Great write up KC.
I noted that the 5 yr average FCL of 53.5m is much higher than the 5 yrs ave PAT of 29m i.e. over the last five yrs it produced 120m more cash than its PAT.
on closer analysis the bulk of the excess came from its 127m non cash depreciation charges vs its 38.4m net capital expenses. I am wondering is this sustainable ?

I agreed with most of what you say in general regarding SPAC. It is also too risky for retail investors to buy sona warrant as it had a definite probability of expired worthless.

However I do think the probability of QA being voted yes is more than 50%. And that the two institutions( CS & PAG) may support the QA by voting yes( or partly voted yes).Their motivation is to maximized their return.

My point is that the better outcome for them is that QA is successful and they get their shares repurchased hence getting a better return since the holding period reduced. This will Not happen if they voted No 100% since they alone hold 27.76% which will count for a min of 34.7%( 27.76/80) if all the 80% qualifying shares vote. So if they vote No that is it! QA will be dead!

So they could try to vote in such a way to get the QA through and get higher return for part of their holding. To make up the potential shortfall in return from their mother shares not repurchased, they can buy the warrant at current low price( indeed warrant seem to move up (last Friday and today)knowing that the WA will shot up if QA is approved.

Also, If CS and PA had indeed indicated they will vote No then there is no point for the latest ( last Friday) capital repayment announcement. So it seems that CS and PA will be supportive of the QA hence the need to still encourage the minority at large to vote Yes or to reduce the No vote.

It will be interesting to see what actually happen!

It appears that QA will go through. Why??

As at latest Bursa announcement, CS Group hold 180,918,100 shares or 12.825% ( of total 1410,714,100 shares) and PAG holdings Ltd hold 210,686,400 shares or 14.935%. Togetehr they hold 27.76% of the total shares.
Since the maximum voting shares for the QA is 80%( management which hold 20% can not vote) it mean that CS & PAG will count for a min of 34.7%( 27.76/80) if all the 80% qualifying shares vote. So if they vote No that is it! QA will be dead!

If they intent to vote no and exercise their share repurchase they should stop buying more sona shares when they get close to 20% otherwise if they vote no it will be NO and they will not get what they(apparently set out to achieve)

The fact that they continue to buy more right until 17 Mar appear to imply that they are not going to vote No or not 100% of their shares will vote No. Indeed if they want to have the QA get through so they can get part of their shares repurchased, some of their shares must vote Yes.

Also, If CS and PA had indeed indicated they will vote No then there is no point for the latest ( today) capital repayment announcement. So it seems that CS and PA will be supportive of the QA hence the need to still encourage the minority at large to vote Yes or to reduce the No vote.

Above is just my thought and i have no additional info other than public domain information.

wow! from 10.5M in 2011 to 117M in 2015, that is more than 11X in 5 years.
I am thinking aloud how much of the performance is due to the so called "star effect".
I cant help wonder if he would never let people know the particular stocks he buy and never say how good they are will the results be as good??
I meant no offence with my comments to Mr.Koon indeed I have high respect for Mr. Koon in particular about his philanthropic deeds.
I am just being skeptical as a normal reaction for e.g. when we read a book.

best regards

It is absolutely clear that KC writings on stock investment are the best in I3. keep up the good work

mililia, I am learning and I find that having to put my thoughts down in writing help greatly in my learning, hence my comments.

Point 3: What I'm trying to say is the rights issue will overcome the shortfall of cash coming from dissenting share holders. This is on top of short fall coming from our currency weakness. The exercise is not to entice dissenting shareholders. It's called dissenting shareholders for a reason.
Agree with your clarification.

