Land & General Berhad - subscribe or be diluted - the ICULS dilemma.

SUMMARY: L&G have a cash horde of RM159M yet proposed a ICULS issue to raise RM77.8M to fund the purchase of a 14 storey office space in Putrajaya @RM575psf. This rights issue may potentially dilute current shareholder's holding by up to 50%.


L&G recently proposed a RM 77,779,589 renounceable rights issue of five years, 1%, ICULS at RM0.13 each for every ordinary share of L&G.

Translation: 
- Each shareholder will be entitled to subscribe for a convertible loan stock paying 1% interest, convertible at anytime within 5 years of issuance.
- The proceed of the rights issue will be used primarily for the purchase of a 13 storey strata office building being constructed in Putrajaya. (edit: apparently the vendor of the office block is a related party according to Focus news article 2 weeks back.)
- The ICULS may be converted in 2 manner; 1) by surrendering 2 ICULS for 1 L&G share, or 2)by surrending 1 ICULS and RM 0.13  for 1 L&G shares. Basically the ICULS can be converted to shares at RM0.26, regardless whether ICULS or cash is used to top up the conversion at a later date.

Impact:
Due to the 2 different methods for conversion (cash and ICULS), the impact on potential dilution cannot be determined beforehand. A illustration was provided in the announcement to illustrate the potential dilutive impact of this exercise.

Based on this illustration, we can foresee a potential dilution of between 25% to 50% for existing shares.

From a share base of 598,304,530, the number of issued shares can potentially double to 1,196,609,060!!!




Does L&G need the ICULS?
Based on the latest available result, L&G holds approximately RM159M, and is generating a steady operational cashflow of RM35M in the 9 months to December 2012. This cashflow is expected to remain (if not strengthen) due to the strong sale at its Elements and Foresta project in Kuala Lumpur.

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Analysis
I personally like the profitability outlook on the company for its current stable of project. The strong sales achieved in its current projects namely Foresta and Elements provided me with this confidence to invest in the company. Its current market cap is approximately RM 245M and based on previous announcement, the company can expect a profit of approximately RM120M for its 50% state in the Elements project alone.

It is also rather odd to me for L&G with its strong development expertise to be purchasing a strata office. The purchase price is RM 575psf, why can't L&G's management purchase a plot of land and built the structure themselves? 

Not being particularly familiar with the value for Putrajaya, I consulted some listing for offices in Putrajaya and found space to be listed for around RM 300 psf only. Note I am not a valuer. But I am not terribly excited with the proposed use of fund.

Conclusion
- Earning dilution is a reality for this proposed rights issue.
- The company may not really need the cash given its healthy cash horde of RM 150M.
- Even if the cash is needed elsewhere, does it really make alot of sense to suffer a dilution of up to 50% in return for a 13 storey office space in Putrajaya? I reckon no.
- However, if the proposal is adopted - I would subscribe, simply because I don't want to be further diluted.


Edit: If you are a minority shareholder keen on voting against this, do get in touch with me. Perhaps we can pool our vote/voice.

Weida - boost from net disposal gain.

Weida - it's got a market cap of approximately RM 188M.
It has been paying a boring annual dividend of approximately 4 cents
Currently trade at about 6xPE.

Just received the shareholder circular on the proposed disposal of its stake in its palm oil subsidiary for approximately RM 151M recording a net gain on disposal of about RM 121.15 million (over its RM188 market cap).

It's got 133.33 shares outstanding - the net gain per share will be approximately 91 cents.

Looking at its proforma balance sheet as at 31 March 2012, the NA per share will increase from RM1.6 to RM 2.56

Their EPS have been growing at an annual rate of approximately 12.5% from 8 cents in 2009 to approximately 19 cents in 2012.

Well worth a look at. 

They've also recently announced a JV for a property development venture.

Essays by Buffett

Quiet an interesting read... his view on value & investing.

Should take a look.

Value Traps

Came across an interesting article by Dali on value traps, it identifies companies with trading price significantly below its NTA value and the rationale behind them (lack of catalyst).

While many investors knows the term value trap, it is perhaps hard to tell a value share apart from a value trap.

