Showing posts with label Goldilocks Investment Fund. Show all posts
Showing posts with label Goldilocks Investment Fund. Show all posts

Sunday 20 June 2021

What are GFH’s Motives for Acquiring KHCB Shares?

لولا اختلاف النظر، لبارت السلع  


 
Summary of key points in this post.

  • 45% premium over market on 13.64% of shares from Shuaa and Goldilocks.

  • Tender offer proposed for remaining 30.95% of shares

  • Favorable Impact on GFH’s Consolidated Shareholders’ Equity


Background

On 6 June GFH announced it had increased its shareholding in KHCB from 55.41% to 69.05% as part of the “Group’s strategy to increase its ownership in KHCB.”

On 7 June GFH provided further details as follows:

With reference to GFH Financial Group’s announcement dated 6th June 2021 pertaining to the subject matter, GFH would like to announce that the increase of ownership in Khaleeji Commercial bank was pursuant to a sale and purchase agreement between GFH along with Shuaa Capital and Goldilocks Investment Company, to acquire their stake of 121,726,795 shares for a total of BD 8,764,329.240 equating to BD 0.072 per share.

On 8 June GFH announced that pursuant to Central Bank of Bahrain requirements regarding takeover and mergers, it had approached KHCB’s Board to make a proposed voluntary takeover offer for the remainder of KHCB’s shares.

Deal Analysis

According to the trading data from the Bahrain Bourse, during the period 4 January through 3 June 2021, the average price of a KHCB share was BD 0.050 (rounded to 3 decimal places). Typically the share trades at roughly 50% of book value.

The BD0.0720 acquisition price represents a 45% premium to the average trading price.

Since the GFH acquisition, the price has increased to just below BD 0.070 perhaps in anticipation of GFH offering the same BD 0.0720 price to remaining shareholders.

Apparently, KHCB is quite a valuable asset.

Though one might not have thought so from the fact that

  • KHCB required an additional BD 60 million in capital to meet CBB requirements

  • GFH had to buy the entire AT1 instrument

Or maybe you read Fitch Ratings comment on KHCB in their reaffirmation of GFH’s B credit rating. (That rating is below investment grade, if you didn’t know)

Following a balance sheet clean-up exercise in recent years KHCB's asset quality has been improving but is still weak and lags higher-rated peers'.

In any case I hope you are confident that the fact that Shuaa and Goldilocks are related parties had no effect on the 45% premium.

That being said, the size of the premium is perhaps perplexing. 

Neither Shuaa nor Goldilocks were inclined to participate in the AT1. That would seem to evidence a lack of faith in KHCB's future.

One might think of them as perhaps motivated sellers of KHCB. 

It is perhaps also difficult to imagine that there were other serious bidders interested in acquiring a minority stake in company where a single shareholder had control.

But then the ways of the market are mysterious and magical. Especially in the land of flying carpets.

Despite the premium, if you look at this earlier post on Goldilocks, you will see that Goldilocks acquired its stake in KHCB from Shuaa for BD0.096 a share. You will also note that KHCB didn’t pay any dividends since Goldilocks’ purchase.

So on this transaction Goldi has a roughly 25% loss from original cost.

No wonder Shuaa doesn’t publish data on Goldilocks’ performance, contrary to previous years.

In the post referenced above I also wondered if Shuaa had held on to its then 3.88% stake.

It certainly appears so because GFH says it bought shares from both Shuaa and Goldilocks and Goldilocks shareholding was 9.76% according to KHCB’s announcement.

Motives for the Transaction

So what is motivating GFH’s acquisition of KHCB?

Only GFH knows for sure but we can explore some possible rationales. 

I've selected two for discussion:

  • Overlooked gem
  • Increase in GFH equity beyond the purchase price

Other possible reasons for the transaction could be “civic duty”, etc. And more than one motive may be operative.

As you read, you can decide for yourself which, if either, is the more compelling one.

Overlooked Gem

The market has fundamentally undervalued KHCB.

