Goldilocks and the 3 Bears - A Financial Fairy Tale - Part 1 GFH

Only One Bear Had the Right Meal for Goldilocks

In an earlier post I noted that the disappointing FY 2019 performance of the Goldilocks Fund—a loss of 7% for the year—didn’t explain the rather large drop in cumulative performance since inception (July 2015) from 219% for the first ten months of 2018 to 134% for 2019.

And promised to take a closer look at what happened with a series of three posts on Goldilocks and the Three Bears.

The three bears in this tale are: GFH Financial Group, Noble Group, and Dana Gas.

We’ll start with the first.

Before we do, a few words on methodology. I’ll begin by reviewing the history of Goldilocks investment in each “bear”.

Then I’ll compute the return to actual exit or if the fund still holds the asset until a current date.

Afterwards I’ll look to allocate the loss or gain over fiscal years.

On 8 January 2018, Goldilocks announced it had taken an approximate 4.99% stake in GFH a Bahrain-based Islamic financial institution that has been struggling for some years. An appropriate target for Goldilocks to work its constructionist magic as abundant posts on this blog indicate.

As of 31 December 2017, GFH had 3,681,650,441 shares issued and outstanding. Goldilocks actually appears to have acquired a 4.987% stake or 183,612,310 shares.

At a rough estimate of trading prices around that time of USD 0.42 per share that’s USD 77,117,170.

But how did it acquire these shares?

With GFH’s trading volumes a purchase of this sort even over a prolonged period would likely increase the entry price.

Situations like this are what friends are for!

From an analysis of disclosures in the equity notes in GFH’s annual financial reports, it appears that Goldilocks bought its shares from ADFG/IC.

According to GFH’s 2016 audited annual report, at year end, Integrated Capital held some 13.38% of GFH’s shares. One year in GFH’s 2017 audited annual report, it held 8.01%. 

Supporting a purchase from ADFG/IC is a record of an insider trade on Mubasher by Integrated Capital on 7 January selling 243,377,750 shares at USD 0.40 per share. 

Using that price, Goldilocks’ entry cost would be USD 73,444,924.

We’ll use this as the assumed entry price.

There’s no explanation who bought the 59,765,440 in additional shares sold. Sold to ADFG or “sold” to a lender to secure financing?

So how did GFH make out on its investment? GFH basically exited GFH in 2020.

On 22 January 2020, as part of a clarification regarding AlHilal Bank’s 5.3% shareholding, GFH revealed that Goldilocks held only 0.39% of its shares. It also noted that the ADFG/IC group and related parties held 9.69% of GFH’s shares. 

For those who follow AFDG/IC note that Reem Finance is listed as a related party in the announcement.

So Goldilocks must have sold its shares to a party or parties considered to be outside the ADFG/IC “group”. 

Assuming that GFH is not tardy in reporting significant changes in major shareholders’ and related parties’ holding of its shares, we can assume that purchase took place in December 2019 and early January 2020.

Let’s assume 1 December 2019 through 22 January 2020.

Looking over daily trading records at the DFM for GFH, this sale does not appear to have taken place on the DFM.

That’s also supported by the fact that the total value of GFH stock traded during the period was some USD 78.4 million equivalent over 3,622 trades.

Why look at the DFM?

Because roughly 74% of GFH’s shares are held and traded there.

What that probably means is that the shares were sold to another investor or investors “off the market” in a single or several “large ticket” transactions. 

AA will be looking at disclosures in GFH’s FY 2019 audited financials to see what information we can glean on who the new shareholder(s) are. Distribution of share ownership in the equity note and any disclosures about major shareholders.

Not by any means an easy task. In conformity with local regulations GFH only reports details on shareholders with 5% or more.

Because Goldilocks sold roughly 4.6% of GFH’s shares unless that shareholder already had holdings of 0.4% we’re not likely to learn its identity.

Let’s turn to the more important question, How did Goldilocks fare on its investment in GFH?

First, let’s estimate Goldilocks exit price.

The average price of GFH stock on the DFM between 1 December 2019 and 22 January was USD 0.2332 (based on DFM closing price data during the period). 

2017 and 2018 cash dividends (paid in 2018 and 2019) add another USD 0.0311 per share so total realized is USD 0.2633.

Based on AA’s assumptions (note that word), Goldilocks bought at USD 0.40 a share and sold at USD 0.263 a share. On its original investment of 183,612,310 shares, it lost USD 0.137 per share or USD 25.2 million. That includes the unrealized loss on shares it didn’t sell (the 0.39%).

Also during 2019 Goldilocks received roughly 10,373,577 in bonus shares which at current values are worth some USD 2.4 million.

That means its loss on the GFH investment is about USD 23 million. Or roughly 31%

This assumes that the above price assumptions are reasonably correct. It also assumes that Goldilocks did not have a price guarantee or favorable put option from IC.

Let’s now allocate that performance over FY 2018 and 2019. Essentially that consists of two allocations: one for dividends (cash and stock) and another for mark-to-market.

As you’ll see from the chart below, the loss was essentially booked in FY 2018 with dividends offsetting further mark-to-market losses.

Goldilocks Investment Returns in GFH
Millions of US Dollars (except share price)
			Dividends
Date	Price	MTM	Cash	Stock	TOTAL
08Jan18	$0.40
31Dec18	$0.25	-$27.5	$4.2	$0.0	-$23.3
31Dec19	$0.23	-$3.7	$1.5	$2.4	$0.2
20Jan20	$0.23	$0.0	$0.0	$0.0	$0.0
TOTAL		-$31.2	$5.7	$2.4	-$23.1