Point 4,5,6: I think you get the concept wrong when come to discount. The discount of not less than 30% is not on CURRENT PRICE. The discount is after ex-price. So on ex-date the share price will be adjusted based on numbers right shares which will be issue. Then the to subscribe to the right share, you are paying 30% discount of the EX-PRICE. How can you confidently say that, "there is absolutely no reward to shareholders no matter how large is the discount?" Too make it obvious, if price shoot up to 80sen (let say only) and the exercise is 1 for 4 plus one free warrant. So theoretical ex price is 54sen. Then, the subscription price for the right share is 30% discount is 38sen. Would you pay 38sen to get for 54sen PLUS come with ONE WARRANT which is already IN THE MONEY?
I am well aware that the discount is on the ex all price.
The fact remains that "there is absolutely no reward to shareholders no matter how large is the discount" My explanation as follow. Let us use your example above but allow me to simplify it slightly by removing the free warrant for the time being. i.e. a simple 1 for 4 rights issue where the rights price is ~30% discount to the ex-price. Using your assumption that the price shoot up to around 80sen and that the 5 days volume weighted average price( before the price fixing date) is 80.75sen, and that the rights share is price at 52 sen, then the TERP(theoretical ex-rights price) is 75 sen. However this does not mean that shareholder can buy share at 52 sen and sell it for 75 sen and make 44% profit! (if so everyone will be rich beyond imagination! BTW I do not know how you get your theoretical ex price of 54 sen???please explain)
If you are an existing shareholder holding 4 shares, before ex your total 4 shares worth 4X0.8075=3.23, after ex you have 5 shares now worth 5X0.75 =3.75( assume that you intend to subscribe your entitle one rights share at 52sen) , the increase in your total shares worth is 52sen exactly the amount you paid to get the additional rights share( which was priced some 30% "DISCOUNT" to you) bottom line you gain Nothing! This is only to be expected as you can't simply create wealth by issuing more shares!
Clearly the above conclusion is the same no matter the amount of discount. Giving "free" warrant will also not change the above conclusion.
I also still believe that" no rights issue ever design to reward shareholders".( I may entertain an exception if you are the one to design it solely to reward shareholders) My believe is that shareholders will be rewarded only if the company make profit or create real wealth and that wealth can not be created by issuing rights, giving free warrants, giving "bonus shares" and any other such schemes.
Taking your argument that the company is doing something big( i will here equate something big to making big profit although I do not believe this is true in general) and say the company profit double and so it should worth double and so every shareholder shares worth should also be double without any rights with warrants issue, in fact doing so will incur cost that will not increase company profit and distract management from focusing on creating real wealth. Berkshire had never ever did any such thing yet it is recognized as one of the the best( if not the best) compounding company the world had ever see.

How about if I tell you it may not cost them anything (at least for now) for the invisible hand to act? That's a trade secret...
I am very keen to learn the secret.

best regards

Mililia comments :

1. The whole proposal to issue rights issue means there are no issues with the approval of the QA, from Securities Commission, points of view.

Make sense . Agreed

2. The proposed rights issue is one way to address the shortfall of cash plus concern from Securities Commission. I am pretty sure while submitting to SC, they would have consulted with SC, the option to overcome the shortfall.

Make sense . Agreed

3. The proposed rights issue is also a ingenious way to overcome some dissent shareholders (expected 25%) who may rejects the deals and block the whole deals.

Not sure whether RI will "oververcome" dissen shareholders. Dissenting shareholders will vote against to realize their sure profit so unlikely to be entice by the RI.


4. The rights issue is a "reward" to the shareholders. Think about it, you will be getting not less than 30% discount for the rights share plus free warrant.

since all existing shareholders are entitled to whatever discount and price will be adjusted ex right accordingly, there is absolutely no reward to shareholders no matter how large the discount is.

5. As I mentioned before, there share price cannot be traded less than the cash value simply because if that happens, then majority of the shareholders will vote against the deal, even the proceed from the rights issue will not be able to cover the shortfall as I pointed in point 3).

share price had been and is still trading below the cash value. If the price rises to at or above cash value,dissent shareholders will sell and realize their profit sooner and not wait for the money to be returned from the trust ac later. You need a a lot of financial muscle to change the tide, so i think this unlikely. Will the "invisible hand" waste their bullets in doing this??

6. Why would one do rights issue at the low price, resulting is maximum dilution. In addition to that, still give discount not less than 30%.