The canny folks at GFH are about to get KHCB “on the cheap”.

Thereby reaping rich rewards long into the future.

Accounting Magic

The key drivers of the appeal of this motive are two “facts”:

  • KHCB’s book value per share exceeds the acquisition price

  • GFH uses the book value—not the market or fair value—of KHCB’s assets and liabilities (and thus by the process of subtraction also KHCB’s equity) to prepare its consolidated financials.

As of 1Q 2021 KHCB’ s Book Value was roughly BD 0.160

By acquiring the shares GFH stands to benefit from the difference between book value (BD 0.16) and the purchase price (BD 0.072) and the happy application of rules for consolidated financial statements.

121,726,795 shares at BD 0.088 equals roughly BD 10.7 million or US$ 28.4 million.

Compare that to the BD 8.8 million purchase price. 

A not inconsiderable gain on purchase.

You might well ask:

How can that be? The P/B ratio is well below one. This can’t make economic sense.”

As I’ve posted here before, accounting does not always reflect economic reality.

Here’s how it would work in detail.

Recall that in its consolidated financials GFH records 100% of KHCB’s assets and liabilities in its (GFH”s) balance sheet using the values appearing in KHCB’s balance sheet. Their book values.

Therefore, net assets (equity) are also reflected in GFH’s financials at book values.

As the final step GFH allocates those net assets between shareholders in the Group and Non Controlling Interests (NCI) in the Consolidated Statement of Changes in Shareholders’ Equity based on their respective ownership/voting rights.

With the acquisition of an additional 13.64% in KHCB shares, GFH’s share of the net assets (total assets minus total liabilities) in KHCB will increase.

This increase in equity attributable to shareholders of GFH will be accompanied by a corresponding decline in equity attributable to NCI in GFH's financials.

If its tender offer for the remaining shares is accepted and completed, an additional increase in Group shareholders’ equity will occur.

Depending on the percent take up on the take over offer, the component in NCI related to KHCB may disappear from GFH’s financials.

But there is indeed more!

You will recall (and if you don’t here’s the link to that post) that in connection with its 2020 purchase of KHCB’s AT1, GFH was required to reduce its consolidated equity attributable to shareholders of the Group by US$ 59.9 million in its FY 2020 financials.

The US$ 59.9 million reflects the excess (positive difference) between (a) GFH’s “contribution”--the amount of the AT1-- and (b) GFH’s share of KHCB’s net assets based on its percentage shareholding in KHCB.

Now that GFH owns 69.05% of KHCB, it is entitled to “recover” some of that amount.

Similarly, it will also have to absorb some of the US$ 14.3 million share of issuance costs levied against the NCI in 2020. Perhaps as much as US$ 4.4 million.

We should see the impact of the 13.64% KHCB share acquisition most likely in GFH’s 2Q2021 financials.

Keep your eye on GFH’s financials to see if my prediction comes true and how the related entries are handled.

Are they disclosed separately as in 2020?

Booked directly to equity?

Or perhaps to income?


Tuesday 3 March 2020

Goldilocks Investment Fund “The Midas Touch” – Khaleeji Commercial Bank

As Legendary Investor Fred C. Dobbs Can Tell You Not Only Have to Have 
the Golden Touch, But You've Got to Know How Hold On to Value
Continuing our fairy tale theme, another instalment on Goldilocks Investment Fund.

In doing a bit of research on GFH, I just happened to discover that Goldilocks owned some 9.98% of the shares of Khaleeji Commercial Bank Bahrain.

From a quick look at previous years KHCB financials, their ownership first emerged in the FYE 2017 report and has been consistent since then.

What changed was that as of FYE 2016 Shuaa Capital owned 14.01% of KHCB.

In the FYE 2017 report it “disappeared” from the list of major shareholders – 5% and above.

According to the Bahrain Stock Exchange, on 26 September 2017, Shuaa sold 100 million shares to Goldilocks at BHD 0.096 per share on the Special Order Market.

