Crowding Out Private by Government Link Funds or Companies…

This is a good article especially for a lot of shallow minded investors in Malaysia…

Towards nationalisation and international irrelevance?

Written by M.A. Wind

Monday, 17 October 2011

A very important article about the increasing influence of Government Linked Investment Companies and their worrisome implications. From The EdgeMalaysia, October 10, 2011. By Yeoh Keat Seng, manager of the KSC Incrementum Fund. The views expressed here are his own. I felt compelled to write this opinion piece after reading with great consternation Permodalan Nasional Bhd’s (PNB) launch of a takeover offer for S P Setia. Investor reaction has so far ranged from relief (that they will be taken out at a premium) and dismay (that the offer caps the longer-term upside of S P Setia) to disillusionment (over the exchange’s possible dual loss of an illustrious property company and a highly respected entrepreneur) and downright indignation. In this article, I would like to focus the discussion on the possible reasoning behind such acquisitions by government-linked investment companies (GLICs) and their longer-term implications rather than dwell on the S P Setia deal. As a start, I must say that given the circumstances and the direction in which GLIC’s have been heading, the real question was when, rather than if, they would embark on such private sector acquisitions. And I would go further to predict that we can anticipate a spree of more such transactions if the landscape does not change. The problem as I see it stems from our stock market’s inability to keep pace with the accelerated growth of our GLIC’s; the high investment concentration of GLIC’s on domestic equities; and their growing desire to exert influence on their investee companies. GLICs such as the Employees Provident Fund, PNB, Tabung Haji and Lembaga Tabung Angkatan Tentera have grown rapidly since the 1990s for a host of reasons, including the captive nature of our mandatory pension funds, our growing workforce and high savings rate, and the exceptional appeal of our savings schemes. By comparison, the growth in our stock market capitalization has trailed far behind owing to the lack of sizeable new listings over the last decade with a couple of exceptions, and the decompression of the valuation of our market over time. As an indication, the combined assets of the EPF and PNB have grown to an estimated 40% of our stock market’s capitalization today from only 24% in 1995. As at end-2010, GLIC’s held domestic equities worth over RM 300 billion, translating into around 30% of the local stock market’s capitalization. Considering that ownership of between 25% and 50% is often adequate to control a company, and that some of the government linked companies (GLCs) themselves also own other listed ones, the influence that these GLICs wield in reality extends to a few multiples their fund size. This assertion can be backed by a sampling of the top 20 largest listed companies. Of these, 10 companies accounting for 57% of the 20 companies’ total capitalization (03 32% of the entire market’s capitalization) are classified as GLCs. Of the remainder, the two gaming companies have no GLIC ownership while all the rest have at least one of them as a significant shareholder. (We consider funds managed by GLICs as extensions of themselves.) Having GLICs as major investors in our largest capitalized companies is not an issue. In fact, GLICs are seen as strong anchor shareholders for banks, telcos and companies in the utility and heavy industry sectors with their deep pockets and long holdings tenure lending credibility, especially in times of distress. The problem arises when GLICs move a couple of tiers down and start buying into mid-sized companies run by entrepreneurs. Putting aside PNB’s earlier acquisition and eventual privatization of Island & Peninsular and Petaling Garden of which they were already major shareholders, this trend can be traced back to almost a year ago when UEM Land initiated the acquisition of Sunrise. Sime Darby’s more recent proposal to buy a sizeable block of Eastern & Oriental may also be seen in the same light. These deals could probably be differentiated from the latest one in that they were strategic and characterized by GLC-operating companies buying into peers with complementary strengths, and involved willing buyers and willing sellers. Nevertheless, it could just as well be said that they set a precedent that may open the floodgates for acquisitions by GLIC’s. Why should there be more such acquisitions? Since the clause for GLICs growing faster than the stock market is structural in nature, it is unlikely to reverse for the foreseeable future. This means that as they seek to deploy their ever-growing funds in the local market, more and more companies will be acquired, starting from the larger and better managed and eventually cascading down to the smaller and less well-managed ones. As mentioned earlier, GLICs already control half of the 20 largest companies. Over time, they should easily control at least half of the next 20 and over an even shorter period, the next 20. Assuming they continue to dogmatically pursue a policy of investing almost exclusively in the domestic equity market, a day would come when the majority of