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Icap AGM on 10th November 2012. Voting for new directors. Are you happy with the share price of your icap? Your destiny is in your hand

Posted by kcchongnz at Nov 4, 2012 12:46 PM | Report Abuse
3 comment(s). Last comment by biancheong at Nov 12, 2012 11:51 PM
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3 posts

Posted by biancheong > Nov 12, 2012 10:54 PM | Report Abuse

It appears that most had agreed with the conclusion by the FM (fund manager) that share buyback is detrimental particularly to the long term benefits of ICAP.biz shareholders.
I would like to offer my 2 cents worth of counter considerations.
1) FM argue that the cash used to buy back shares will deprive shareholders the opportunity to compound that sum of cash at 18% annual rate (ICAP’s average rate of compounding) and that other companies e.g. Berthshire may be ok to buy back as they continue to generate new cash flow whereas ICAP being a closed end fund do not have such new stream of cash. Is this argument correct??
At 18% compound return, $1 will become $2 in 4 years time. So it is true that if RM10M cash is used for share buyback today, the NAV will presumably be smaller by RM20M in 4 years time.
BUT the RM10M cash did not vanished; it is just converted and kept as ICAP treasury shares. In 4 years ICAP NAV/per share double and so we expect its share price will also double assuming the same discount exist then. Should the discount narrowed (in fact most including the PM himself do believe it will narrow or may even become a premium) the price would be more than double. When that happens the treasury shares can be selling back to the market and used for other higher return investment.
So it appears that share buyback at a discount particularly at higher discount than the compounding rate of NAV is a no lose proposition.
More over when the RM140M cash is just earning 1.5% net return( deducting FM's fee of 1.5%)it is not exactly meaningful to assume it can compound at 18% while it is certainly closer to the truth that the ICAP shares bought back will compound at higher rate than 1.5%! and closer to the assumed 18% rate.
As pointed out by Peter Lim the cash used up for share buyback will reduce the NAV by the same amount and hence reduce the FM's fee which appear to be a win loose proposition and if such will not be good for all in the long run. What we want is to ensure alignment of FM and shareholder's interest. But this is only a short term lost to the FM. Longer term when the treasury shares is sold back into more cash the FM will also be rewarded.
Now let us consider share buyback in the case of non closed end fund listed companies e.g. Berthshire. It is true that Berthshire generate plenty of new cash flow yearly while ICAP does not, but it is the same for Berthshire that the cash it used up to buy back its own share will by ICAP's FM same argument also deprive Berthshire's shareholder the opportunity to compound at Berthshire long term rate of ROE(return on equity)
Generate more new cash is not relevant in this consideration. Simply the pertinent consideration is weighing the potential return versus its attendant opportunity cost.
Hence there is really no critical difference in share buyback for close end fund vs. that of non close end fund companies.

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Posted by biancheong > Nov 12, 2012 11:11 PM | Report Abuse

Read the edge financial daily interview of TTB on 7 Nov in which he mentioned that ICAP.biz may consider paying dividends if shareholders want it. Why consider paying dividend when he is against share buyback whcih he say will deprive the fund of cash for investment.
Paying dividend will reduce cash for ever while share bought back can be converted back into cash in future.
Can not follow his reasoning??

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Posted by biancheong > Nov 12, 2012 11:51 PM | Report Abuse

On 9 Nov Star in an apparent rebukes to Laxey earlier press statements that TTB had overtsated ICAP.biz performance vs that of KLCI benchmark as the index ( used by TTB) was not adjusted for dividend yield.

TTB said: "Despite the fact that the FBM KLCI pays dividend, its performance has lagged that of iCapital.biz, which is a non-dividend paying fund, as can be seen from its first annual report of 2006. If the KLCI pays no dividends, its underperformance would be even worse,”

If TTB uses the KLCI index without adjusting for its dividend he is overstating ICAP.biz performance(against the understated KLCI since KLCI has a dividend yield). If this is not true than he should answer this straight to the point. Instead what he say is rather confusing and misleading.

So let me ask openly here did he used an adjusted(for dividend)KLCI?? If Yes he is not overtstaing ICAP performance if NO he is overstating his performance.

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