Perils of Failed Privatization Bids

Perils of Failed Privatization Bids

Bids by major shareholders to privatize companies are sometimes very intriguing. The recent unsuccessful bid by Perak Corporation Bhd (PCorp)'s major shareholders Perbadanan Kemajuan Negeri Perak (PKNP) is one example of how the share price swung sharply before and after the D-day's decision. D-day means the day shareholders know whether it is going to be successful or not.

In January 2014, PKNP proposed a selective share capital reduction (Proposed SCR) and a corresponding capital repayment under Section 62 of the Companies Act 1965 worth RM183.60 million in cash payment. This translates into RM3.90 per Perak Corp share for the other share holders.

Perak Corp's share price surged from below RM3 to RM3.75 in that month, and stayed there throughout the next several months until D-day recently. But for this Proposed SCR to go through, one major shareholders Sime Darby Property Bhd (SDPB) who holds a 13% stake, must support. Without SDPB's vote, the Proposed SCR would not be a successful one.

In October, expectedly, SDPB did not give this Proposed SCR its supports and thence, the privatisation bid ended in failures.

Immediately after the announcement came out on Oct 24, Perak Corp's share price fell by sharply the next day. By the time of posting, Perak Corp's share is trading at RM2.73 on Nov 28, 2014.

Now one very intriguing question in my mind is if SDPB did not support the bid, SPDB must have seen higher value then the offered price of RM3.90. According to regulatory fillings, the net asset value per Perak Corp share is RM5.32!

Shouldn't then that Perak Corp's share price be at least traded higher or at the same pre-Proposed SCR price? Instead, its share price fell to RM3 plus and  is now at RM2.73. Why are minorities selling at this depressed price knowing that the several major shareholders are not willing to let go at RM3.90? Surely the selling are not sold by the several major shareholders, otherwise, there would be announcement on the website of Bursa Malaysia.

So this brings the question of the participation of minorities. Why are they selling now? Shouldn't the minorities be happy that the bid was not successful and hang on the shares for the longer term for its share price to reflect its so-called higher value in the long run.

The major shareholders of Perak Corp are not fazed by the swings of its share price as they are basically companies holding on for the long term. But for the minorities, the wide swing of its share price has a big bearing on individual's portfolio. For example a minority holding 100,000 shares of Perak Corp would be feeling the big difference! If he had sold at the pre-Proposed SCR period, he could have sold at easily RM3.75 and thence netted RM375,000.00. But because he held, the current price of RM2.73 means his shares are now worth only RM273,000.00. See a different of around RM100,000.00. Any ordinary investor would feel very  "sakit hati" like it or not.

So as we can see, privatisation can cause minority shareholders to feel happy and depress when it does not go through.

This also make me wonder about my shares in Delloyd Ventures Bhd which is also in the midst of a  proposed privatisation. According to a report, Deputy group MD, Datuk Leon Tee Wee Leng said the company is currently going through a due diligence process, whereby independent advisors as well as valuers are being appointed.

Delloyd Ventures Bhd's proposed privatisation would depend on the shareholders' feedback at the company's extraordinary general meeting (EGM) to be held in December.

What would happen then? I do not know. I can only pray it won't go the way of Perak Corp and see the share price falling to RM4 or below.

Cameron Highlands is over developed

Recently our beloved famous Cameron Highlands was in the limelight for all the wrong reasons. Floods, some landslides, rampant illegal land-clearing, occupation by undocumented foreign workers and even deaths due to the one main issue - i.e. over development. Fingers are being pointed at who or whom are responsible for allowing all these illegal clearing of trees and land for cultivation of fruits and vegetables.

To witness the extend of these so called over development, last week I drove to see for myself how extensive it was. I must admit over development is not the correct word enough. Cameron Highlands is massively over developed from all sides. Whether illegal or legal, the authorities must immediately take the most drastic actions to stop this.

Compared to my trip five years ago and last week, there are simply too many developments from new hotels or apartments, new attraction park Lavendar where visitors would be greeted by a Mickey Mouse mascot, continuous clearance of land for cultivation every turn here and there along the road. Even one bee farm is doing extension of a two or three storey building for business just by the back of its bee farm.

The hotel where I stayed is in Brinchang where from my top view, I could see two major developments going on. Look at the picture which I captured. On the top right side are two giant cranes in action for a big development while on the top left side, one can see the top hill has been cleared and planted for cultivation. Now when the top side are cleared, surely continuous heavy rain's water will seep downwards below as there are no massive big trees to help retain the water. That is one of the reasons landslides occur.

To rehabilitate back Cameron Highlands is possible. No one can run away from any illegal clearance or new building without approvals. The authorities need to send their team on a regular weekly basis to check. I don't think the illegals have a chance against the authorities as long as they are being checked from time to time.

