The short position Saturday, 6 December 2014

by **Cals** Mon 08 Dec 2014, 02:35

The short position

Saturday, 6 December 2014

When owners start to buy
A noteworthy trend surfacing amidst the selldown of oil and gas (O&G) stocks is that some major shareholders have begun nibbling their own company shares.
This has taken place in two of the biggest O&G services firms, SapuraKencana Petroleum Bhd and Bumi Armada Bhd.
In the case of SapuraKencana, its vice-chairman Tan Sri Mokhzani Mahathir bought some two million shares in the company, seemingly taking advantage of the current low price.
Similarly, Bumi Armada’s substantial shareholders Datuk Ahmad Fuad Md Ali and Datuk Abdul Farish Abd Rashid collectively picked up more than two million shares in the company after its share price retreated close to the RM1 level.
Is this, in turn, an indication that there’s value in these counters at current prices?
Possibly.
On the other hand, do note that their purchases are relatively small, considering that both companies have around six billion shares in issue. Additionally, one needs to consider that there still seem to be shareholders who are selling down their holdings in these companies. So, who is selling and why? Are they concerned that the price of oil could dip further or worried about the overall economic situation in the country or globally? Hence, aside from taking note of major shareholders’ moves, investors should seek to answer these questions before diving in.
The most valuable firm?

FOR a company that was bleeding and worried about its long-term prospects, Tenaga Nasional Bhd (TNB) has certainly hit a purple patch of late.
With it now being the second-most valuable company on Bursa Malaysia, TNB has certainly been the beneficiary of the tariff hikes that have translated to its bottomline being beefed up.
It is now waiting to see if the mood for tariff rationalisation would translate to another tariff hike in June next year after the cost of electricity has been hiked on average by 15%
The improvement in its profitability has been through design and luck. The tariff hike compounded by lower coal prices will boost its margins. The company has also to be commended for improving its efficiency to realise the kind of profits it is making today.
But being a monopoly means that the profits that it makes and its ranking as the second-most valuable company on Bursa Malaysia deserve some scrutiny.
Its position has been helped by the fall in valuations of other companies, but its lofty position would certainly raise eyebrows.
Making a profit and increasing the market capitalisation of a Government-linked company that is a monopoly in the sale and distribution of power means that its is benefiting from the sale of power to consumers.
At a time when there are people wondering why their power bill has increased by more than the average hike in tariffs, TNB is seeing higher profits basically from a tariff adjustment that rewards it from the higher amounts of power people consume.
The problem is that consumers don’t have an alternative. They have to buy power from TNB, and is it fair for the power company to make huge profits from consumers and see its value catapult up the ranking of companies when it has a lock on the sale of power in the country?
Being the second-most valuable company if it is down to market forces is one thing. Being at that position as a result of it being a monopoly means that it is benefiting from the higher tariffs it is charging.
Whether it should get a tariff adjustment next year is something that has to be deliberated on carefully. Doing so would mean burdening consumers at the expense of enriching the shareholders of a monopoly. That might not be palatable to the public.
Rapid Synergy’s odd move

WHY is Rapid Synergy Bhd buying close to a million shares in Hong Leong Capital Bhd (HLCap), the latter being the most expensive listed banking stock?
HLCap is trading at a price-to-book ratio of almost six times, higher than even Public Bank Bhd’s 2.62 times. HLCap is also trading at an eye-popping 29 times price-earnings ratio.
What is Rapid Synergy, a semiconductor firm with some property investments, going to get for this RM12.67mil investment?
Interestingly, one common factor between the two companies is that Rapid Synergy’s major shareholder, Datuk Dr Yu Kuan Chon with 29.6%, also has in his personal capacity a 4.774% stake in HLCap.
Yu, who once was a substantial shareholder of HLCap, shot into the limelight last year for blocking the privatisation of HLCap by its major shareholder Hong Leong Financial Group Bhd, whose ultimate shareholder is Tan Sri Quek Leng Chan.
Rapid Synergy says that the investment in HLCap is in line with the group’s long-term intention of deploying capital into suitable quoted investment opportunities. On the same day, Rapid Synergy disposed its 0.22% stake in Shangri-la Hotels (M) Bhd for some RM7.02mil. But that came at only a very small gain on disposal of RM2,600. The company said the disposal offered a good opportunity to unlock and realise the value of its investment, and would allow Rapid Synergy to allocate the resources to other opportunities.
What is also worrying is that Rapid Synergy is making an investment into a company (HLCap) that is saddled with an inability to meet the public shareholding requirement since March last year. On Wednesday, the company asked Bursa Malaysia to allow it to maintain a lower spread than the minimum 25% requirement, or alternatively, for a further extension of time of six months to comply with the rule.
The public shareholding spread of HLCap as at Nov 5 stood at 18.67%.
This would be HLCap’s fourth appeal to Bursa to meet the 25% public shareholding spread requirement. This would also be the first time in recent years that a company has sought approval from the exchange to have a lower public shareholding spread than the amount required under the listing rules.
In the past, the market regulator has suspended the trading of counters whose free float had fallen below the 10% free float threshold that triggers an automatic suspension. But it has typically given companies a lot of leeway in addressing the 25% public shareholding spread requirement.
Perhaps, a new Practice Note should be introduced to call for a suspension after a certain number of attempts to address this fails. Only then will companies take listing rules seriously.
Back to Rapid Synergy, Yu has previously said that he is a long-term investor in HLCap and will stay invested in the company no matter what. With the free-float risk that HLCap is in, one wonders whether it would be wise for Rapid Synergy to be in for the long haul?