our top 100 companies will be entitled to carry GLC membership cards. Where does this leave our local entrepreneur owners who hold less than a controlling stake in their listed companies? Feeling stifled and paranoid about being the next candidate to be bought out and coming under pressure to defend their companies. This trend creates several highly disconcerting possible implications for our market. First, GLICs buying out mid-cap companies run the risk of eliminating entrepeneurs and crowding out the private sector. If our GLICs had taken over S P Setia, AirAsia, IOI Corp or JobStreet in the early days of their growth trajectory, it is doubtful these would have grown to become the industry champions they are today. I am not saying that institutional shareholding is incompatible with entrepreneurship as the phenomenal success of the late Steve Jobs and Apple Inc would attest to. Apple was already listed and owned by institutional investors when Steve Jobbs returned in 1997, turned it into an icon and generated 100-fold value creation in the process. However, Apple’s shareholders are commercial organizations with an uncomplicated profit-making motive. None of them had control over the company and management was given free rein as they continued to deliver. In comparison, our GLOC CEO’s have KPI’s that often extend beyond maximizing shareholder value. It could be difficult for a strong-minded and successful shareholder entrepreneur to peacefully co-exist with new controlling shareholders that may want to impose their influence on areas such as management composition, CEO compensation, business direction, capital funding, corporate culture and so on. Even a decision as fundamental as whether the company should retain the bulk of its earning for reinvestment or whether earnings should be largely paid out to meet the income needs of GLIC shareholders could be a source of tension. Singapore andChina too face the highly sensitive issue of GLICs or state-owned enterprises (SOEs) crowding out the private sector. Over there, the crowding out takes place via GLICs or SOEs out-competing smaller companies by virtue of being endowed with subsidies or other unfair advantages, having better access to credit or by simply being better run. Malaysia seems to be formulating its own model in the game – buying out publicly listed companies that presumably will then compete aggressively with the private sector. Second, the free float of our stock market will decline over time and minority investors risk getting squeezed out as liquidity becomes a problem. Even more importantly, their voting rights will diminish in value, weighted against the holdings of these giants. The idea of using GLICs to buy out foreign investors to defend our stock market was first mooted during the Asian financial crisis and sadly, it could become a reality someday even though this is not longer the desired direction. Third, the Malaysian market’s weighting on international benchmarks such as the MSCI, which takes into account free float, will shrink even further. Already,Indonesia’s market capitalization has almost caught up with ours while its trading volume has surpassed ours. Fourth, it will inevitable create an equity bubble as the market cannot grow fast enough to absorb the inflow of new funds. With too much funds chasing too few stocks, prices are bound to inflate. If we extrapolate this far enough, it is possible that our market could someday trade at stratospheric levels thatJapan did in the 1990s. Why should we argue against the creation of a bull market where stocks could get inflated to PER levels of 30 times, 40 times or even 50 times? Simply because we know it will not last. For an idea of the after-effects, please refer toJapan’s double-decade bear market. From being the most dynamic market in the region,BursaMalaysia has traded down to a stature where the market’s velocity is one of the lowest around. The same applies to its foreign shareholding level. This can be attributed to many reasons, but certainly the risk of being semi-nationalised and becoming internationally irrelevant ranks high. Today, with international investors having their choice pickings of investment markets, we cannot offer an attractive proposition if their view of our market is that the entrepreneur community is shrinking, liquidity is poor and the voice of minority shareholders will shrivel over time. To prevent the problem from escalating, there has to be immediate recognition of the potentially destructive nature of this trend. The longer we wait, the greater the inertia, and the harder it would be to contain it. What are the possible solutions? Since the continued fast-paced growth of GLIC assets can be taken as a given, the most optimal solution is to open up the funds to invest in a broader spectrum of asset classes beyond domestic equities, such as international equities and bonds, private equities, real estate, commodities and so on. To achieve this goal, it is imperative that GLICs undertake a holistic review of their mandates and conduct a comprehensive asset allocation exercise. This should take into account not just their own needs and comfort zone, but also that of the domestic capital market’s ability to accommodate them as well as the long-term risk implications of their actions today.