According to Bahrain Stock Exchange data, the closing price on that day in the regular market was BHD 0.1113 so Goldilocks bought at a 15% discount.

Goldilocks already owned some 3,950,000 shares as of that date and apparently acquired another 829,110 shares prior to FY 2017 end.

Shuaa retained 40,779,824 shares or 3.88 % of its holding then.

It’s not clear if it still does.

What was Goldilocks’ return on its investment?

KHCB paid no cash dividends since Goldilocks’ acquisition.

So the return is change in the market value of stock.

KHCB closed at BHD 0.052 on 2 May 2020.

ROI is negative 46% (based only on the cost of the 100 million shares purchased from Shuaa).

That’s before consideration of the likely negative impact on Goldilocks and other KHCB's existing shareholders of KHCB’s need to raise BHD 37.1 million in new Tier 1 equity. 


But save some of your pity for KHCB which is sitting on a similar size block of Treasury Shares at an average cost of BHD 0.1138 and facing a much lower ROI – negative 54%.

You’ll recall and if you don’t AA will remind you that Shuaa bought AlImtiaz's 14% stake in KHCB in December 2006 for BHD 0.065 per share. Approximately one month after ADFG bought a little over 48% of Shuaa.

Shuaa’s ROI on its investment in the 100 million in KHCB shares it sold Goldilocks was roughly a positive 48%.

Side note:  Ending of film pictured above presents an unrealistic scenario when atomic weight is considered, though it has a nice cinematic effect.

Thursday 13 February 2020

Goldilocks and the 3 Bears - A Financial Fairy Tale - Part III Dana Gas

Almost Golden Once More
Links to earlier posts in this series Post 1 and Post 2 

On 20 June 2017 Dana Gas announced that Goldilocks’ shareholding had reached 5% based on information it received from the ADX.

At the same time local press reported Goldilocks’ announcement that it had purchased 350 million shares in Dana Gas giving it a 5% stake.

Looking over trading on the DFM, there was a spike in volumes concentrated in the period 5 June through 18 June.

Why stop at 18 June?

As per its regulations, the ADX had to notify Dana when trades caused a shareholder’s shareholding to reach 5%. Presumably this notice to GFH came late on 18 June or 19 June. Dana then had to prepare its announcement and send it in. 

Also trading in Dana shares was relatively light on 19 June..

What we do know is that Goldilocks reached the 5% reporting threshold sometime around 18 June.

But we don’t know if this is because it bought 5% during this period.

Or if it held a position previously and only a modest amount of purchases took it over the threshold.

I think it’s likely that Goldilocks purchased the 5% around this period. This would be in line with their “constructionist” philosophy, i.e., an active investor. They don’t seem to be the type of investor who would accumulate a passive position.

But who knows.

If you remember this is during the early stages of DG’s restructuring of its previously restructured sukuk. So there was a “dip” in price.

What better time for a savvy investor like Goldilocks to buy?

Some details on DG stock transactions.

From 5 June to 18 June the volume of trades in DG stock increased dramatically. Some 84% of trading volume between 1 May 2017 and 18 June 2017 incurred during this period.

For the full period 5 June to 18 June, 1,548,351,688 DG shares were traded with a total value of AED 921,047,016.63. Average price AED 0.60.

For the period 12 June to 18 June, 1,020,149,231 DG shares were traded with a total value of AED 698,149,961.05. Average price AED 0.68.

For the period 14 June to 18 June 632,217,208.00 DG shares were trade with total value of AED 449,382,287.83. Average price AED 0.71.

Note the above are value weighted averages based on volume and value of shares traded not closing prices only. However, the closing price averages are almost the same.

That gives us three plausible entry costs: AED 0.60, AED 0.68 and AED 0.71 per share.

One wrinkle.

According to page 181 of the Listing Particulars for the Nile Delta Sukuk as of 31 December 2017, Goldilocks owned 4.68% of DG’s shares.

I have not been able to find an explanation for the decline from 5%.

