A Tale of Two Markets: DFM and Bahrain Bourse

Prepare Yourself for One of AA's Rants

You bet AA is mad and frankly isn’t going to take it anymore, especially after another frustrating attempt to use the DFM website to do some background research on GFH.  

One of the things that investors generally expect from stock exchanges is information.  Some exchanges make information easy to find and obtain.  Some don’t. 

Now if you were to ask the average Abullah or Trevor from the street about the DFM and BB, the DFM would generally come out as the “better” exchange. 

This post will discuss three areas of shortcoming where the DFM misses the standard of the BB using GFH to illustrate them. 

First, easily accessing corporate disclosures.  

Here are links to the corporate disclosure pages at DFM and BB for GFH.  

The first thing you’ll note is that the BB link goes directly to the Corporate Actions page.  

The DFM link goes to the overview page and you have to select the disclosures tab at the top.   Not a big thing.  Let’s mark this a minor inconvenience.  

More importantly, you’ll note that the BB has a descriptive title for the majority of news items, Dividends Declared, Market Making Report.  

DFM contents itself with the descriptor “Notification”.  Ah, tell me something I didn’t know. It’s a notification, right?  But about what?  

Notification is definitely not helpful and leads to a waste of time if one is trying to research a particular topic or wants to know what disclosures GFH or another issuer has made.  Mark this a major inconvenience.  One that really doesn’t need to be.  

At the DFM, if you click on a particular Notification, you get a second page with a button which tells you how many documents there are on what is still a “secret” topic.  Click on the button.  You get another link to the still “secret” document or documents.  Click on the document to retrieve it.  Your patience is finally rewarded because at this point when the document opens, the “secret” is revealed.  You now know what the “notification” is about.  But للصبر  حدود Mark this a major time waster.  Mark this as highly user unfriendly.   

At the BB, you click on the title and get directed to a page with additional information on the topic and then one further click to get the document.  One less click.  You need not go down the rabbit hole as at the DFM to figure out if this is a notification you’re interested in or not.  

Now suppose you want to go back to the list of disclosures.   

At the DFM, there is no back button.  So if having solved one mystery, you’re up to try your luck with a second Notification, you need to use the “page back” button/arrow on your browser. Alas, you find yourself back to page 1 of the list you’re looking at.  If you’ve picked a period with multiple pages, yes, you go back to page 1 even if you were on page 2, 3, or 4.  Mark this down as ridiculous.   As well not particularly user friendly.  

At BB, there is a back button.  Surely the DFM can afford a back button.  Can’t it?  

Click on it (BB’s back button) and you wind up on the last page you were looking at. 

Second, trading information. 

The DFM apparently believes or knows that its investors really only look back six months from the current date.  

BB caters to an apparently different set of investors who may wish to take longer looks up to 10 years.  But note if you click a longer period, the entire chart might not display in the window so you will have to scroll horizontally.  As well, BB allows customization of its data charts.  Want candles? They got candles.  Want bars? They got bars.  And not just for week-ending Saudis!  Want technicals? They got technicals. 

Surely if BB can do this, DFM with much greater resources can at least do the same.  Why it apparently hasn’t, is one of those Middle Eastern “mysteries”.  

Third, disclosure standards. 

The Central Bank of Bahrain has mandated that an issuer listed in Bahrain or one that has offered a security there must disclose in Bahrain any information required by another exchange even if Bahrain doesn’t otherwise require that disclosure.  

You won’t find the minutes of GFH’s March 2019 AGM and EGM at the DFM.  You will find them at the BB. All that’s at the DFM or all that I could find is a summary of decisions taken.  No insight into debate or shareholder objections.  

This information should be at the DFM.  

Additionally, the DFM or other regulatory authority should mandate a rule similar to the CBB’s.  If you disclose elsewhere, you must disclose on the DFM even if we don’t otherwise require it. 

