Translation of GFH 2019 Annual General Meeting Minutes - Part 2 of 2

AA Takes a Moment to Reflect on the Nuances of Translation

Arabic is  a Language of Subtle "Taste" Like a Glass of Cold Vimto

And Both are to be Savoured and Enjoyed

Here’s the continuation from Part 1.

As before, if any reader of Arabic sees an error or shortcoming in my translation, please post a comment.  AA would welcome the tuition.

Discussion of Fiscal Year 2018 Financial Statements (Agenda Item #5)  

During the discussion Mr. Ahmad Abdullah asked for clarification on the settlement of the (Villamar) Sukuk.  Mr. Jaliil Aali of KPMG explained that GFH had settled a sukuk issued by a related company at a discount that resulted in a USD 77.8 million profit. 

This would appear to be precisely what was said in the FYE 2018 annual report with no further details provided.  But we don’t know if there were more points that were edited away. 

Mr. Abdullah continued by asking about the increase in personnel expenses and whether it was going to continue.  GFH’s Chairman noted that it included the expenses of KHCB and other companies in the Group.   And that it would continue or not in line with the growth of the Group.  

Responding to a follow up question on this topic by Fadi Majaaly, GFH’s Chairman noted that according to accounting principles, GFH included 100% of KHCB’s personnel expenses in GFH's personnel expenses not just GFH’s ownership share in KHCB (55.54% but not mentioned) and that these and other similar expenses are deducted from profit at the end (presumably a reference to the one line attribution of the share in net income due to “Non-Controlling Interests”.  This one line figure is a net of revenues and expenses as its name indicates). And note well GFH also recognizes 100% of the revenue of consolidated firms which is similarly adjusted via the NCI allocation of net income.

Fadi noted that the y-o-y growth in expense was 18% much above other banks and that these other banks were working to reduce expenses.  That was important because 95% of profit was from debt settlement.  

GFH’s Chairman noted that the profit was not generated by debt settlement but by contracts to acquire companies (capital reorganizations) and the sale of assets to “the company” (unclear what this reference is, but it seems it may be GFH) and the profit was real and that the auditors had agreed to the amounts shown.  

Whatever the case AA doesn’t understand the Chairman’s reply.

First, it is a fact that GFH recorded USD 77.8 million for debt settlement from GH and another USD 35.3 million from AHC. In the first case the amount arises from the difference between the face amount of the Villamar Sukuk and the price at which it was purchased.  The second from a reversal of a  prior year non-cash provision for settlement costs.

As far as other profit associated with the acquisition of GH, GFH had not recognized any change in asset values or good or bad will in connection with that transaction.  Perhaps, it’s a reference to the acquisition of AHC – the other component of the debt settlement income for the year.  If so, the amount doesn’t appear to be material.

In any case if GFH acquired GH, but Al Rajhi did not sell the Villamar Sukuk at a discount.  GFH's FY 2018 net profit would USD 77.8 million lower. 

Mr. Ziyaad alBanaa spoke up to say that there were individuals (presumably shareholders) who had no idea about the matters appearing in the annual report.  GFH’s Chairman noted that some shareholders (AA wants to emphasize these words) were deficient in following and reading the official announcements made by GFH as well as the articles written by GFH’s CEO Mr. AlRayes.  

The CEO then emphasized the need for shareholders to pay attention to official press releases by the Group.

Ziyaad continued that performance  (إنجازات)  should be added at the beginning of the report. (I believe that is a reference to metrics on performance rather than a recitation of other "accomplishments")  Mr. AlRayes referred to a press release the Group published at the Bahrain Bourse with detailed comparisons year by year, quarter by quarter, semi-annually of GFH’s performance, viz. profit, expenses according to the principles set down by the Central Bank of Bahrain.

Next up was Mr. Abdul Muhsin Ad-Darwiish, the representative of Al Rajhi who objected to the Chairman’s comments about shareholders being deficient in reading announcements. His complimented the efforts of GFH and paid tribute to its work, and then continued by complaining that the book value (per share) in 2018 was lower than 2016 and about the purchase of real estate portfolio in 2018

AA believes this is a typo.  In 2017 GFH increased its equity by persuading certain holders of infrastructure investments and GFH funds to swap those fine investments for even finer GFH shares thus increasing the number of shares roughly 63%.  That is dilution with not only a capital “D” but the entire word in capitals.  According to AA's calculations, these shares were issued at an approximate 5%  discount from the value of the assets received (USD 297.502 million) and 7.8% from net proceeds to GFH USD 293.106 million).  AA assumes the USD 4.396 million between the two are expenses associated with the issuance of the new shares. Thus, the 5% discount from par is the better measure of the discount.  Expect to see more on this topic in another post.