In my short investment life, I've focused on the discovery of value share - those that tick all of Graham's criteria for value. But recent lessons has made me reevaluate my approach in investment.

Here's an excerpt from Buffett's annual letter to investor:

So if value is not the key to a successful portfolio then what is? Investment is not an easy game to play afterall!

Revisiting YTL Cement privatisation

Summary - this is my rant about how YTLC minority could have gotten a better deal if they've stayed listed & YTLP shareholder shouldn't get too excited about attempt to privatise through share swap

(Dedicated to HNG :P)
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YTL privatisation - is it a good deal for minority? A lot of commentators before me have pointed out it's a raw deal to minority who have invested in a business hoping for a payday when the company is more profitable.

Intrinsic value

I am of the opinion that shareholder gets better intrinsic value by holding a pure-play cement counter rather than holding a conglomerate counter like YTL. If I want to hold YTL, I would have went out to buy their shares - no thanks for forcing me to be a shareholder. In YTLP's case, I say no thanks to any privatisation attempt through share swap with no acquisition premium. YTLP's underlying holding is far superior than YTL's mix pot of assets.

Earning growth

As noted in my last post, YTLC's earning is up 41% is its latest announced quarter. No doubt by privatising it, YTL have managed to plug the cashflow leakage to minority shareholder, thereby maximising the cashflow for its own benefit. Assuming the same PE multiples, the increase bottomline will directly mean a better underlying share price. Those YTLC shareholder that bought in at over RM5 would know.

Currently Malaysia is going through a huge construction upswing, with cement sector doing particularly well. What would the effect be if YTLC stay listed? We can look at Lafarge for a comparison.

It's up approximately 48%! YTL's management are not stupid to privatise an overvalued assets, they are among the smartest team of management in Malaysia with their ability to buy distressed asset and turn them around profitably.

Dividend payout?

Althought YTLP and YTL is paying the same absolute dividend at the moment - YTLP's cashflow generation rate allows them to pay a far higher dividend then what YTL is capable of. This is by virtue of their current cash horde of RM10B - along with their cash generation ability. The lowering of dividend is a conscious management decision and not forced upon them by any external difficulty.

Much of YTL's cash horde of RM 12B (I believe) lies in YTLP. The estimated figure is $10B out of the RM12B sits at the subsidiary level. They could get to it by doing an intercompany loan (look at L&G), payout a dividend, or privatise YTLP then payout a dividend.

Looking at their history with YTLC - in hoarding cash then privatising it without EGM - I hope they will keep YTLP listed and increase the payout. But I can only speculate.

Likelihood of privatisation & EGM

Unlike the YTLC privatisation where a waiver of EGM requirement allows them to carry out the share swap it is extremely unlikely for a similar situation to happen in YTLP's case.

YTL despite its frequent rhetoric on its desire to privatise YTLP has recently made a massive grant of WB to YTL's shareholder - my initial suspicion was a privatisation attempt. But Felicity of Intellecpoint has pointed out it's extremely unlikely for them to give out WB at a discount then buy it back at a premium - just doesn't make sense.

In the event that they do attempt to privatise, waiver is unlikely to be given as shares required to be issued will exceed the 10% threshold. But this only applies at YTL level - as YTL shareholder, of course I will support the deal. YTLP's EGM situation is more murky. I am not too sure what's the effect of the mandatory takeover code on such privatisation attempt - if there's anyone that's an expert do chirp in.

I would speculate that an attempt to privatise will be conducted through another private vehicle not part of YTL's group of company. Simply because despite the value of YTLP - it doesn't make sense for YTL to give out discounted warrant and then purchase it back at a premium. 

Makes more sense to give out discounted warrant and allow a private party to purchase it back in the market at the depressed pricing.

Excerpt of news article on privatisation of YTLC

YTL Corp Berhad - Massive buyback program

Summary: YTL share price have been well supported through a massive share buyback program amounting to over RM600 million over the past 12 months. 

However underlying earning have also improved, primarily due to favourable results in its Cement segment. Quarterly earnings at YTLC increased by approximately 41% or RM 50 mil. 

