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

Goldilocks and the 3 Bears - A Financial Fairy Tale - Part II Noble Group

Die gescheiterte Hoffnung

Part II of a three-part series.  Part I here.

Goldilocks foray into the Noble Group has already been analyzed in an excellent detailed post by Arkad.

There is no point in my doing any analysis. So I’ll just post the link.

This quote by Arkad should serve as a teaser to spark your interest in taking a side trip away from Suq Al Mal, if indeed you need any teasers at all.

As of Friday 9th November [2018], Noble’s share price closed at SGD 0.089. Goldilocks’ average entry price was SGD 0.50. Goldilock’s USD 38.8mn investment is now worth USD 6.9mn – effectively a -82% loss.

Since Arkad wrote this post, Noble Group Ltd (the “old” company) delisted. After a debt restructuring, the successor company Noble Group Holdings emerged.

Old Noble shareholders were given 20% of the equity in the new company with creditors taking 70% and management 10%.

Clearly a sign of extreme financial distress in the old company. No doubt a source of distress of another kind among its “old” shareholders.

According to the restructuring of Noble Group Ltd (Old Noble) shareholders received 1 share in Noble Group Holdings (the Newco) for each ten they held in Old Noble.

That means Goldilocks was entitled to 10,756,450 shares. Noble Group Holdings as some 663,761,605 shares par value USD 0.01.

That gives Goldilocks a 1.6205% shareholding versus its 8.19% shareholding in the old company. That’s dilution with a capital “D”.

Not a good start.

But that’s not all the bad news.

Noble Group’s 3Q2019 financials contain scant evidence of any comfort for Goldilocks.

Net loss of USD 47 million for the nine month period.

Comprehensive loss of USD 71 million.

Noble Group Shareholders’ total equity at USD 60 million down from USD 130 million as of 31 Dec 2018.

Based on book value as of 30 September 2019 and Goldilocks’ 1.6205% ownership, its investment is worth USD 972,317. Or a loss of some 98% of the initial investment.

If we look at equity as of 31 December 2018, the loss is only 96%.

Whether Goldilocks reflected the full loss mentioned above or used the last stock price, it would have taken a 2018 loss between USD 32 million to USD 37 million.

If you’re keeping track and AA sure is, the losses in FY 2018 from GFH and Noble total some USD 60 million.

On its face Noble seems a perplexing choice for an investment given Goldilocks stated investment strategy as “Goldilocks invests in listed equities with a long-term goal to compound our capital at an above average rate of return while minimizing the risk of loss of capital by taking a constructive activist role in listed companies to unlock value.”

The point I’m focused on is the bit about risk control.

It was pretty clear that Noble’s problem was not one of inefficiency in its operations.

There was little “unlocked” value apparent.

Rather it was a distressed firm burdened by debt which exceeded its repayment capacity. 

Investors usually “play” this sort of situation for the short term. If one thinks the company has a future, buy the debt at a distressed price and then flip it when the price rises. 

Or buy the debt at a discount and hold on to it assuming that the debt will be exchanged for equity at a very favorable “price”. Equity which one can then “unload” at a profit.

Why?

Because when creditors restructure a distressed company, they focus on getting paid back. 

Debt service not new investment in the business is prioritized. Lack of funds also erodes the existing franchise.  

Dividends curtailed. 

Often sadly assets are fire-saled at less than fair values in order to reduce debt.

In the most extreme cases creditors take equity away from the previous shareholders.

And debt restructurings are multi-year affairs. Sometimes more than one restructuring is needed.

So the constraints on growing the business reman for years.

”Constructivism” via the Board won’t work because the Board’s hands are tied by the restructuring agreement.

None of this should be “news” to sophisticated investors. There are abundant historical case histories.

The “sad” story of Global Investment in Kuwait or the even more tragic story of TID are well known. The latter locked in Satrean "No Exit".

Why Goldilocks took this rather perilous path isn’t clear.

So far not so good, but Goldilocks struck “gold” on the next investment.