Selling 0.32% of its holdings seems a strange thing to do, particularly because just a short while later it increased its holdings to 5.21%.

Since Goldilocks announced its 5% holding, it would seem that this wasn’t a maneuver to disguise its status as a “major” shareholder.

For those with an interest in which "fish" may be in the same "school", among other shareholders mentioned in the Listing Particulars are Ajman Bank, Bank of Sharjah, Shuaa etc. 

Whether other members of the ADFG/IC are the UBOs of these shares or not is not determinable from the information at hand (at least AA’s hand).

On 6 February 2018 The National reported that Goldilocks had increased its share to 5.21% and that ADFG/IC owned roughly another 3.79% for a total of 9% of the company.

Goldilocks announcement was made the day prior.

I’m going to ignore the information in the Nile Delta Sukuk Listing Particulars and assume that prior to this increase Goldilocks held 5%.

As FYE 2017, DG had 6,976,623,442 shares of stock. 0.21% is equivalent to 14,650,909 shares.

On 6 February the day prior to the announcement, 61,978,999 DG shares were traded for AED 44,739,016.70. Average price AED 0.72.

If we assume—and AA does—Goldilocks reported shortly after buying more shares, then this is a likely day for the purchase.

Another wrinkle.

As of today, according to the ADX, Ajman Bank holds 5.59% of DG shares.

Did Goldilocks sell it shares to Ajman Bank or a customer of the bank in a “true” sale?

Or did it “sell” the shares to Ajman to “perfect” Ajman’s collateral for a loan to finance the shares?

If Goldilocks is still the “owner” of the shares, then it appears there is a less rigorous concept of major shareholders and related party groups than for example on the Bahrain Stock Exchange

There the UBOs for GFH shares registered in Bank AlHilal’s name are disclosed. On the DFM they are not.

It would appear, and I hope I’m wrong, that in the UAE if the shares are registered in the Name of X, never mind if Y is the UBO. If X is related to Y and Z, never mind considering them a group.

So how did Goldilocks make out on this investment?

The market price of a share of DG stock on 13 February 2020 was AED 0.92.

In 2018 and 2019 it received cash dividends of AED 0.05 and 0.055 per share.

Ignoring the time value of money that means the exit price is AED 1.025.

Based on the most favorable entry price of AED 0.60, Goldilocks had a 71% return over the period. Note that is not a per annum return.

Based on AED 0.68 entry price, the return is 51%.

Based on an AED 0.71 entry price, the return is 44%.

Note: I have not adjusted the entry price for the February 2018 purchase of 0.21% in additional shares.

That’s because we’re working with estimates. There’s really no point trying to add precision where there are so many assumptions.

Cash on cash AED 0.425 gain per per share equals AED 149 million (USD 41 million) on Goldilock’s 5.21% stake.

To sum up: GFH a loss of USD 23 million; Noble a loss of USD 38 million, DG a gain of USD 41 million. A net loss of USD 20 million over the lives of the investments.

But let’s turn to a year by year allocation to see the impact on FY2018.

As you’ll recall from Post 1 and Post 2, for FY 2108 Goldilocks had an estimated loss on GFH and Noble of between USD 55 million to USD 60 million, depending on its FYE 2018 valuation of its Noble Group Holdings shares.

As per the table below, Goldilocks estimated FY 2018 earnings on DG are AED 70 million (roughly USD 20 million). So for FY 2018, the 3 Bears represented a loss of USD 35 to USD 40 million, again depending on the FYE value of Noble.


Goldilocks Investment Returns in Dana Gas
Millions of UAE Dirhams (except share price)

Dividends
Date Price MTM Cash Stock TOTAL
20Jun17 0.60



31Dec17 0.81 73.50 0.00 0.00 73.50
31Dec18 0.96 52.50 17.50 0.00 70.00
31Dec19 0.96 -0.35 19.25 0.00 18.90
13Feb20 0.92 -13.65 0.00 0.00 -13.65






TOTAL
112.00 36.75 0.00 148.75