehouses and upgrading of other port facilities over the next two years.

􀁘 The consultants hired by Johor Port, IPC Island Property Consultants Sdn Bhd, is projecting an IRR of 12% from the investment, based on fairly aggressive assumptions, namely: (1) The land will be fully developed and sold in seven years; and (2) The land will be sold as industrial plots priced at an average of RM19psf, against a total cost of RM12psf consisting of the land cost of about RM4psf and land development costs (i.e. infrastructure and land reclamation costs) of RM8psf.

􀁘 We find it hard to visualise a property project in excess of 2,000 acres in size to be fully developed and sold within seven years (translating to about 300 acres per annum), especially, under the current economic conditions. While not strictly comparable, a mixed property project measuring about 1,000 acres in the Klang Valley, for instance, will take at least seven years to be fully completed. We also find the projected average selling price of the land of RM19psf unrealistic given that industrial land in the Pontian area changed hands at below RM5psf in recent years.

􀁘 While the Board of Directors of Johor Port supposedly approved the land deal based on the favourable outcome of the feasibility study done by the consultants, i.e. an IRR of 12% that is in excess of Johor Port’s historical average ROE of 10.6% by developing the land into reclaimed industrial land, Johor Port has a different plan for the land. Johor Port intends to dispose of a substantial portion of the land as bare land or on a “as is where is” basis. The rationale is to cap Johor Port’s cash outflow at the purchase price with no further investment in land reclamation (Based on the consultants’ model, Johor Port is supposed to fork out RM1.1bn in land reclamation cost over the 7-year period).

Logically, by selling a substantial portion of the land in its bare form (as against reclaimed and developed), it will result in a lower overall IRR that makes Johor Port’s investment in the land less worthwhile.

􀁘 The 5% discount in price does little to mitigate Johor Port’s risks in relation to this huge investment, so is the payment that will now be staggered over two years. We are downgrading Johor Port’s FY12/06-07 net profit forecasts by 6% and 12% largely to account for the holding cost of the land. Until and unless Johor Port starts to register sales from the land, the annual holding cost alone will be RM9.4m in FY12/06 and RM18.8m in FY12/07 based on our estimate.

􀁘 Meanwhile, Johor Port independent director Ooi Teik Huat who chaired yesterday’s EGM was quoted by the press as saying that only minority shareholders who owned 74.5m shares or 54% of the total shares held by minority shareholders who turned up yesterday voted in favour of the deal. As such, it could be deduced that “disgruntled minority shareholders” out there hold a total of at least 63.5m shares. We expect a new wave of selling from some of these “disgruntled minority shareholders” over the next few days or weeks.

􀁘 Maintain UNDERPEROFM. Indicative fair value of RM1.61 based on 5x FY12/06 EPS. The low PER rating is to reflect Johor Port’s vulnerability


Now Johor Port story did not end here, not on Aug 2005.

Dec 2005....... came the privatisation issue!


MMC Plans to Buy 52 Percent of Johor Port, Take It Private

(Bloomberg) -- MMC Corp., a Malaysian builder and engineering group controlled by Syed Mokhtar Al-Bukhary, agreed to buy his 52 percent stake in Johor Port Bhd. for 427 million ringgit ($113 million), expanding its port business.

MMC is buying 170.8 million Johor Port shares at 2.50 ringgit apiece from his Seaport Terminal (Johore) Sdn Bhd., it said today in a statement. MMC will later offer to buy the rest of Johor Port and delist it. The takeover values the company at 825 million ringgit.

Acquiring Johor Port, the country's second-biggest port, will help Syed Mokhtar consolidate his port operations under MMC, which owns half of the Port of Tanjung Pelepas, and diversify its transport and logistics divisions.

Now this is where.... I will say.... think about it!

Yes.. just think about what had happened.

Look at the chain of events.

Nov 2004, Johor Port ( cash rich, trading at a price of 2.49) announced it's RELATED PARTY TRANSACTION underwater land deal.

Johor Port of course tanked big time...

A year later.... MMC says wants to take Johor Port private.... at 2.50.

And yeah...  just think about it.


And DRB Went Into A Meltdown During Trading At Close.. Guess Who Came For Dinner

The following chart says it all....

Look at the last 2 transactions!

All done during trading at close.

Someone deemed it fit that DRB, which was trading between 2.28 and 2.27, should have a meltdown during trading at close.

Someone deemed it fit that DRB be traded some 33 bids lower.

Someone, on the other hand, was brilliantly smart to queue for DRB at 33 bids lower.

Someone, on the other hand, just knew that they would be lucky and that they would be able to get a small truckload of DRB shares at 33 bids lower.


Oh yeah... some trick questions.

DRB has a lot of 'warrants' issued.

Do you know which warrant would be severely impacted by this SUDDEN DRASTIC change in price?

Do you know the impact?

Who would turn out to the big loser with this sudden meltdown?

And who would be the big winner? Yeah, guess who came for dinner.


ps: Personally, from my flawed point of view, I reckon Trading At Close is the utterly most stupidest thing ever implemented. It put the stock market players at risk. Example? This DRB case yesterday says it all.

