Sunday, February 12, 2017

GFH: A New and Improved Strategy

Not Proof of a Successful Strategy, Hard Work, or Integrity

If you’ve read GFHFG’s press release regarding 2016 net income, you’ll see that GFH has declared success in implementing the strategy it announced in December 2014--a scant two years after announcing what was described as a "long-term" strategy--and the  need for a new strategy.
Let’s let GFH’s top management set the stage for this post.

Commenting on the results, Dr. Ahmed Al Mutawa, Chairman of GFH, said, “We are extremely pleased to have delivered great performance for 2016. These results are a testament to the success of the strategy that GFH has adopted since 2014, and the commitment and integrity of the Board and management team. Our results were supported by the significant recoveries that saw $460 million of assets restored back to the Group, a major benefit for shareholders and one that will allow us to deliver stronger results for the years to come.
Building on the successful achievement of our strategy for 2014-2016, GFH’s Board of Directors has also approved and recommended a new strategy for 2017-2019, which focuses on accelerating growth by way of acquiring financial institutions, infrastructure investments and strategic assets. The new strategy will be presented for shareholder approval at the next General Assembly Meeting and are subject to final regulatory approvals.

Mr. Hisham Alrayes, CEO of GFH, added, “2016 was a year of significant progress across the Group and we are proud of the transformation that has been accomplished as demonstrated by our results.  During the year, we have delivered on our promise to shareholders and the market with regard to recoveries, which will effectively return to the Group all past accumulated and written-off losses of the last eight years.

We have also set the group foundations for the future by further strengthening our Investment Banking, Real Estate and Commercial Banking activities, and have taken sufficient provisions to make the Group’s balance sheet more efficient for future value extraction.

As a prelude to my comments, a recap of GFH’s 2014 strategy.
  1. stable and recurring income, profitability and cashflow 
  2. reduce holdings in “land-based” business  (real estate) from 50% to 40% in the midterm and to around 30% in the long term
  3. ensure greater stability from global financial issues
You’ll find an excellent analysis of GFH’s strategy in this earlier post.
Now to my comments.
Chairman al Mutawa:
  1. “Delivered great performance” -- According to my analysis GFH had an operating loss of some US$ 192 million for 2016.  The windfall earnings from litigation settlements do not reflect underlying performance or any fundamental change in GFH’s ability to generate income.  Operating earnings do.  And they evidence dismal performance and no substantial change. 
  2. “Testament to the success of the strategy” -- Looking at the above key pillars, I don’t see that any of these were achieved.  Nor does the equivalent of buying a winning “lottery” ticket validate that strategy.  
  3. “Commitment and integrity of the Board and management team” -- Frankly AA is puzzled how these two factors influenced the litigation settlement.    Since this was an out-of-court settlement, I suppose one could read this statement to mean that in conducting the negotiations GFH’s board and management team looked out for the interests of GFH and not the payees.  A strange comment to make. 
  4. “Results supported by significant recoveries” – Excuse me.   The litigation settlement was the entire cause of the results.  As noted above without the settlement, GFH had a net loss from ongoing operations in 2016. 
CEO Al Rayes
  1. “Proud of the transformation” -- What precisely has been transformed?  Certainly not the underlying business (see 2016 results from ongoing operations).   The windfall litigation settlement reflects nothing more than the successful conclusion of legal actions.  
  2. “Laid the foundation”  -- One would expect a firm whose main business is real estate development to know that laying foundations and actually completing buildings are two different things.  Though I’m told GFH’s historic forte has been marketing.  There is I am told a lot of unfinished construction at the BFH – Villawhere as local wags have it.  Foundations laid buildings not completed.  Hardly a demonstration of anything except perhaps difficulties in persuading one’s lender to advance more funds. 
  3. “Demonstrated by our results” – This is an even further stretch than “laid the foundation” as proving success of the earlier strategy. 
  4. “Taken sufficient provisions to make the Group’s balance sheet more efficient for future value extraction” – Since impairment provisions are only to be taken to reflect the impairment of assets, this is indeed a puzzling statement.   Is Al Rayes admitting that GFH has overprovisioned in order to build up a “hidden reserve” to use to boost lower operating revenues in the future?  This could of course "demonstrate" the success of whatever strategy GFH claimed to be following at the time.  And as well the integrity and commitment of the Board.  Or is he admitting that GFH was severely underprovisioned?  
As regards the new strategy, mark AA as unconvinced. 
There seems to be nothing new here.   The touted potential acquisition of an Islamic bank in Bahrain and infrastructure development are fundamentally exposures to real estate. 
A glance at the Chairman’s report in GFHFG’s 2016 financials bears this out. 
Mentioned in quick succession are: 
  1. Acquisition of a US-based  industrial real estate portfolio and discussion of existing US industrial real estate 
  2. Jeddah Mall 
  3. Villamar aka Villawhere? 
  4. Harbour Row and Harbour Walk (also at BFH)
  5. Tunis Financial Harbour
  6. Gateway to Morocco
  7. Mumbai Economic Development Zone
 A following post will take a look at the assets received in the litigation settlement. 
What is the quality of these earnings, a key issue for the Financial Group going forward.

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