Mr. AdDarwiish asserted that there was no clarification of the profit to be obtained on exit (from the real estate purchased) and the transaction harmed “old” shareholders. And that the new shareholders had benefited at the expense of the old for the 2016 recovery of money.

A reference to the 2016 settlement of litigation that added USD 465 million to GFH’s income.  Presumably a reference to the new shareholders having the ongoing benefit as these assets were realized in the future.

And he continued that over 5 years the new shareholders had benefited at the expense of the old shareholders as shown by the decline in book value per share from 0.366 to 0.299 (USD). AA doesn't understand the "5 years" reference.  New shareholders entered in 2017.

Below is a chart that shows GFH’s book value per share, price to book ratio and market price over the period 2014 through 2018. Information from GFH’s website.

It’s not clear to me why Mr. AdDarwiish is focused on book value.  Perhaps he has some doubts—which AA shares-- about the efficiency of local markets and resulting “market” prices.  Or that GFH’s price support activities might distort its share price away from “fair” value.

Yet, when it comes time to sell one’s shares or pledge them to a lender for a loan, market value not the book value is going to be the determinant of value ascribed.

GFH Share Performance
	2014	2015	2016	2017	2018
BVPS	$0.14	$0.31	$0.40	$0.31	$0.29
P/B	1.24	0.38	1.13	1.23	0.83
Price	$0.17	$0.12	$0.45	$0.38	$0.24

Rather dismal performance across the board (read that as a pun if you’d like to).

Turning to Mr. AdDarwiish's first point, GFH's Chairman apologized for the misunderstanding noting that he had not meant that all shareholders weren’t reading (the press releases and other documents issued by GFH) but only some. (As outlined above, the minutes state that Mr. al Seddiqi did say "some shareholders" earlier).

He then continued noting the share repurchases and cash distributions were responsible for reducing the book value. And that if we wanted to grow and expand we would need to increase cash distributions and thus the book value per share will go down.  He also commented that there were profits in 2016, 2017, and 2018 which increased book value per share (BVPS).

This is patently absurd if we look at the change from 2016 to 2018. BVPS has clearly decreased. 

One can compare the relative impacts by looking at the change from 2016 to 2017 (dilution) and 2017 to 2018 (treasury shares). The impact of each is clear. 

As to distributions, if the number of GFH’s shares does not increase, then unless GFH pays out more in dividends than that year's net income, dividends will not cause book value per share to decrease. BVPS may not increase as fast it would if less dividends were paid out but it won't decrease. A key point here is that the dates used for comparison must be equivalent.  One cannot compare BVPS at FYE BV to BVPS on the ex-dividend date. 

That is less an issue with GFH.  With over 3.6 billion in shares and dividends per share at say 10% of par or USD 0.0265 per share dividends are unlikely to have an effect that most shareholders are going to notice.

As to Treasury Shares, while GFH did waste (sorry "invest") a lot of shareholder money with its excellent misadventure in Treasury Shares, the effect of the purchase on share book value was minuscule compared to the impact of increasing the number of shares 63% in 2017.  

Clearly, the trading in Treasury Shares caused real harm to shareholders.  By selling Treasury Shares below their purchase price as discussed here and then cancelling them as discussed here.  

It is unclear to me what he means by increasing cash distributions.  Is he referring to the fact that GFH needs to pay out more dividends and thus book value will not grow as much?  This is an answer to a different lament than book value going down.

One might ask if GFH wishes to grow and expand, should it therefore limit dividends and treasury share purchases to husband cash for investments?

On the other hand, if GFH makes (buys) new investments, there should be no impact on equity if it funds the purchase by using its cash.  The new investment on the books is offset by a decrease in cash. 

If GFH funds the investment with a loan, then loans will increase.

In neither case is there a change in equity. Equity will change when profit or loss is recorded on the new investments.

If GFH issues new shares for the new investment as it did in 2017, then yes book value per share will go down unless the seller agrees to pay more than book value per share for the new shares.

Or in the case where Treasury Shares are used as compensation, book value will not go down, if value of a Treasury Share is considered to be  more than the greater of (a) BVPS and (b) cost of acquisition of the Treasury Share.

If on the other hand, Mr. al Seddiqi is referring to the need to hire additional staff and incur other additional expenses, this should result in a reduction of net income which wouldn’t reduce book value per share but just moderate its growth unless of course such additional expenditures resulted in a net loss, i.e.  expenses exceed revenues.