DRBHICOM – FLAG PATTERN

DRBHICOM is showing a bullish flag pattern. Bullish flag pattern is a sign of continuous trend and the target price normally has the same quantum as the pole. Target price for DRBHICOM is RM3.08. At current price of RM2.66, it represents 15.8% upside. What about the downside? Immediate stop loss is at RM2.48.

I rate this a high risk, high return trade. Only RSI is showing a weak sign of bullish reversal while other indicators are neutral.

Today’s Trade: Malton Bhd

It has been a while since I talked about the market. I feel I have properly positioned myself and all I need is waiting to reap the fruit. The disadvantage is I have no more investment idea to write though I have a lot other “somehow” related issue which I would like to talk about like i) public housing by government, ii) my opposite view on MBSB after reading snowball’s blog and iii) SC’s idea of changing reporting frequency from quarterly to half yearly. Shall touch all these issues later..

Anyway, I am very confident on Benalec as you can read from previous posts. True enough I have gained more than 10% in just few weeks. On July 7, I sold close to 45% of my holding Benalec at usual resistance level of RM1.55. That free up some cash for my next trade…

That trade is Malton Bhd where I bought at RM0.52, close to its support level. It went as low as RM0.51 today after Europe markets open in red. At one instance, Italian market was down by 4.0% which I believe did affect the sentiment of our local market. On the other hand, I see it as an opportunity to buy into Malton Berhad at an attractive price. If you are fortunate enough to read this blog, this stock deserve a look. Buy at RM0.52 or better.

I shall discuss this more later. As for now, I need to get some sleep.

Food for Thought: Padini to be Affected by Drought in Texas?

Gloves counters were whacked due to high latex price. So do you think Padini will be hit due to drought in Texas? Farmers apparently abandoning their crops because of drought. Will this send cotton price sky-rocket?

If Gap and Polo Ralph Lauren are cutting their earnings estimates, do you think Padini will not be affected? It’s for you to decide…

Bloomberg News,
Texas Cotton Farmers May Abandon Record Acres on Drought

June 30 (Bloomberg) — Cotton farmers in Texas, the biggest U.S. growers, may abandon a record number of acres after the worst drought in at least a century damaged plants and boosted costs for textile makers including Gap Inc.

“This year will probably rank among the top abandonments,” said John Robinson, a professor and extension economist at Texas A&M University in College Station. “The situation looks very grave.”

About 55 percent of the Texas cotton fields were in poor or very poor condition on June 26, matching the record low in 2006, the U.S. Department of Agriculture said. More than 70 percent of the state was experiencing “exceptional” drought as of June 21, and non-irrigated crops in the Panhandle and South Plains regions have all failed, a Texas A&M research unit said.

While the U.S. Midwest got too much rain this spring, flooding millions of acres of corn, soybean and rice fields, the dry conditions in Texas — the worst since record-keeping began 116 years ago — may force farmers to make crop-insurance claims rather than harvest cotton.

Abandonment in the High Plains region, which usually produces about two-thirds of the state’s cotton, may reach 50 percent, the highest since 53 percent of the crop was left to rot in 1992, according to Lubbock, Texas-based Plains Cotton Growers Inc. The record is 42 percent in 1998, according to the USDA.

Gap Cuts Forecast

Cotton futures in New York as much as doubled in the past year, touching a record $2.197 a pound on March 7, as adverse weather lowered output in China, the world’s biggest consumer and producer. San Francisco-based Gap, the largest U.S. apparel chain, cut its full-year profit forecast by 22 percent in May, citing higher costs, while Polo Ralph Lauren Corp. posted a 36 percent decline in net income in the quarter ended April 2.

Prices have dropped more than 45 percent from the record on signs of slowing global demand, particularly in China. Cotton for December delivery fell by the 5-cent exchange limit, or 4.1 percent, to $1.164 at 10:14 a.m. on ICE Futures U.S. in New York. That’s the lowest since Nov. 30.

“On one hand, output is declining in the U.S., and on the other, demand has taken a severe hit,” said Peter Egli, the director of risk management in Chicago at Plexus Cotton Ltd., a U.K.-based merchant. “Higher prices have rationed demand.”

The drought in Texas, which accounted for 44 percent of the nation’s harvest last year, may accelerate a projected drop in production in the U.S., the world’s largest exporter, and revive prices. Only about a third of the acres in Texas are irrigated.

Cotton may climb to $1.59 by end of year, according to a Bloomberg survey of 14 analysts and traders.