Bottom line is to raise the target amount of fund needed to bridge the potential gap. High discount tend to mislead a lot of people into thinking they are getting a bargain!! Every single shareholder is getting the same deal, what bargain is there??

7. Secondly, if you think point 4), 5) and 6) make sense, then the share price will go up from current price. The proposed rights issue not only address the funding shortfall but also a way to reward current shareholders.

No rights issue ever design to reward shareholders!

09/10/2015 07:24

It is difficult to doubt Mr. Koon's noble intention in trying to share his insight and benefit others which is consistent with his other good deeds.
But we are all human and if you read about the power of "Incentive Bias" as described by Charlie Munger, you can understand how our mind can be distorted by our stake at risk.

Mr.koon's article"Overweight Plantation Shares on 21 Jun 2014 concluded with the sentence "Now is the best time to buy back Jaya Tiasa"and Jtiasa price did went up in the following few days to a high of 2.66 (from 2.50) But it went downhill all the way since. So in this case it is apparent that Mr. Koon did not follow his own advise. In this latest mail he did admit that he could quicklyas he could after changing his mind due to change of fundamentals.
I guess herein lies the problem when one publicly promote a particular stock and explicitly say something like "best time to buy"then when things change almost immediately to become "time to sell quickly" one tend not to tell others about this lest no buyers to buy from him!

You wrote the BEST value investing articles in Malaysia.

I like to add that for businesses than can not expect to earn more than a market return of cost of capital, growth has no value at all! At best it is neutral, worse it can destroy shareholders value.

Therefore reasoning VS should fetch high multiples because of high growth is not correct.

1)And alternative way to figure out the fair value of VS is to look at VS's balance sheet instead of its P &L.

2)VS is definitely not a business that has pricing power or possess any superior technology that allows it to earn extra return than cost of capital. As such it would not fetch higher value than its capital otherwise competitors will join in and eventually bring the return down to the cost of capital level at which point it is no longer attractive for new competitors to come in.

3) Therefore a safe price to pay for VS is not more than its reproduction cost.

4)And a good and estimate for its reproduction cost is its book value of around RM3.

5) I think it is highly risky to pay a price much higher than RM3 for VS.

Most peoples will agree that the value of a company is equal to the present value of its distributable cash flows. Yet most peoples could not readily see that growth in earning could reduce value instead of increase value of a company.
I think this could largely due to peoples just simply equate earning as distributable cashflows as if all earning can be distributed out.
The fact is that almost all growth required additional capital, that is in the general case distributable cash flow is less than earning infact it equal earning -additional capital required for growth. To be able to explain this better let me use the following symbols, let;
V=present value, E=earning, aC=additional capital needed for growth,ROE=return on equity,r=cost of capital, g=growth rate
Then the present value formula is simply:
V=(E-aC)/(r-g), I think most peoples may simply omit subtracting aC(additional capital required for growth) from E, in which case present value is wrongly stated as V=E/(r-g) which give rise to the wrong conclusion that any g will inflate V as it reduces the denominator of the V equation.
Realising the correct equation is V=(E-aC)/(r-g) we can proceed to see why or how g can actually reduces V. To do that let us simplify and assume that a proportional increased of capital employed is required to fund growth e.g. a 10% growth required a 10% additional capital employed, then
V=(E-aC)/(r-g)=(E-g X C)/(r-g)=((ROE X C)-(g X C))/(r-g)=C x(ROE-g)/(r-g), where C= Equity employed
Restating again V= C X (ROE-g)/(r-g) less us discuss some of the different scenarios
1) if g=o, i.e. if there is no growth then V=C X ROE/r =E/r, this is the equation that most peoples are familiar. It is insightful to note that if ROE is equal to r i.e. if return of equity is equal to cost of capital then value is simply equal to the equity or capital put up by the shareholders, no more and no less. One can only expect to have a higher V if the return is higher than its cost, if ROE is less than r it can actually reduces the value of the equity committed in the first place i.e. value destruction. This equation reinforces why ROE is critical!
2)If ROE=r, V=C irrespective of any g, simply put no amount of growth will add value if ROE is just equal to r.
3) if ROE < r then higher g actually make V smaller, that is higher growth is worse if return on equity is less than cost of capital or as Kc puts it it destroyed value faster!
It is interesting to ponder what should be the appropriate scenario for VS valuation and that of Globetronic.