Comeon... Bursa.... stop making yourself the laughing stock. Enough is enough. Companies now list and delist anyhow they want. Delist it at a cheap valuation and relist it based on a super rich valuation. Who benefits?

I know.. you, Bursa, is a listed entity. You need to make money.

But hey.... think about it.... at whose expense?

And have you heard that good solid business is built on strong foundations? Have you not heard of this saying before?

Look at what's happening in front of you.

Are you seriously impressed with what's happening?

Comeon... protect the minority shareholders. And dude, the minority shareholders of any business, they are also your business partner.

Treat them right, and you will prosper.

Is this too difficult to comprehend?

Sunday, July 24, 2011

A Letter From A Truly Disappointed Ex Minority Shareholder Of Bumi Armada

Got reconnected and received a note from an old pal of mine. He had participated and given his feedback on Corporate Governance Blue Print 2011

There was this section on the Delisting of Bumi Armada (there's one on Maybulk too - maybe later) which I certainly feel should deserve more readership (and for those who are interested, his letter was send to some newspapers too)


Delisting of Bumi Armada (Barmada):

In 2003 Barmada’s Minority Investors received a notice that there would be a GO for their shares, that the Majority Investors had no intention to continue with the listed status of the company, that no dividends might be paid, that rights issues might be necessary for further funding and that shares would be mandatory acquired. Please note that the GO in itself is good, but the company should not be allowed to use the delisting threat. This is the kind of deal Minority Investors are scared of, we invest for the long-term in good quality companies at a cheap price, and hate it when we are forced to sell, especially if the price is unbelievable cheap. In this case the offer was for only RM 7, with net earnings of RM 1 and growing nicely, an excellent balance sheet and one of the highest Return on Equity’s (more than 20%) of the whole BM. The offer price was horrific low by any standard, there was no premium, the share price had been clearly higher before at which price I (and other Minority Investors) had not sold my shares. The PE of about 7 compared with PE’s of 15 to 20 of similar, much lower quality companies, etc, etc, etc. The circular was as usual of very low quality, lots of important information was left out, lots of unimportant information was added. In this case the Majority Investors try to paint as bleak as possible picture of the company’s future (to try to convince the Minority Investors to sell at the low price), and they did an excellent job.

I filed a complaint with the SC, was asked to come to the office twice, but these talks turned out to be fruitless. I pointed at the following very important rules (emphasis is mine):

(a) that the shareholders and directors of an offeree and the market for the shares that are the subject of the take-over offer

(i) are aware of the identity of the acquirer and offeror;

(ii) have reasonable time in which to consider a take-over offer (A); and

(iii) are supplied with sufficient information (B) necessary to enable them to assess the merits of any take-over offer;

(b) that, so far as practicable, all shareholders of an offeree have equal opportunities to participate in benefits accruing from the take-over offer, including in the premium payable for control (C);

(c) that fair and equal treatment of all shareholders, in particular, minority shareholders (D), in relation to the take-over offer, merger or compulsory acquisition would be achieved; and

(d) in its response to, or making recommendations with respect to any take-over offer, merger or compulsory acquisition, the directors of the offeree and acquirer shall act in good faith (E) to observe the objects, and the manner in which they observe the objects, specified in this subsection,

and that minority shareholders are not subject to oppression or disadvantaged by the treatment and conduct of the directors (F) of the offeree or the acquirer.

[CMSA 2007, part 6, paragraph (5)]

My comments regarding the implementation of these rules in the Barmada case:

(A): the time to consider the take-over offer, to study the documents, to try to rally other Minority Investors, to contact the MSWG, to try to write articles for newspapers & magazines was extremely short and definitely nor reasonable, and the important “independent” report was send even much later to the Minority Investors, there was hardly any time to react on it.

(B): lots of important information was missing, like: What is the sales pipeline? What are the profit projections for the coming years? No recently audited P&L or BS was given, no proper reason for the delisting, etc, etc, etc.

(C): there was no premium at all let alone for control, the price was based on an artificial low price at which certain bondholders of Barmada’s parent company were prepared to sell.

(D): this rule, which is so clear and important is never ever used by SC/BM. It should however, in any case where there is doubt, and in the advantage of the Minority Investor.

(E): by cutting the dividend, not giving as reason for that and providing inadequate information directors clearly acted in bad faith, and breached the listing rules that explicitly require this information.

(F): again, it cannot get clearer than this rule, why is it never used by SC/BM?

I contacted the MSWG, was supposed to meet the CEO but only met two analysts who didn’t know anything about the case. Later there was supposed to be a meeting with other fund managers, but I never received an invitation. MSWG did not put up any fight at all, all extremely disappointing.

My complaints to SC and BM lasted a very, very long time, no information was ever given in the meantime, and finally both came to the same conclusion, nothing wrong had happened. First of all very strange given all the clear evidence I had given of the opposite, also SC/BM both didn’t want to point out the reasons for its decision. I was clearly stonewalled by both institutions, the standard technique that SC/BM uses in handling of Minority Investor complaints. I was warned before by my Malaysian friends, and as usual, they were right, although many had helped me to write my complaint to SC/BM.