USDA Crop Estimate

The USDA on June 9 slashed its forecast for the total U.S. crop to 17 million bales, from 18 million in May, citing the worsening conditions in Texas. That would mean a 6.1 percent decline from a year earlier, when output was 18.1 million bales. A bale weighs 480 pounds (218 kilograms).

That was the first time since the drought of 1998 that the USDA lowered its production outlook in June, according to Sharon Johnson, a senior analyst at Penson Futures in Atlanta.

“We will see more cuts as the year progresses and the extent of damage becomes more evident,” Johnson said.

Without rain soon, output will drop more than the government’s forecast, said Gary Raines, an economist at FCStone Fibers & Textiles in Nashville, Tennessee. Plexis Cotton’s Egli said production may fall to less than 15 million bales.

Declining Production

U.S. production is expected to be lower even after farmers boosted planting. A USDA survey of growers released today showed that 13.725 million acres were sown, compared with 12.565 million estimated in March.

The condition of the Texas crop as of June 26 matches the low of August 2006, which was the worst since rating records are available from the USDA going back to 1986.

Craig Heinrich, a 44-year old farmer near Lubbock, said he already has abandoned half of his 2,400-acre cotton crop because of the drought and high winds. Heinrich said he’ll seek to collect on his policy with Armtech Insurance Services.

“If beneficial rain doesn’t fall in most areas of Texas soon, claims will most likely be higher than in years past,” said Tom Zacharias, the president of Overland Park, Kansas-based National Crop Insurance Services. In 2008, farmers held $90 billion in insurance covering 272 million acres nationwide, the highest liability ever, he said.

Ted Etheredge, the president of Armtech Insurance, declined to comment. Officials from 14 other companies designated by the USDA to provide coverage through a government reinsurance program were either unavailable or declined to comment.

Texas Harvest

Texas may harvest 3.5 million acres (1.4 million hectares) if the present conditions prevail, FCStone’s Raines said. That compares with 6.115 million planted acres projected by the USDA in March after surveying farmers.

Tropical Storm Arlene, the first named storm of the Atlantic hurricane season, may bring rain to the region over the next several days, according to Donald Keeney, a meteorologist at Rockville, Maryland-based MDA Information Systems Inc.

“Maybe some rain now can save parts of the irrigated area,” said Heinrich, the Texas farmer. “For most of the area, it’s just too late.”

To contact the reporter on this story: Debarati Roy in New York at droy5@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net .

Technical Analysis on Benalec

Below are my comment after buying into Benalec 5 days ago…

It is a game of patience when you deal with market. If you are read my introduction in “About Me”, you will notice that I am lacking of waiting power. As a result, I miss out a lot of opportunities. I find myself good in identifyng stocks but I reap no fruit because I am so impatient…

But I am very determine to change that with Benalec and Suncity-W. For this post, I would like to bring your attention to Benalec. This stock has been trading sideline for a while now. If you are to notice the highlighted part in the chart, you notice “indecision” indicator, which they call it “DOJI” under candlestick. Now, when you see doji, it basically means two things. First, it is the sign of reversal of the previous trends. Second, it is taking a breather before it continue trending (upward or downward). Simple isn’t it? For Benalec it has shown “DOJI” for three days, where it open and close at the same price as last closing price 4 trading days ago. Now this is my analysis purely on Technical. I will talk about Fundamental later…

1. Is it a sign of bullish reversal? The answer is NO. There is no upward trending in the first place. Look at the chart, the share price has been relatively flat since April. And amazingly, the support price is at RM1.4o which is the same as my entry price. I count myself fortunate. Since, the share price has been relatively flat, I really believe it is just a matter of time, before we see the share price shoot up! Of course there is a chance for it drop too since “DOJI” simply means “indecision”. But I think upside on share price is more likely because 1) I believe it is currently at consolidating phase, where people is accumulating at this price range and 2) since IPO (IPO Price = RM1.00), the share has been at this level on average for the longest time, where it open on the first day at RM1.36. So those IPO investors either waiting for share price to go up further by sitting on the profit or sold it already. So, the support level is around this price. Therefore, upside is more likely…

2. Is it a sign of taking breather before showing trends? YES. Indecision for some time only can mean two things. Trending up or trending down only. Traders will not participate when there is no sign of clear trend. So you see volume getting lesser and lesser. But, assuming what I say on Point 1 is correct, volume will eventually returns because someone will eventually make a “decision” and that will push the share price higher.