"There is no noble person who will help you to make money from share trading in the stock market...helping people to make money from the stock market is not a noble act"Very well said KC!

Sharing about general principles/approaches like Warren Buffett did in his annual letters is noble though.

If one has a great insight about any particular stock, he will definitely buy all he can before telling anyone about this good deal, lest others will chase up the price and render his insight useless. Only when he had collected all he want he will then share with others, at this time others who buy will not be competing with him but helping him to push up the share price.
It is the same thing when he want to sell, he will sell first. Being human many will not publicly declare he sold the stock which he had not too long ago proclaimed to be a very "cheap" and "good" stock that had plenty of upside.

My conclusion is learn those general principles like what KC share. Be very careful when someone told you specific stock that is really great but he already bought!

apparently Mondrian is net disposing instead of acquiring. Christ1234 why/how you conclude they keep buying recently ?

thks mililia.

mililia, which certain party will be happy ?

mililia, You seem to imply that if mother share is trading at above RM1 say at 1.2 then RPS could trade above RM1 ? Is this what u imply? I f so can you explain why.
My thought is that since the RPS is not convertable into mother share it's price will not rise in tandem with mother share. I could not see how RPS can trade above its face value of RM1 other than in the unlikely event that interest rate drop significantly.
thks

Yet another thing I feel not quite right is regarding the new dual listed fund which TTB recently provided more details during the road show.
This is regarding performance fees. Let me says it out right that I had no issue with performance fees in general.
But in this case I had 2 issues with it.
The first being how the performance is calculated. The fund manager must clear two hurdles to earn a 20% performance fees, the 2 hurdles are : 1) yearly performance of 6% and 2) compound return of 6% per annum. The second hurdle appear to safe guard the shareholders.
But the devil is in the details. An example will illustrate. Assume the par value is RM1 per share. Say at the end of 1st year the NAV become RM1.3( i.e. 30% increase), hence the fund manger get a performance fee of 20% X(30%-6%)=4.8%(on top of the regular 1.5% management fees).Nobidy will complain I guess since the fund manager did a good job.
Let us further assume that at the end of 2nd year the NAV become 90 sen (due mainly to a major market correction).The fund manager get zero performance fee( still get the 1.5% fee) as it fails both hurdles. No problem here again.
The market subsequently rebounded strongly and at the end of 3rd year the NAV is back to RM1.30. Do you think the fund manager deserves a performance fee?? if you think like me than the answer is no! since the NAV just get back to what it was 2 years ago,and the fund manager was already rewarded with a 4.8% fee then. But the way the performance fee was calculated the fund manager actually will get a performance fee, because it meet the yearly hurdle of 6% since NAV increased from 90sen to RM1.30 or 44.4% > 6%. For the 2nd hurdle 6% compound for 3 years is 19.1% and since the NAV is at 1.30 or 30% >19.1% so the 2nd hurdle was also met. So the fund manger will get a performance fee of 20% X ( 44.4%-6%) = 7.68% !
Let me confirmed that i did not misunderstood the performance fee calculation that was presented by ttb because I specifically asked him about it. Let me also says that the above scenario is not unlikely events. In any case it does not appear right that performance fees was charge a second time when the performance did not exceed the previous high.
The mind boggling part is that TTB mentioned that the consultant they engaged says that their performance fee calculation was the toughest in the industry !!?? What do you say ??

The second thing about the performance fee which i feel not quite right is that the current ICAP.biz close end fund has no management fee!( it only charges the 1.5% management fee). ttb mentioned that this dual listed fund is mainly for the benefits of current ICAP share holders, if so i feel it should stick with the same fee system and not charge additional. This will be worse if he is thinking of using the cuurent ICAP cash for this dual listed fund. If so the current ICAP shareholder will be paying a higher fee in the new dual listed fund. this dos not seem right especially ttb had told the shareholders that it is better to set up a new vehicle for global investing instead of changing ICAP's charter to allow for global investing. Yet by setting a new dual listed fund the sharehlders will now hd to pay additional performance fee!

so much for TTB supporters.

