Comments On Hume Industries Privatisation

Why do you buy stocks?

Duh! To make money.

LOL! That's the bottom line no? Now of course, many would be extremely quick to point out the many ways to do so but I am not here to talk about how to make money. Instead I would like to focus on the investor or the minority shareholder.

The minority shareholder believes that by investing LONG TERM. And when minority shareholder talks about long term, they are talking about time frames in decades and certainly not the one or two year time frame. This is because they reckon by investing long term, one mitigate the short term fluctuations of the stock market and most important by investing in the longer time frame, they feel that the company could grow and from the company's long term earnings growth, the minority shareholder feels that they could reap the benefits and be fully compensated for taking the plunge and risking their money in the stock market investment.

And this is how the investing 'game' is being played.

Invest or buy stocks of a company whose business one reckons is good and would have a fair chance to be better in the future at a cheap price. Yes, buy them cheap and hope that in time, the company's value appreciates fully to compensate the risk in buying the listed stock.

Yes the risk in investing is that one could buy the wrong stock or at the wrong price. Or through no fault of the investor, the company's fortunes could turn for the worst and go bust or a stock market crash could happen.

Ah, the chances of the stock market crash is real, no?

People talk about investing in decades. Yes more than 10 years. Some more than 20 years. Which is fine, if the company does indeed have a real rock solid business fundamentals. But on the other hand, if one look at our Recent Stock Market Crashes, one would have noticed that stock market crashes have occurred in every single decade for our Malaysian stock market. So the issue one have to justify is if one is investing long term in our local market is whether one's stock selection is solid enough to withstand a stock market crash? And if during the stock market crash, what if a real life emergency situation requires massive cash and forces one to withdraw their investments? Yes, one could staunchly believe in holding long term but what if the unforeseen situation offers no alternative solution and forces one to sell out during a period when the market has collapsed? Not remotely possible?

These are the investment risks. There is no such thing as a risk free investment. Which means when one buy a stock at any price, there is always the risk of seeing their investment go to zero.

So my point this morning is that when we can use a long term investing strategy in buying a stock but in regardless of our strategy, there is always a chance that our investment could go to zero. (Yes, I am aware of the cut loss option).

So how is the just compensation for one's investments risks?

Don't we want to see upside unlimited? Yes, there is zero boundary in how much we can win! :D

Is that request unfair? Is that request unjust?

No?

Let's see, we invest, we can lose it all, yes? So if we can lose it all, shouldn't it be fair that we are given a chance to win it all?

No?

If there is no chance to win it all, why invest?

Yes, why risk our hard earned money just to take the plunge in investing in a stock?

Are these simple fair arguements so far?

But what if the game is tilted?

You buy a stock at 5.00 and you are willing to risk all the 5.00 because you reckon the stock is worth at least 12.00 or even more if the company continues to grow. But what if someone comes in and put a cap to your gains and cut it to 5.50? Do you think it's just?

And this is how I feel whenever I see our local listed companies taking our company private!

And yes, this is how I felt when I read Hume Industry being taken private!

Outright shame.

Minority investors had invested in the company, WILLING TO RISK ALL THEIR MONEY IN THE STOCK because they felt there was value in the stock. Now the owners come in and cut them short in their investment by taking the company private!

Do you think the minority shareholders are fully compensated for their investment risks?

Do you?

Jan 15th 2010: Hong Leong group offers RM4.30 apiece for Hume and the following article caught my attention: Offer to take Hume private due to competitive forces

• Saturday January 16, 2010
  Offer to take Hume private due to competitive forces
  By FINTAN NG
  
  PETALING JAYA: Spectrum Arrangement Sdn Bhd’s offer to take Hume Industries (M) Bhd private by acquiring all the shares it or parties acting in concert do not already own may be prompted by Hume’s increasingly tough outlook for the businesses it is involved in.
  
  According to analysts, Hume is up against major competition in the business segments it is in. The little-covered company is involved in the manufacture of building materials such as fibreboard and concrete as well as furniture.
  
  Spectrum Arrangement, a subsidiary of Hong Leong Co (M) Bhd in which Tan Sri Quek Leng Chan is chairman and chief executive officer as well as a substantial shareholder, made the cash offer through Hong Leong Investment Bank Bhd on Thursday at RM4.30 per share.
  
  Quek is also executive chairman of Hume. As at Jan 14, Spectrum Arrangement directly owned 64.94% of Hume.
  
  “Although Hume is a manufacturer of medium-density fibreboards, Evergreen Fibreboard Bhd is the market leader while in concrete products, the big boys dominate,” OSK Research Sdn Bhd analyst Vincent Lim Vi Ming told StarBiz.
  
  Local listed firms that manufacture ready-mixed concrete products include Lafarge Malayan Cement Bhd and YTL Cement Bhd.
  