This year probably in response to GFH’s excellent 2018 adventure (perhaps more accurately misadventure) in treasury share trading, the CBB began requiring that each month’s market making activity be disclosed.  GFH is disclosing this on both the BB and DFM.  

The DFM should consider having a similar rule because this is useful information and not every issuer on the DFM is subject to CBB regulations. 

Does all this mean that the DFM is not a good exchange?  No, what it means in standard financial advice terms is that the “DFM needs to up its game”.  Make its website more user friendly, provide more information, and strengthen some aspects of its disclosure rules.  

Gulf Finance House –2018 and 1Q19 Treasury Share Transactions Cost GFH Shareholders More than USD 37 Million

Satellite View of GFH Statement of Changes in Shareholders' Equity 

Update  12 June below in red.

The sad story of wasted shareholder money continues here.

First, a technical note to ground the analysis that follows.  In line with accounting standards, gains and losses on sales of treasury shares don’t pass through GFH’s income statement so technically they are not “income”.   But since this decline in value is the result of deliberate actions by GFH, it’s hard for AA not to consider this the equivalent of an income statement “loss”.  And I shall use the term “loss” in that sense in this post.  

Now to the analysis.  

In his Shareholders Report in the 2018 audited consolidated financial statements, GFH’s Chairman stated: “Also of note during the year, GFH took active steps to support its share price and market capitalisation, acquiring treasury shares up to 7% of the Group’s total issued shares.”  

Indeed, it did!  

But perhaps the results weren’t so good for GFH’s shareholders.  

In short (1) a lot of money was spent and lost and (2) the impact seems to have been minimal.  

As per AA’s analysis, it appears that the net result of GFH’s buying and selling of its own shares in FY 2018 was a reduction in equity of some USD 27.9 million.   If you’ll look at Statement of Changes in Shareholders’ Equity in GFH’s 1Q19 interim unaudited report, you see that GFH admits to losses of USD 24. 8 million on treasury share transactions in 2018.  

AA believes the roughly USD 3 million difference between AA and GFH relates to the USD 3,058 million 2018 charge to the share premium account which zeroed it out.  It appears that GFH considers that “loss” to be covered by earlier years’ gains.   

You will also note in the 1Q19 report that GFH has continued its treasury share transactions in 1Q19 for an additional USD 9.6 million “loss”.  And three more quarters left this year.  That's a time reference not a monetary one.

So a total of USD 34 million by GFH’s accounting and USD 37 million by AA’s.  

But you might ask AA:  Yes, but what about the impact on the share price? Surely, this was a small price to pay for “supporting GFH’s share price and capitalization”.  

GFH’s closing share price on 2 January 2018 was AED 1.520 and on 31 December 2018 was AED 0.902, according to investing.com.  Looking at share price performance only, that’s a decline of approximately 41%.  The share price at the end of March and May this year was in a similar range to the FYE 2018 price. 

I suppose in defense of GFH one might argue that absent their efforts the price would be even lower.  AA will not.  

The central question is why GFH is spending shareholders’ money to prop up the stock price?   

And perhaps whether regulators think that the method employed is “sound practice”?  

We don’t really know what is motivating GFH’s board and management. 

But what we can do is take a detailed look at their actions and try to guess (note that word) what is going on.  

In the recent past, GFH had minimal treasury share transactions.  It was only in FY 2017 that break was made with past moderate efforts.  FY 2018 saw a real break with the past as this chart demonstrates.  

GFH Financial Group Holding of Treasury Shares
FYE		Number of TS		Total Issued Shares		TS as % TIS
2013		5,283,272		3,161,889,967		0.17%
2014		5,204,536		4,730,665,467		0.11%
2015		24,503,697		2,256,583,403		1.09%
2016		2,211,891		2,256,583,403		0.10%
2017		106,467,804		3,681,450,441		2.89%
2018		255,455,953		3,681,450,441		6.94%

Source:  GFH Annual Reports  

1. Clearly, FY 2017 was a transitional year from the pattern of the previous four years.  
2. FY 2018 saw an “explosion” of Treasury Share transactions.  