3. Trading at lower band of Bollinger Band important? YES. It gives me the comfort level that I am buying the stock within the value band and it is at the lowest value band! For me, it is worth the bet despite being slightly more risky when there is no strong upward trend yet. Knowing the company gives me even more comfort level.

In conclusion, I am pretty positive it will give 15-20% in 8 weeks time. In fact, the stock potentially can trade in and out a few times during that 8 weeks. My target price is RM1.62 – RM1.65. I almost don’t need stop loss as I am confident this is the support level, but lets put it at RM1.25. Chances are, at RM1.25, I will buy further… hehe!

So, huat ar comrade…

Glomac Eventually Shines…

Just follow up from my last posting. You can read it from I Sold Glomac to Make Way for Suncity-W. Although I no longer have Glomac, I am very proud of the company. It eventually shines and better still it broke the resistance level at RM1.85 which I mentioned in previous suggested. At this level, I would suggest investor to increase the stop loss from RM1.65 to RM1.85. I have confident this stop will run up to RM1.95, then market will start to take profit, so if you ask me, I think the resistance will be at RM1.95. Don’t be too greedy, increase your stop loss and lock in your profit.

As I have suggested, the company will achieve RM64 million profit for the full year, representing EPS (diluted) of RM0.2025. The company reported RM63million instead, representing EPS of RM0.1945, where my net profit target deviated 1.5% compare to the real result. The company continue to give surprises by announcing another RM0.05 dividend for the quarter. For the full year, the company has given out RM0.095 as a dividend to the shareholders, representing 5.43% gross dividend yield. Not too bad, really… Not to mentioned, there will be a share split and this will improve liquidity of the share. Everything is going well with Glomac. This is a good long term stock.

Still, I suggest investor to be cautious and pay attention to short term reversal trend and lock your profit with stop loss at RM1.85.

Maybank and CIMB Scrap Merger Plans with RHBCap

I am glad Maybank and CIMB scrap merger plans with RHBCap. This is such a smart move and GOOD LUCK to Aabar Investments who just “bought” RHBCap at 2.25x book value and see how they can realized gain from their investment. I think they are going to sit on it for a long time and risk to sell their 24.9% at much cheaper valuation like what happen to Primus!

I am even happier when TA Head of Research, Mr. Kaladher, who agreed they are better deal out there like AFG and Affin. He clearly mentioned the name of Affin. I wish to re-iterate here, with RHBCap out of the way, there are actually not many banks in Malaysia that is available for acquisition and that should mean smaller bank like AFG and Affin deserves “scarcity premium”. I am not surprise to see Affin and AFG share price to go higher from here.

UPDATE 4-Malaysia’s Maybank, CIMB scrap merger plans with RHB

7:08am EDT

By Liau Y-Sing and Min Hun Fong

KUALA LUMPUR, June 23 (Reuters) – Malaysia’s largest two banks, Maybank and CIMB Group , have dropped separate plans to acquire smaller rival RHB Capital in a deal valued around $7 billion, dashing the nation’s hope of creating Southeast Asia’s most valuable lender.

The two banks confirmed a newspaper report that merger talks were off, in light of Abu Dhabi Commercial Bank setting a high valuation bar when it sold its 25 percent stake in RHB to Aabar Investment at 10.80 ringgit ($3.56) a share last week.

The price paid by Aabar values RHB at around 23.7 billion ringgit ($7.8 billion), nearly 18 percent above the current market value of $6.6 billion. Other shareholders likely would also expect at least that much under a deal.

“Based on our various discussions and our assessment of the present expectations of key stakeholders, we do not believe that we will be able to arrive at a value creating merger,” CIMB Chief Executive Nazir Razak, the brother of Malaysian Prime Minister Najib Razak, said in a statement.

The news, which was first reported by Singapore’s Straits Times, sent RHB shares almost 6 percent lower, and delays impending moves to cut the number of banks from the current 10.

An earlier round of mergers in 1998 shrunk the number of lenders to 10 from 54.