Let me also point out another fact.
In every annual report ICAP fund performance is always compared to that of KLCI index which seem logical. BUT the comparison did not correct for the dividend of KLCI stocks. In effect this is over reporting ICAP's performance by about 3%!
I remember in one of the ICAP AGM a few years ago someone pointed out this to him yet no changes was made to this subsequently.

I can not understand why so many(it appears that the majority!) just simply state that they support ttb! To me it is so crystal clear that the persistent discount to NAV is critical to all ICAP shareholder and must be dealt with and seen to be dealt with! as others had pointed out that ICAP IPO prospectus had specific section detailing various possible corrective actions. Yet TTB and the Board simply sit there and do nothing.
Myself and a few others had asked him to consider about share buy back(at substantial discount to NAV)which in fact is one of the possible action mentioned in the IPO prospectus itself. Yet he just simply say share buy back will not work for ICAP! can some one who is supporting him explains how share buy back at 20% discount to NAV is a lesser option than keeping in bank earning 1.5% net interest??

ICAP IPO prospectus has a section on managing discounts which detailed specific corrective actions that include share buy back, liquidation, managed distribution etc. Yet the board of directors sit still and do nothing, while ttb say that share buy back is not applicable to close end funds! it is ridiculous that keeping cash in bank earning a net income of 1.5%(after paying 1.5% for fee) can be a better option than buying ICAP share at 20% discount! and TTB is saying that ICAP will be able to compound at 15% per annum ! if true than the buy back share will worth a lot more.

The major issue with ttb is he fails to do anything constructive to narrow the discount of ICAP. In this respect indeed the whole of ICAP board should take the major blame for not doing anything at all. It is appalling!

From how TTB responded to my questions during the recent road show it was clear that he is planning to use ICAP cash to subscribe the Dual listed fund.

However since ICAP explicitly stated only to invest in KLSE, it can not force ICAP share owners to subscribe to the new Dual listed fund which will invest globally.

Therefore the appropriate way is to call for an EGM to vote for a capital repayment which will either be in cash( for those who opt not to subsribe to the new dual listed fund) or in new shares of Dual listed fund( for those who want to subsribe to it)

To see how this might help reduce ICAP discount, assume that the capital repayment is RM1.65 or 1 new dual listed share ( US$ 0.5 say equivalent to RM1.65) for each ICAP share.

This will reduce the NAV of ICAP by RM1.65. Given latest NAV of ICAP @ RM3.03 and cash of ~1.72 and share price of say 2.40 the NAV will be RM1.38( 3.03-1.65) and if share price will also drop 1.65, the ex share price will be RM0.75(2.4-1.65) i.e. the discount will widen to 45.6%! (1-0.75/1.38) from 20.8% (1- 2.4/3.03) currently. Such a huge discount will presumably attract more buyers to come in couple with less seller who want to sell, the net effect is clearly a narrowing of the discount to may be close to 25% say. This mean the price will rise to around RM1.04( 75% of 1.38) or increase of RM0.29!

In summary if you buy 1 share of ICAP @ RM2.40 now and if ( and please take note of IF) what i described above happen you will get a RM1.65 cash back( in about 8 mths time) leaving you a net cash outlay of RM0.75 for one ICAP share of around RM1.04 or upside of ~35%.

For those who opted to receive the new share the result should be similar as the new share plus fraction of free warrant should trade higher than cost since everyone who own the new share can only obtain it at the same cost price hence nobody will sell it for less, at least for the initial period.

Please take note that the capital repayment of RM1.65 is most likely on the high side and if such capital repayment happen it is more likely to be lower than RM1.65. I use 1.65 simply for ease of illustration.

I like to stress that I am not recommending buy ICAP at current price. I am simply sharing what I thought TTB is hinting at when he say the new Dual Listed fund will indirectly help to reduce the ICAP discount.