Let’s look a bit closer at FY 2018.   

GFH Financial Group Treasury Share Transactions
by Quarter for FY 2018 -Millions of US Dollars
		TS BOP		Buy	Sell	Net = B-S	TS EOP	G/(L)
Q1		$58.4		$5.4	$3.2	$2.2	$60.6	($0.9)
Q2		$60.6		$10.8	$20.6	($9.8)	$50.8	($5.2)
Q3		$50.8		$56.1	$17.9	$38.2	$89.0	$0.0
Q4		$89.0		$88.7	$92.3	($3.6)	$85.4	($21.8)
FY TOTAL				$161.0	$134.0	$27.0		($27.9)

 Source:  GFH 2018 Quarterly Financials, Amounts in Thousands of US Dollars

1. TS= Treasury Shares BOP = Beginning of Period, EOP End of Period.  G/(L) = Gains/Losses.  
2. Buys in 4Q18 were 55% of the FY’s total and 69% of sales.  
3. It appears that these (4Q) sales were undertaken to either fund new purchases or because of imposed limits on the amount of Treasury Shares GFH was allowed to hold either from its regulator (CBB) or the GFH Board itself.  Or perhaps some combination of both.  
4. 78% of FY 2018’s loss on Treasury Share transactions occurred in 4Q.  
5. That suggests, but does not prove, that GFH was frantically trying to stave off a decline in share price for the “all-important” FYE 31 December reporting date.  

Just how frantic that activity was can be seen from the next two charts.  

First, let’s look at 4Q18 transactions in GFH shares on the BSE, KSE, and DFM.

Trading in GFH Financial Group Shares 4Q2018
		Local Currency		USD Equivalent
BSE		BHD 6,379,970		USD 16,906,921
KSE
Oct		KWD 1,013,881.569		USD 3,335,137
Nov		KWD 311,267.257		USD 1,023,905
Dec		KWD 4,119,336.652		USD 13,550,450
DFM		AED 1,363,936,328.99		USD 371,644,776
TOTAL				USD 406,461,188

Sources:  BSE, KSE October, KSE November, KSE December, and DFM.

1. With the DFM, you’ll have to do a bit of manual tinkering to select the time period.  Click on the orange box on the upper left hand side of the Bulletins Page.  Select 2018 and then Q4.  
2. What emphasizes the “frantic” nature of GFH’s efforts is the percentage of their Treasury Share transactions of the above total as detailed in the chart below.

GFH Financial Group Treasury Share Transactions 4Q18
	Amount		% Total 4Q18 Transactions
Buys	$88,662,000		22%
Sales	$92,267,000
Loss on Sales	-$21,780,000
Net Sales	$70,487,000		17%
Total Transactions	$159,149,000		39%

Sources:  Previous Two Charts.

1. Percentages are calculated using the Total Transaction from the previous chart, i.e., USD 406,461,188.  
2. Net sales transactions are estimates of cash proceeds = Cost – Loss = Cash.  
3. Chart is based on the assumption that all of GFH’s Treasury Share transactions took place on a stock exchange.  
4. If the above analysis is correct—and AA invites readers to point out any mistakes—then GFH had an outsized share of transactions.   Does AA dare use the phrase “حوت الخليج“ ?   

What are we to make of all of this? 

Here are some thoughts of what might be going on.  Not proofs, but rather conjectures.  

Some of you out there may have other thoughts.  Please post a comment. Share your views.   Point out AA's mistakes.

If we assume limits on GFH’s holding of Treasury Shares (as a percentage of shares rather than a USD amount), then it would seem likely that GFH’s management would be aware that attempting to continue to prop up the share price in 4Q18 would require selling some of the existing Treasury Shares to make room for new purchases.     

And that selling those shares would lead to losses.  