Perhaps more rangers/officials should be directed to cover certain stretch/ares of Cameron Highlands respectively and they are to report directly to their superiors in a weekly basis. The superiors would then submit a monthly report to the higher authorities. In this way, every officials are responsible for their own areas. In this way, officials would not be over burdened and would be able to carry out their duties more efficiently.

Only the highest authority has the power to direct such orders. It is still not too late to save Cameron Highlands.

 

Massive wastage of food and resources

Another moment that caught my attention was the massive wastage of food by a thirty plus couple during the morning buffet breakfast. As I was sitting next to their table, I noticed that they were busy accumulating varieties of food on their table. I also wondered if they are able to finish all those food. In the end, they left all those food untouched including chilly sauce!

It is not that I wish to criticize this couple, but really I felt very "geram" when this sort of incidents occur right in front of me. I really cannot understand what is in their mind when they left the table with all those untouched food, but taken. Not only the hotel staff has more unnecessary plates to wash, precious water and detergents are also needed just because of such uncallous action of people. So "geram"  was I on that morning that I snapped a few pictures to share with readers about this.

Harrisons - The Kingpin Strikes Back

Harrisons - The Kingpin Strikes Back

Moviegoers will relish with nostalgic moments in the early 1980s when the Star Wars films hit the cinemas at that time. I remembered lining up in a long queue to buy the tickets for the first Star Wars film. There were a total of six Star Wars films, but amongst the films, the one I liked most is the second film : The Empire Strikes Back.

The story is about the villainous Darth Vader pursuing Luke Skywalker and the rest of the Rebel Alliance across the galaxy and succeeded. At that time, Luke was studying the Force under Jedi Master Yoda and must decide whether to complete his training and become a full Jedi Knight or to confront Vader and save his comrades.

Back to Bursa Malaysia, the recent storm of the mini-market correction world wide hit a broad base of counters, resulting in many counters touching a new year low in a quick space of a few weeks. 

Amidst this big storm, one not only stood still, but as a matter of fact, struck back at the storm and went on to record higher share price, much to the delight of its "share-owners".  I would prefer to call it : Harrisons : The Kingpin Strikes Back. Ha, ha ... Recall that Harrisons was featured on April 11  this year in my blog titled : Harrisons - The Kingpin of East Malaysia.

During the start of the mini-market correction, Harrisons share price stood steadily at the range of RM3.50 level plus. As the market recovered gradually following Wall St's strong rebounds, investors chased up Harrisons shares further resulting it to close at RM4.03 on Oct 24. For the record, between the week of Oct 20 - 24, Harrisons recorded an impressive gain of 50 sen.

Ironically when Harrisons was gaining on share price, its two main competitors in the trading house business, the larger DKSH and the smallish Yee Lee were both experiencing contrasting declining share prices on that week. DKSH closed at RM6.20  from a week high of RM6.60 and even touching a new 52 week low of RM5.92.

Yee Lee meanwhile closed at RM1.50 on Oct 24. Its 52 week high is RM1.96 and its 52 week low is RM1.22. Both DKSH and Yee Lee seemed to have tapered off the cliff when one looks at their 52 week high and compared to the present share price.

On Apr 1, both shares price of DKSH and Harrisons were at the widest range apart. On that day, DKSH traded at its peak price of RM9.20 and Harrisons at RM3.05.  Any DKSH shareowner who sold his 1,000 DKSH shares at RM9.20 and had used the entire proceeds to purchase Harrisons shares at RM3.05 would be having 3,000 Harrisons shares and multiplied by the current share price of RM3.82, that investor would be laughing all the way to the bank as his investment in Harrisons stands at RM11,460 instead of DKSH's current price of RM6.45 on Nov 11.

So what caused investors to chase after Harrisons share price, resulting in it propelling to new 52 week high of RM4.05 recorded on Oct 24? For someone who has been a share owner of this company since 2004 and again buying more shares, (Bought additional 3,000 shares on Apr 4 at RM3.08), the rise in the share price must have given me some sweet smiles to flash around lately.

Compared to that time I posted Harrisons on April 11, and the share price now at RM 3.82 on Nov 11, I am sitting on some additional new paper profits of 6,370.00 (share price RM3.82 on Nov 11 x 13,000 shares is RM49,660.00 compared to RM3.38 on April 11 x 13,000 shares is RM43,940.00). There is a difference of paper profits of RM5,720.00. Plus the dividend of RM150.00 per share paid on Aug 8 (RM150 x 13,000 shares, there is another RM1,950.00 already banked in). Total is RM7,670.00.

Is there anything brewing at Harrisons that caused investors to buy the shares?

Impressive average earning of 37 sen per year

during the last seven years

Take a history of last seven's years total profit after taxation (from 2008 to 2013). Total profit after tax is RM181,145 million divided by 68,489,200 shares is RM2.64 divided by seven years is 37 sen per year. Yes, Harrisons has managed to earn an average of 37 sen during the last seven years.