“This (RHB deal) is working out to be a stumbling block in the whole Malaysian banking consolidation story,” said Kaladher Govindan, head of research with TA Investment Bank.

“There are still smaller banks in Malaysia to look at, from the likes of Affin, for instance. It appears that RHB Capital will be left alone for some time because it has some good synergies with its new 25 percent shareholder.”

A source with knowledge of the discussions told Reuters that CIMB decided to call off the merger talks after Aabar Investments snapped up the stake in the bank at a relatively high price. The source was not authorised to speak to the media and declined to be identified.

Malaysian newspapers have said that the 10.80 ringgit per share paid by Aabar for ADCB’s 25 percent stake was high as it valued the bank at 2.25 times book value.

In comparison, the last bank takeover in the country — Hong Leong’s acquisition of EON Cap earlier this year — was done at only 1.4 times book.

“The Aabar deal kind of kept a floor on valuation which is undoubtedly difficult for Maybank and CIMB to pay,” said a Dubai-based banking source, who declined to be identified because of the sensitivity of the matter.

Malaysian pension fund EPF is RHB’s biggest shareholder, owning a 45 percent stake.

 

COMPLICATIONS

The Straits Times quoted sources as saying the stake sale by Abu Dhabi Commercial Bank has complicated the proposed takeover of RHB.

“Pricing wise, the takeover doesn’t make much sense now. There is going to be a cooling down and the two banks may revisit the prospect of a merger with RHB at some other time,” a senior financial executive, who spoke on condition of anonymity, was quoted as saying by the newspaper.

A consolidation of the banking sector was at the heart of Prime Minister Razak’s initiative to create regional banking champions, as part of the government’s plan to increase investment in the Southeast Asian nation and move it up the value chain.

A takeover by Maybank would have created the biggest banking group in Southeast Asia by market value, at around $28.4 billion, while a CIMB-RHB combination would have a combined value of around $27.6 billion. Both would exceed the $26.7 billion of Singapore’s DBS .

Credit Suisse is advising RHB on the transaction while Nomura is helping Maybank. Morgan Stanley is advising CIMB, a source told Reuters.

RHB shares settled nearly 6 percent lower after the news, weighing on the broader Malaysian market that fell 0.3 percent. CIMB and Maybank shares were little changed. (Additional reporting by Niluksi Koswanage in KUALA LUMPUR, Dinesh Nair in DUBAI, Saeed Azhar and Harry Suhartono in SINGAPORE; Editing by Muralikumar Anantharaman)

 

 

Bought Benalec at RM1.40

Remember my last post where I free up my Glomac in exchange for Suncity-W? My reasoning is simple. Market is volatile, so there is no reason to buy in a stock believing the intrinsic value is higher than current price. So why not purchase something that has guaranteed PRICE? Not only the PRICE is fixed and guarantee, you also have an opportunity to ride on capital gain when the Newco share is listed somewhere in August. Long gestation period but it’s worth it.

Unfortunately, Suncity-W holds so well above RM1.25, tad higher than my target entry price of RM1.23-1.24. While waiting another opportunity pop up. One of favorite stock fell to its support line of RM1.40. I am using my smartphone to type this blog so unable to include the chart. At this level, Benalec provides a good entry price! So I bought 3,800 units at RM1.40.

If you are keen on this stock, buy at RM1.42 or better. This stock has been consolidating at this level (+/- 10 cent) for the longest time. Fundamentally looks reasonable with FY11 P/E of slightly above 10.0x only. Company with strong earnings growth and visibility, price hardly move, low valuation and solid business model with strong margin. I think this is a long term trade! I won’t repeat my mistake by selling early without getting a reasonable upside.

So, let’s huat ar…

CIMB: Bid for RHBCap Involves Share Swap

It’s 3.30am now and I just received the latest news from Business Times, that CIMB is still considering “acquiring” RHBCap but now they claim RHBCap is not open for acquisition but a merger! This is getting very very interesting and creative… Read below:-

KUALA LUMPUR: CIMB Group Holdings Bhd’s planned takeover of RHB Capital Bhd (RHBCap) will involve a share swap and should be seen as a value-creating merger rather than an acquisition, says CIMB chief Datuk Seri Nazir Razak.He expects CIMB to be able to come up with a merger proposal by the end of this month.

He said questions about pricing in such a merger are irrelevant as it will involve a share swap.