  AmResearch Sdn Bhd analyst Mak Hoy Ken said companies in the building materials industry faced tough conditions if they did not have access to markets abroad.
  
  “Bricks-and-mortar companies such as Hume cannot rely on just the local market,” he said. Mak does not have Hume in his coverage universe.
  
  Lim added that there were also risks in the furniture business due to price competition from China and difficulty in obtaining contracts. “Evergreen also has a furniture-making business but it’s ancillary to the company’s other businesses,” he said.
  
  Lim, who does not cover Hume, said at RM4.30, the offer was at a discount to the company’s net book value of RM4.67 per share as at Sept 30, 2009.
  
  “I’m not really sure of the reason for the discount except that it may be because Hume is not a market leader in the businesses it is in,” he said, adding that the company had incurred a loss of RM100.77mil for the quarter ended Dec 31, 2008 and another loss of RM20.76mil for the quarter ended Mar 31, 2009.
  
  However, Lim said from the offeror’s perspective, this could be a good time to take Hume private as demand for fibreboards was steadily picking up and selling prices were also going up after a plunge in mid-2008.

Rather appalling news if you asked me.

• may be prompted by Hume’s increasingly tough outlook for the businesses it is involved in. According to analysts, Hume is up against major competition in the business segments it is in. The little-covered company is involved in the manufacture of building materials such as fibreboard and concrete as well as furniture.

Errr... I am sure that Hume Industry is not the ONLY company in the building materials in our market and if this is the justifications, then I guess all the other listed companies should also pack their bags and go private too!

Now OSK's Vincent Lim made the following remarks.

• “I’m not really sure of the reason for the discount except that it may be because Hume is not a market leader in the businesses it is in,” he said, adding that the company had incurred a loss of RM100.77mil for the quarter ended Dec 31, 2008 and another loss of RM20.76mil for the quarter ended Mar 31, 2009.

How would one interpret such a statement? Incurred losses of rm100.77 mil for quarter ended Dec 31, 2008 and another loss of rm20.76 mil for the quarter ended Mar 31, 2009.

Doesn't this not sound like a company which has no future?

However, take a look at this screen shot.

Does Hume Industries looked doomed at all?

And the so called analyst from OSK picks on the ONLY 2 quarters that Hume Industries had suffered losses!

Why on earth did he not mention that since those 2 quarters, Hume Industries had turned around very impressively?

Another lopsided view from OSK? ( See my dear solomon would surely ask why I always pick on OSK's analysts! But.. but.. but.. isn't it so clear about OSK analysts?)

And best of all, let's dig a little bit at Hume Industries losses. Its 100 million losses: Quarterly rpt on consolidated results for the financial period ended 31/12/2008


And how much was the Southern Steel losses? Under Hume Industries business segmentals.


And then... the little thingy called irony struck me.

Southern Steel is under OSK's coverage!!!!!!!!!!!!!!!!!!!!!!!

See Featured Report: OSK On Southern Steel. For example in it's 7 May 2009 report (click on this screen shot posted earlier), OSK increased the Target Pric)e for Southern Steel just because it lost less money! (ps on today's papers: OSK Research overweight on steel. Quote: ""We have BUY calls on Lion Industries,Southern Steel and Masteel, a Trading BUY on Perwaja, but a NEUTRAL call for Kinsteel and a SELL on Ann Joo," it said. )

So how could OSK be so optimistic about Southern Steel and not rank Hume Industries at all when Southern Steel contributes a lot of its earnings to Hume Industries?

Yet another big mystery about OSK, eh?

Here's Hume Industries last reported earnings in November: Quarterly rpt on consolidated results for the financial period ended 30/9/2009. It made some 20.956 million for the quarter or an eps of 13.52 sen! (just imagine if you annualised the eps and compare the annualised eps versus the offer price to take Hume private!)

Now the best of all this is Hume Industries balance sheet. Look at the piggy bank cash! ( And I just could not believe how OSK analyst could comment at this stock without even looking at Hume's latest earnings and its balance sheet.)

Yup, Hume Industries have some 349 million in cash balances and its bank borrowings is a mere 15.3 million. (Hume has some 191 million shares. What is the cash per share ratio?)
Hume is being offered to be taken private at 4.30!!!!!!!!!

Good deal for who?

Does it sound fair for the minority shareholders who took the stock market risk to invest in the stock?

Do you think the minority shareholders are fully compensated?

How?

Here's another question. Now this is NOT the first privatisation exercise from Hong Leong group. It had happened before. OYL and Hume Cemboard comes to mind (and both privatisation left sour taste for the minorities too!). So what if Hong Leong group decides to pull another stunt on another of their company? Would you want to invest in another of their company when you know that there is a chance that you might not be fully compensated if the company is taken private?

How?