Any company that is able to record this kind of consistent earnings should be at least traded at a higher Price Earnings Ratio. Yet a glance back showed its PE is hardly above 13 times during the last seven years.

Why is the market refusing to accord it a higher PE?

Harrisons' business will always be there

as long as there are population growth.

The population is increasing by the year in Malaysia and the rest of the world. And people are living longer too, thanks to advance medical treatment available. People are willing to spend more for food now sad ay compared to my early childhood days where I still remembered one drink being shared by several family members at a dining table. Today you can see that several drinking cups on the dining tables is a common scene.

As the main supplier of Nestles' products in the east, it can be considered as having a  virtual monopoly business. Not to mention the sales of other products from other established brands, too.  

Excellent dividend paymaster

Harrisons recently paid a 15 sen single tier dividend for its Financial Year 2013. Harrisons has continue to reward its share owners during the last decade. Let us take the average dividend of the last seven years.

Total dividend for the last seven years is RM1495.00 divided by seven years is RM213 per year.  Granted that the last seven years' total dividend included a RM500 special dividend paid in 2011, but that special dividend is also a result of impressive accumulated earnings of those years prior 2011. By paying out this special dividend, Harrisons has demonstrated to its share owners that the company is willing to share its profits by paying regular and special dividends.

Share owners should understand that the earnings for year 2014 will most probably be utilised to pay for alleged unpaid import duty, excise duty and sales tax amounting to RM31.5 mil. Perhaps it might not be enough and might require 1st and 2nd Qtr 2015's earnings as well. This is just my assumption.

Whether Harrisons will pay a dividend for its Financial Year 2014 remains to be seen. My guess is that a smaller dividend seems likely, maybe a 5 sen or 10 sen single tier dividend.

Venturing into retail market

Thanks to Focus Malaysia's issue dated Aug 2-8, 2014, I was able to find out what Harrisons has been doing so far this year.

While it continues to expand its distribution business, it has also expand into the retail market by tying up a partnership with Japanese listed company Watts to set up Komonoya outlets, develop its own brands and venturing into the Philippines, its first foreign market.

The joint venture (JV) with Watts to open Komonoya shops, a chain which sells discount goods from Japan mainly priced at RM5. So far, the JV has successfully set up two shops in Malaysia and is expected to open at least four more before the end of this year. As usual, in any business, there are usually competitors around. In this case, the main competitor is Daiso also from Japan. However many of the Daiso stores are owned by Aeon and the business is parked under its new retail business category.

As this is something new, there is no guarantee if this JV would result in bringing in new revenue and profits. It might even result in loss. Nevertheless, time will be the judge as they say : nothing venture, nothing gain.

What if DKSH and Harrisons merged?

DKSH and Harrisons merged? Are you joking? Well, companies merging with one another seem to be in vogue these days in Malaysia. The recent mega bank mega exercise involving CIMB Holdlings Group Bhd, RHB Capital Bhd and Malaysian Building Society Bhd  is a good example although it remains to be seen if it can be a successful one.

Although both companies may have their different cultural ways of doing business, I believe we can't rue out the possibility of that happening one day in the future. Should it happens, it would create the biggest trading house in Malaysia with hardly any competitors able to challenge. There could be massive savings as business operations and the infrastructure supports and warehousing could be utilized to the maximum. This is just my assumption as I believe there could be conflict of interest if this newco is dealing with competitors' products such as Nestle and Dutch Lady. Perhaps that issues might be ironed out if there is a win-win situation for all.

Beyond 2015

Should the earnings of Financial Year 2014 is enough to settle the alleged unpaid import duty, excise duty and sales tax amounting to RM31.5 million, then the earning for Financial Year 2015 would hopefully return to normalisation.

Assuming it is able to record a 30 - 37 sen earnings, then share owners can look forward to higher dividend payouts from the company.

By then, will the share price of Harrisons still trade at below RM4?

People's business

Harrisons' business has been around for almost a century. The company has the distinction of being one of the oldest and largest sales, marketing, warehousing, distribution and services companies in Malaysia.

This kind of business thrives because the population growth keeps on growing and there is a constant demand for what ever Harrisons is dealing. Take Nestle as an example. Nestle's products has continued to experience solid business growth years after years. As Harrisons distributes Nestle's products in East Malaysia, one could safely assume that Harrisons is indeed in the sweetest spot of all.

So in conclusion, if you own Harrisons shares, you are in effect in the business of selling products mainly in East Malaysia, apart from other ventures the company has been expanding into. And this is one business that is not easy to duplicate.

It is one business I believe not even the most modern technology available on Earth could replace its business. It is one business that will continue to thrive on, even surpassing my time!

This is one company for conservative and long term investors who can buy and forget about it for years to come. Of course, easier said because when the annual attractive dividends are banked into your account, you will say : Thanks Harrisons for giving me some money to buy Nestle products year after year.