“If you look at the magnitude of this transaction, the probability is it’s going to be wholly or largely in a share swap. If that is the case, what relevance is there of price? In share swaps, you don’t have to have a price … you can just have a ratio,” Nazir remarked.

He was responding to market views that CIMB would have to at least match the RM10.80 a share that Abu Dhabi’s Aabar Investments paid for a 25 per cent stake in RHBCap last week.

The price, done at 2.25 times RHBCap’s book value, was viewed as expensive by analysts. Aabar bought the stake from its sister company, Abu Dhabi Commercial Bank.

RHBCap’s share price closed at RM9.56 on Bursa Malaysia yesterday.

Nazir pointed out that CIMB’s valuation would also have to be considered in a share swap situation.

“The price of RHBCap alone is meaningless in a share swap scenario. It is of full meaning if we are going to buy RHBCap, which we are not. CIMB is looking to negotiate a value-creating merger. To the best of my knowledge, RHBCap is not for sale,” he stressed to reporters after a CIMB event here yesterday.

RHBCap, the country’s fifth largest lender, is currently being eyed for a takeover by not just CIMB, but also top lender Malayan Banking Bhd (Maybank).

A news report over the weekend, citing sources, said that bids by CIMB and Maybank may exclude RHBCap’s investment banking and Islamic banking units as these would add little value to the larger banks.

Nazir said talks with RHBCap were still at an early stage and that the two were trying to understand better where potential synergies and duplications lay.

“If there’s a prima facie case for a value-creating merger with RHBCap, then we will then proceed to make a submission for the RHBCap board’s consideration,” he said.

He said three possible scenarios could eventually emerge.

“One is, they (RHBCap) proceed with a merger with CIMB; two, they proceed with a merger with a bank of yellow colour (Maybank); or three, RHBCap stands alone.

“As far as I’m concerned, there is a one-third chance of each of those possible outcomes because we’re still at a relatively early stage of the process,” he remarked.

Both CIMB and Maybank have indicated that they would not overpay for RHBCap.

Meanwhile, CIMB has yet to engage Aabar in talks to see if it is supportive of a merger, he said.

CIMB will first have to write to Bank Negara Malaysia for approval to talk to Aabar now that it has become the new shareholder of RHBCap.

Aabar chief executive officer Mohamed Badawy Al Husseiny said here last week that it was “excited” by the opportunity to potentially participate in the domestic banking consolidation.

Read more: CIMB: Bid for RHBCap to involve share swap http://www.btimes.com.my/Current_News/BTIMES/articles/cimbvc/Article/#ixzz1PqYh63SD

 

Smart Bank Negara versus Cunning Abu Dhabi

Last Friday, we saw the signing of Share Sale Agreement (SSA) of 24.9% in RHB Capital between two Abu Dhabi sister companies, Abu Dhabi Commercial Bank (ADCB) and Abu Dhabi investment fund, Aabar Investments. The deal valued RHB Capital at RM10.80/share equivalent to 2.25x of RHB’s Price to Book (P/B). You hear me right…at P/B of 2.25x! That is expensive in comparison of what Hong Leong Bank pay for Eon Bank at 1.42x book value.

Now, why would Aabar Investments would want to purchase RHB Capital at 2.25x of RHB’s book? If I run a investment house, logically, I would want to purchase something cheap and sell it at higher price. By Aabar Investments purchasing RHB Cap at 2.25x book value, not only it is extremely expensive, what is the upside? How much can Aabar Investments sell to the next investors? At 2.75x book value? Or 3.00x book value? This deal does sound very dodgy and it is not to hard to put the puzzle together to realized this is just a right hand to left hand transaction, or in related party transaction (RPT). Since both companies run by the State, in effect, there is no gain/loss in this deal. But one thing has change!! The price of RHB Capital has been inflated artificially…

Imagine this, my friend and I have a total cash of RM1.0million. We decided to buy a house of RM1.0million, but using my name only. Then a year or two later, I sold to my friend at RM2.0million and it was transacted. So how much is the value of the house now since the last transacted value is at RM2.0million? How will the property valuer value the house? IT WILL BE AT RM2.0million, but is RM2.0million the true reflection of the value of the property? NO!