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YTL Corp's share have been on a tear lately. The price shot up from its trading range of around RM 1.4 to RM1.6 to eventually trade above RM 2 before currently trading at RM1.80. Representing an appreciation of almost 29% (40 cents up from 1.40).

It's currently trading at approximately 12x forward PE (based on annualised Q1 earning) or 15x historic PE. 

If you review their P&L, you won't find anything extraordinary to warrant these price movement I reckon.. net income went up from 1.03B to 1.18B - roughly a 10% increase.

Its EPS and DPS figure shows improvement but is it really the cause of the appreciation??

EPS went up from 0.11 to 0.12 cents in last 12 months - about 9% increase. 

YTL Cement

Since their delisting in April 2012 after privatisation, the YTL Cement unit have achieved a 41% jump in quarterly profit. I wonder what would the price be if they were still traded. This result announcement was around June/August 2012.. YTL's price declined from RM2 since this result announcement.

 Based on current quarter earning, Net income is 392M or EPS @ .04 (.16 annualised) - approximately 33% increase from prior year's EPS of 0.12.

Based on segmented result at 30/Sept 2012 - it seems that the biggest contribution to the net income increase is YTL Cement and management service. 

MASSIVE buybacks

In the past month alone YTL repurchased approximately 15.4M shares amounting to approximately RM 29M through share buybacks.

Since January 2012 - their total buybacks amount to 361,850,700 units. 

(Looking at 15 Jan 2012 buyback announcement and 16 Jan 2013 buyback announcement - taking into consideration distribution of treasury shares in July 2012 of 647M shares)

The cash outflow from buybacks is pretty significant, in FY 2012 they spent over RM 500 M in buybacks. More than on distribution of dividends.

Given that they have continued repurchasing shares since its financial year end, I would estimate the total amount spent on repurchase of shares to exceed RM 600 M. Given that the share price movement does not track the result announcement, I would assume this massive buyback is the primary cause of the price increase. 

Implication?

YTLP's price is depressed due to a massive supply of discounted WB granted by YTL. If an attempt to privatise YTLP through shareswap as claimed by many analyst, then the minority shareholder of YTLP would be giving up share in a depressed YTLP (with potential catalyst) for a share that's trading 30% higher than its trading range on the back of a massive share buyback scheme. 

YTLP - debt, leverage and natural hedging

Summary: High gearing for foreign denominated assets reduced FOREX risk through natural hedging of forex risk, reduces overall asset portfolio risk.

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YTLP has approximately RM23 B of debt as at June 2012 (up front RM21B) in June 2011. Bulk of this increase is due to capital spending at Wessex Water and Yes of approximately RM1.6B and RM897M respectively.

The Wessex capital spending is due to their  £1B investment plan between 2010-2015. I am not sure what's the ROI for these investment given the declining segmental profit since 2010.

Debt as natural hedge in oversea investment
Anyway, the bulk of the borrowings lies in Power Seraya and Wessex Water. These borrowing represent approximately RM16B or 69% of total borrowing as at June 2012.

These debt represent 77% and 91% of asset in Power Seraya and Wessex Water.

As highlighted in the past by the management, YTL seek to hedge its FX exposure through foreign denominated borrowing that correspond to the underlying asset currency.

Hence, I think its FX borrowing (at rather low effective rate) acts as a efficient risk management strategy and given the secured nature of the underlying cashflow - investors should not be too worry about its level of gearing.

Illustration

Currently GBP/MYR is approximately 4.8, it's approximately 6.2 back in 2009 - representing a weakening of 22.5% over 4 years. 

Assets held under Wessex water was RM11.5B as at June 2011 or approximately GBP2.4B.

GBP2.4B @6.2 = RM14.9B

Representing a devaluation of approximately RM3.35B in asset value.

HOWEVER - due to "natural hedging" in the form of GBP denominated debt, the debt has also devalued by 22.5% - reducing the devaluation loss to approximately RM336M.

Saved the shareholder RM3B due to this "high gearing".

Note: Actual figure will differ - but concept is accurate.