Barmada has since relisted recently. After taking into account the bonus and rights issues, the current price corresponds to about RM 140 in 2003 terms, in other words a 20-fold increase in price, for each lot of 1,000 shares investors would not receive the paltry RM 7,000 but RM 140,000 (my friends, my wife and my company owned dozens of lots). The difference between the two amounts was pocketed by the Majority Investor. In the relisting exercise, it was important for the Majority Investor to paint a picture as rosy as possible, and needless to say, they did again an excellent job there. The contrast with the GO brochure of 2003 was very stark. SC/BM, who should look into this and assure that information is of the same level, turned their heads the other direction. The whole affair with the delisting in 2003, the reason why they wanted to delist, the horrible low delisted price (at current diluted amount of shares only RM 0.20), the pressure that was put on the Minority Investors, the way Minority Investors were treated in the past, all was conveniently left out of the relisting circular although the circular contained hundreds of pages.

I have filed another complaint about this matter to SC/BM, I expect to be stonewalled again, as usual, and am confident that no action will be taken again.

The total value of the shares that were forcefully acquired by the Majority Investor from the Minority Investors has increased by RM 2,500,000,000!

Another very black page of Malaysia’s CG book. 


ps: due to the poor corporate governance, my pal will not invest in Malaysia stock market anymore.

ps: Here's the link to SC's website on Corporate Governance Blueprint 2011:

And as stated:

The SC welcomes feedback from all interested parties and the public on the Blueprint. All feedback can be emailed to by 15 September 2011 or provided in writing to:

CG Blueprint Team
Securities Commission Malaysia
3, Persiaran Bukit Kiara, Bukit Kiara
50490 Kuala Lumpur, Malaysia

ps:  Do read the blueprint documents on the link below - it's highly recommended!

Saturday, July 23, 2011

I Am Not Wrong So Why Should I Sell My Stock?

There are so many reasons to sell a stock.

Yes, even Warren Buffett does sell his stocks.

And there is no sin in selling a stock either and I, for one, feels that stocks should be bought and sold for the correct reasoning. From the investing perspective, there are many valid reasons to sell their stock and one of the best single advice ever given is:

  • A stock that begins to show decaying fundamentals, such as lower profit margins or lower return on invested capital should be sold.
The decaying fundamentals would suggest that company that we had invested isn't the same anymore. It used to be good but the decaying fundamentals/business economics could turn the company to a poor company and the longer we hold on to the stock, the greater the chances the market could punish our mistake for thinking that the company is still a great company. And we know how the market is always very unforgiving to the investor holding on to such stocks. And yes sometimes stubbornly holding on to a stock for all the wrong reasoning could wipe the investor out of the game.

Having said that, knowing what needs to be done and actually doing it is rather difficult..

Yes, it's easier said than done.

For this is where it gets extremely tricky.


The Es comes to play.

E as in emotions. Ms. Emotion. All of us have different emotions and for many of us, emotions is a deadly hindrance in the stock market for it prevents the investor of doing what needs to be done, which is acknowledging and rectifying the mistake(s) made in the investment(s).

How could one do what is needed to be done, like selling the stock, when one does not want to admit that perhaps they are wrong in their reasoning, their stock selection?

And then there is the other E. The Mr. Ego who is never ever wrong.

I am never wrong.

My decision to buy the stock is correct!

The company is owned by Mr. So and Mr. So. How could I go wrong?

Or one buys a stock because it's a growth stock. But if the growth ends, then what comes may of one's investment? To hold on to the stock, one reverts to the growth issue and declares that there's still value in the stock. Of course there's always some sort of value in any stock.

See how the reasoning to invest in the stock had changed? From growth investing to value investing. And some would correctly point out that the great Warren Buffett has said that growth is an integral part of value, hence they should not sell.

However, Buffett's insistence on growth is an integral part of value,  for how could a company be considered a great company if it has no growth?

Ah... see the difference? Without the growth, how then would you define a company with declining profitability? Would it still be a great company? If no... then...?

And yes, needless to say  that Mr. Pasar views strongly against company with declining profitability. Have we not seen how a 'growth' company like Hai-O traded very much lower once the growth story ended? ( posted on March 2011: Looking Back At Hai-O Then And Now. ) Or the recent decline of the rubber glove stocks.

But the greatest obstacle in selling is Mr. P or Mr. Price.

Price in my opinion is the greatest hindrance to an investor.

The investor could easily reason out what's happening to their investment and they could clearly see the decaying fundamentals but once they look at Mr. P, all logic goes out of the window.

Which is why, there's one teaching where one should try to leave out Mr.P when one buys or sells a stock!

Oooh... that sounds rather crazy but the reasoning in this is by leaving out the price, the decision to buy or sell a stock is based solely on the investing reasoning or the fundamentals of the stock. For example, if the stock begins to show decaying fundamentals, such as lower profit margins or lower return on invested capital, the stock should be sold right there and then, in regardless of the traded price.