That is exactly what the Abu Dhabis is trying to do. They knew Maybank and CIMB are competing to acquire and has already gotten Bank Negara’s approval. They also knew the fate of Primus who had lost control of EON Bank, who had purchased EON Bank higher valuation some time ago than what Hong Leong Bank is offering. I am also very confident that, they knew Bank Negara’s eventual goal is to reduce the number of banks to only 7 anchor banks only. In order to protect their investment, they quickly do the RPT and inflate the valuation of RHB Capital. Quite smart…

Until Bank Negara outsmart then by imposing two requirements:-

1. New shareholder must support a possible merger with another Malaysian Bank; and

2. Aabar Investments to adjust the sale price if the merger price is lower than the RM10.80 per share price agreed by both companies and the merger must not deviate too far from the market price so as to weaken the merged entity.

While such requirements do not mean much and cannot do much, but I have to give credit to Bank Negara for realizing the cunning method by the Abu Dhabis. I see the two requirements as EXPOSING the cunning method of the Abu Dhabis. The choice now is between Maybank and CIMB. Are they silly enough to pay equal or higher valuation for RHB Capital? Are they going to kill themselves while benefit the Abu Dhabis? The free float for RHB Capital is 25%, EPF owns 45% and Aabar owns 25%. In order to take control of RHB Capital, the key is to purchase from EPF and Aabar. It was said, to acquire entire stake of EPF alone, assuming valuation of 2.0-2.5x book value, one have to fork out close to RM26billion! That is a lot of money… I am sure Aabar is not going to sell anything below 2.25x book value, so valuing RHB Cap at 2.50x is about right, though it is artificial. EPF who are unanswerable to their stakeholders like you and me who contribute to the Fund, is in difficult situation. Making good profit by selling to either Maybank or CIMB and kill one of them or support sustainability of our two banking giants? At the end of the day, the choice is with CIMB and Maybank. If they have brain… they would stop the whole idea of purchasing RHB Capital and let the Aabar sit on their “dead investment” for a long time. RHB Capital don’t need Maybank or CIMB… they are good by itself. On the other hand, there are many other smaller banks like Alliance Financial Group or Affin Bank which are readily available to be consolidate. Why aim for RHB Capital only? Does it worth that much? Alliance Financial Group is only at 1.4x book value and Affin is still below book, trading at 0.9x book value.

Bank Negara has already exposed the cunningness of Abu Dhabi. Take that as a warning! Don’t be silly CIMB and Maybank. Not worth being the largest in Malaysia or even ASEAN by overpaying! Stop killing each other…

After all this event, I like Affin and AFG even better now. If RHB Capital is out of the picture, I believe there is scarcity premium on Affin and AFG. Their valuation should trade higher especially for Affin. For me, I have counted RHB Capital as no longer a acquisition target anymore. On the other hand, if Maybank and CIMB proceed with the acquisition, my advice is to sell Maybank and CIMB! When one is pursuing something despite not making sense, you know they care about their PRIDE more than anything else. The biggest loser is the shareholder ultimately. Can you believe one stupid (I call him sor hai) banker said the following,

This should be a free market transaction. Why the need for the strange conditions? Bank Negara should also allow the new shareholders to decide if they want to support a merger or not. We don’t need a nanny state in banking.

I think this anonymous banker wanted to stay anonymous because he is so “sor hai”. What is the purpose of Bank Negara? They are regulator! Of course, their job is to regulate to the best interest of the country. I don’t think Bank Negara’s condition is strange or stringent at all. Over-regulated is not good for any industry which I think Bank Negara is not! The free market is at what price EPF wanted to sell? The free market is at what price CIMB and Maybank wanted to buy? If the pricing is not favorable to Aabar, it is their stupidity to purchase at higher price (let say EPF wants to sell lower) and they can bring it to High Court and challenge the motion. Who say EPF cannot sell lower? If CIMB and Maybank willing to pay more, then it is stupidity for the two banks and Aabar benefits from it. THAT IS CALL FREE MARKET! HELLO.. “sor hai” banker…

Make me damn piss talking about the anonymous banker. My call is pay close attention to Affin and AFG. I think they are the safest bet and free from all stupidity! They should be the WINNERs. I love this two banks for the longest time, especially for Affin. Anyway, have a look at the picture below. I wonder Najib is truly smiling while attending the signing ceremony.