GFH Treasury Shares – More Shareholder Value Destruction on the Horizon

It’s hard to understand the “logic” being applied by GFH’s board and management with respect to Treasury Shares, particularly given GFH's weak state.

On 16 February 2021 GFH announced two proposals:

1. The cancellation of 141,335,000 in Treasury Shares.
2. The issue of 94,339,623 in new “bonus” shares.

I’ve written before that the cancellation of Treasury Shares is a direct waste of shareholder funds. One buys shares from the market paying cash and then one cancels them and receives nothing. A dead loss.

The first proposal will result in the cancellation of 45% of GFH’s Treasury Shares (total value of USD 69 million). So USD 29 million. 

A large amount for a bank like GFH that has reported net income of USD 50 million the past two years.

If approved, the first proposal will bring the total of shareholders money “whistled” away in Treasury Share transactions to some USD 161 million before 2021's TS trading losses:

1. USD 3 million in losses on 2017 TS sales
2. USD 27 million in losses on 2018 TS sales
3. USD 28 million in losses on 2019 TS sales
4. USD 51 million in losses on 2019 cancellation of TS shares
5. USD 23 million in losses of 2020 TS sales
6. USD 29 million loss on the proposed 2021 cancellation of TS shares

As I noted in my most recent post on this “strategy” it does not make sense nor does it appear to have resulted in any benefit to shareholders in general.

Imagine instead that GFH had not “spent” (or more appropriately mis-spent) shareholder money on TS. 

Instead of borrowing USD 300 million at 7.5% per annum, it would only have needed to borrow USD 140 million resulting in an annual saving on interest of some USD 12 million a year. 

An amount equal to 24% of reported FY 2020 net income!

I’ve argued that cancellation of TS is unlikely to have a material impact on GFH’s share price given the relatively small percent canceled.  And that there are other less costly ways to increase the per share price of GFH. 

But note those would not increase the value of GFH.

Once again via the second proposal GFH will undo what little effect there is by issuing 94 million new bonus shares.

GFH is a weak institution.

Low quality of earnings. Subpar ROAE. Concentration in illiquid assets. A sub investment grade debt rating. 

Poor market performance of its stock, now trading at a P/BV ratio of 0.6X

All this would seem to argue for a more careful stewardship by the Board and management of the bank.

Given all that, it is also hard to understand how the CBB allowed these proposals to be put forward.

That leaves the decision in the hands of the shareholders.

Based on the past the probability of shareholder action to reject these proposals seems low.