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Key Points
GFH’s equity has “grown” a mere US$ 5 million between FYE 2016 and FYE 2020, despite GFH having earned US$ 90 million net of cash dividends. US$ 292 million in net income less US$ 202 million (cash dividends).
Market making activity and Treasury Share Accumulation cost GFH’s shareholders US$ 146 million.
GFH also canceled US$ 50.5 million in Treasury Shares leading to another economic loss not captured in its financials though the vagaries of accounting.
Beyond that, other transactions, largely related to losses incurred on acquisitions totaled US$ 88.5 million, not including the US$ 60 million charge related to KHCB’s BD 60 million AT1.
On 22 May GFH announced that its live webcast on 20 May on 1Q2021 results had been successful.
During the Q&A session the moderator read a question from an unnamed shareholder.
The next question is, while the group has managed to increase its assets, liabilities, and AUM, but not its equity, could you shed some light on the declining equity?
Suryanarayanan Hariharan, GFH’s CFO responded:
There has been a marginal increase in the equity as of 31st March 2021. Despite the profit, there’s also a fair value movement of our treasury portfolio, which is captured on the equity, and for Q1 2021, there was a drop in the fair value movement, and that touched on the equity for the group.
That didn’t seem like a completely satisfactory answer to me.
It omits the fact that the US$ 8.280 million in profit on the disposal of a sukuk was already reflected in equity. And, so, even though it appeared on the income statement, it did not increase equity.
And also that the shareholder seemed to be asking a question about more than the change in equity from FYE 2020 which as noted by GFH’s CFO was positive..
But I didn’t “attend” the webcast so perhaps this is summary of a longer exposition with details “lost in condensation”.
In any case, I thought it would be an interesting topic to look at the “evolution” of GFH Group Shareholders’ Equity.
I chose the period 2017 through 2020.
Some methodological notes:
GFH’s Consolidated Statements of Changes in Shareholders’ Equity is the primary source document for information.
The focus is on changes in the equity belonging to shareholders of GFH Financial Group. To be clear that excludes the NCI.
Calculations reconcile to the changes in that equity. And so as outlined below miss one rather large economic loss
So let’s start with an overview of changes in Group shareholders’ equity over the period.
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There really has not been much of a change over the period. US$ 5 million only.
Over the four year period, GFH has declared US$ 292 million in comprehensive income and has paid cash dividends of US$ 202 million.
That should lead to a US$ 90 million increase in equity.
From the chart above it clearly has not.
GFH is ’“short” some US$ 85 million.
So what accounts for the difference?
Let’s go through the categories starting from the bottom.
TS Loss – Is the loss incurred on selling Treasury Shares.
Note this does NOT include the economic loss on GFH’s cancellation of some US$ 50.5 million of Treasury Shares in 2019.
Why not, after all my ranting and raving about this being a totally incomprehensible act that was to the detriment of the shareholders?
It’s not included because this transaction was netted against outstanding shares so the effect on shareholders’ equity was nil. In a master stroke of financial skill, GFH then issued US$ 55 million in bonus shares so that paid in capital remained unchanged. And I am reconciling to the equity as presented.
Despite that, it is still a loss to shareholders because GFH could have sold those shares in the market. It probably wouldn’t have recovered all of the US$ 50.5 million. But it would have recouped a good portion. That would have been of more benefit to shareholders than canceling the shares.
Or alternatively, it could have foregone issuing bonus shares by just distributing the Treasury Shares to its shareholders.
Net +/- TS – Is the net change in the US$ value of Treasury Shares, that is, purchases (a negative) against sales (a positive). Again this doesn’t include the share cancellation mentioned above for the same reconciliation reasons.
Emp Shares – Are purchases of Treasury Shares for GFH’s employee stock incentive program. A negative number is an acquisition of shares, a positive number the issuance of shares to employees.
Other – Is a collection of all other entries to Group Shareholders’ Equity.
As you’d expect this includes recurring items such as zakat and charity contributions. But there are some one-off items.
Let’s step through each year looking at major entries in the Other category to see if anything else catches our eye.
Each year’s total for Other is given should you want to explore for more detail on your own.
2017 (Total for the Year US$ 252 million)
US$ 293 million in new stock issued. Some shareholders in GFH projects (Tunis Bay and India) gave GFH their shares in those assets in exchange for equally good GFH shares. This is a non cash transaction.
US$ 37.5 million charge related to acquisition of increased share of the projects acquired in the stock exchange. Not broken down. KHCB and MGIC (Morocco) appear to be responsible. Probably primarily MGIC.
2018 (Total for the Year US$ 20 million charge)
US$ 17 million in charges (via restatement) for adoption of FAS 30.
2019 (Total for the Year US$ 39 million charge)
US$51 million charge for acquisition of additional interests in pre-existing investment with no change of control. Related to Tunis Bay and Residential South Real Estate Development Company (RSRED).
US$ 14 million credit related to FX rate changes.
2020 (Total for the Year US$ 89 million charge)
US$ 60 million charge related to KHCB AT1 purchase.
US$ 14 million charge related to revision of financing terms. Likely KHCB related.
US$ 18 million charge related to FX rate changes.
US$ 4 million grant from Govt of Bahrain related to Covid and probably to KHCB.
Looking at items in Other, the US$ 88.5 million in charges related to Tunis Bay, RSRED, KHCB, and MGIC have yet to prove their value.
Some general observations;
It’s not generally considered a sign of success when you wind up buying an incomplete project investment back from a client at a higher price than you sold it. Particularly when there’s no real “market” price.
If the project has really increased in value since the initial sale, why would the investor want to sell now? Presumably that value will continue to increase as the project completes.
If the seller is motivated to sell for liquidity or other reasons, wouldn’t that tend to decrease its pricing “power” in negotiations?
If the buyer alone can unlock the value of the asset, then shouldn’t he or she have some leverage over the purchase price? After all, the buyer hopefully intends to make a profit on the project. If the re-acquisition price is too high, then the profit will be smaller than envisioned.
The identity of the investor can also play a role in the price negotiations. Big fish or VIS, whatever you might like to call them, probably have more leverage.
As I’ve noted before when a sale is concluded via the exchange of boot (non cash items), value can be rather hard to “pin down”. But perhaps easier to manage.
GFH shares are no doubt more liquid that TBC, RSRED, MGIC. Thus, offering an investor a much easier way to exit. Particularly, if attempts were made to keep the share price “stable”. That might also explain why GFH “experienced” a persistent considerable and uncharacteristic loss on its “market making” activities.
Among the remaining items only the US$ 60 million charge related to the KHCB AT1 sticks out. This was probably unavoidable. GFH didn’t have any good options in the situation.
Summary
If we assume that the employee stock incentive is a worthwhile endeavour and not just another way to accumulate Treasury Shares, then the loss on market making of US$81 million and US$ 65 million in net TS purchases—totaling US$ 146 million—were probably not in the best interests of shareholders in general. Though perhaps some big fish may have benefited.
When the 2019 cancellation of the US$ 51 million in Treasury Shares is added in, we’re talking about some real money. Roughly equal to the cash dividends GFH paid over the period.
Adding the items from Other, particularly the US$ 88.5 million that I’ve flagged above, and it’s not a “pretty picture” to use a financial term of art as well as an homage of sorts for a former GFH senior officer.
All that said, the question for shareholders is how they evaluate GFH’s management’s performance.
C'est bien dit, mais il faut cultiver leur jardin.
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