If one looks at the average Buy/Sell ratio by quarter (adjusted for the cash losses on existing Treasury Shares), it’s 1.7 in Q1, 0.7 in Q2, 3.1 in Q3, and 1.3 in Q4. 

Clearly, the “bang for the buck” in Q4 is rather limited.  Each USD 1 of existing Treasury Shares sold only increases demand by USD 1.3.   Hard to see that having a material effect on the price.  

Perhaps that explains GFH’s whale-sized share of total trades in 4Q.  Trying to use volume to move the price in a favorable direction.

But taking on that volume of transaction caused substantial losses. 

AA is at a loss to understand why GFH did not stop trading in its shares when the losses began to mount.  If this were FX or other trading, a stop loss limit would have been triggered.  

GFH’s shareholders were bleeding substantial cash.  And consequences of continuing in 4Q18 are highly likely responsible for some of the pain in 1Q19. Overall a loss to the tune of USD 37 million for FY 2018 and 1Q19.  

We don’t know what GFH’s reason for continuing Treasury Share transaction but they certainly evidenced determination to proceed David Farragut style at a level that AA interprets as “frantic”.  

All this leads AA to conjecture that there seems more to this behavior than merely propping up the share price because it appears management accepted the large amount of losses incurred.  

What could motivate this behavior?  

As noted above we don’t know. 

But if we want to conjecture, what could be possible motives?  

Was GFH propping up the shares to “help” those investors who financed their share purchases using the shares as collateral?  And were exposed to lenders calling in the loans or asking for more collateral?  If so, who might those shareholders be?  

If Homer can nod, surely AA can.   In early August 2018 as reported by Gulf News, GFH advised the market "that on Thursday that its shareholders Abu Dhabi Financial Company (ADFG) and Integrated Capital (IC) have transferred 102,094,573 and 79,905,427 of GFH’s shares respectively from their NINs to Al Hilal Bank for a financing facility."   Coincidence?

Or perhaps to help investment funds who bought GFH’s shares “high” and would have to report a loss to their investors based on FYE 2018’s much lower price?  Who might those funds be?

Well, according to press accounts, Goldilocks acquired a 4.9% stake in GFH in January 2018.  At that time shares were trading around AED 1.5 per share.   As noted above with the share price at AED 0.902 at year end, Goldilocks would have to have reported a 41% loss on the investment considering only movement in the stock price over the year. 

AA in the Press Again as Usual with Similar Effects, Sadly

Reporting “Rant” Questions 

In previous years, GFH’s Statement of Changes in Consolidated Equity clearly labeled the results of Treasury Sales transactions which resulted in a Loss or a Gain by using those exact words.  That changed with the 2018 FYE report.  The loss amounts appear but there is no descriptor.  

Those who know their IAS/IFRS would understand that there was a loss in 2018.  But AA believes that certainly not all of GFH’s shareholders are accounting experts.  And it’s highly likely that only a handful are.   And how many of the accounting experts are reading GFH's financials?  

2018 was coincidentally a year in which the loss was quite large.  

Questions for GFH:

1. Was this change designed to avoid drawing attention to the loss?  
2. Or a simple oversight?  If this is the case, what caused the change in the existing template?  Or in other words, why change the tried and true? 

Interestingly, the term “loss” to describe 2018 was used in a footnote to the 1Q19 interim financial Statement of Changes to Consolidated Equity.  But in the same note on page 4 in the 1Q19 financials, the 1Q19 "loss" was again not used as it had been in past as part of the main text?   Why is this?  

Questions for external auditors,

1. Did they “miss” this rather important change in 2018 AR?   
2. Or did they approve it?  
3. Additionally, when a bank loses an amount this size (some 20% of net income) is this not a material piece of information that needs to be highlighted?  And not buried in a note?  Which is unclear except to accountants? 
4. Would auditors consider this level of "trading" in a firm's Treasury Shares as constituting "material information" as well? 

More posts to come on GFH’s 2018 results.