Mr. AdDarwish interrupted him disagreeing with his view stating that an increase in book value was a profit for him.

Mr. al Seddiqi commented that if he followed the financial statements from 2016 to 2018 he would see there was profit that went to share book value, but then there were cash distributions and treasury share transactions that reduced it (again the argument from above which ignores the massive dilution in 2017) and that there was a profit in 2016, 2017, and 2018 and that value went to the shareholder.

Mr. AdDarwish expressed his opposition to the Chairman’s view saying that the real estate portfolio (AA believes this is a reference to the real estate obtained for the share conversion) was a harm to the old shareholders and that he believed the profit announced in February contained exaggerations and wasn’t real and that the old shareholders were entitled to the benefits from amounts (settlement) received in 2016..

Mr. al Seddiqi pointed out that GFH’s operation and financial statements were subject to supervision by the CBB and the Bahrain, Kuwait, and Dubai stock markets.  If there was anything confusing or erroneous in what GFH published, it would correct it immediately. (An answer to the doubt raised on the accuracy and "realness" of GFH's reported income).

He also commented that GFH was bound by law to allocate the 2016 settlement to shareholders at that time (presumably when settlement was received).  He noted that the board had a duty to recompense shareholders but because it is a bank is subject to financial solvency (ratios) that it must keep.

This appears to be a reference to GFH’s inability to dividend out the full amount of the  settlement because if it did, it would breach these limits. Most likely capital adequacy ratios. There is also the issue of when the settlement assets actually turned into cash. That did not happen immediately on receipt.  Once one becomes a shareholder, one is entitled to profit on assets the company held before one owned shares.  The theory being that current shareholders will factor that into the price of the shares that they sell.  Here the shares were issued by the firm after receiving shareholder approval at the EGM in 2017.

One very important thing to note is that at the 2017 AGM for FY 2016, GFH's shareholders voted to increase the proposed cash dividend from 10% to 12% of par.   The Central Bank of Bahrain did not approve the increase.  Readers may draw their own conclusions why the CBB refused.

He then asked Mr. AdDarwiish that if he had any proposals to make regarding the old shareholders, he should write to the supervisory organizations with a copy to the Board.

After this topic was finished, Mr. Fadi AlMajaaly asked about the USD 150 million acquisition of The Entertainer.  Mr. al Seddiqi replied that GFH was selling shares to other shareholders and had earned some USD 15 million in profit on these sales with another USD 10 million to come in FY 2019.  At present GFH owns 10% of The Entertainer.

Next came the “adding or submission of notices” ( أضاف ملاحظة  )  by shareholders.

AA believes but doesn’t know that this is the presentation of written statements by shareholders recommending actions or registering objections so that these become an official part of the record.  Such written documents have more legal force than verbal statements which may be construed as questions or expression of feelings rather than formal requests for action or formal objections.

Mr. Ahmad Abdullah noted the lack of precision and detail in news published by GFH.  The Chairman agreed and ordered the management to produce more transparent and detailed reports in the future.

Mr. Ziyaad AlBanaa asked about the Tunis Project.  Mr. AlRayes noted that this was GFH’s AGM to discuss GFH’s shares.  Discussions on the Tunis Project would take place with individuals later.  (This seems a strange comment.  GFH is majority owner of Tunis Bay. It would seem GFH shareholders would have the right to ask about major shareholdings.)

(اخيرا وليس آخرا ) tip of AA’s tarbush to whoever prepared the minutes for adding this phase (last but not least), Mr. Ali Tariif gave his “notice” which stressed the necessity of lowering liabilities and increasing shareholders’ equity from the decline the previous year.  He also recommended an increase in focus and concern on expenses and on return on shares.  And finally stressed the importance of controlling provisions that lower the value of assets and operating sectors.

The minutes record that the Board took all these comments and notices under advisement/into consideration.

Discussion of 2018 Board Compensation (Agenda Item # 7) 

Mr. Fadi AlMajaaly commented that the proposed USD 3. 5 million was extremely high when compared to the compensation and profits of other firms in Bahrain.  And he pointed out the importance of consideration for the interest of the shareholders as a priority

The Chairman noted that this proposal was subject to shareholder vote. (Presumably to retort that the shareholders' vote would express if the shareholders felt that this compensation was putting shareholders' interests first.)

Mr. Ziyaad AlBanaa proposed that in future years the Board’s compensation be lowered and distributions to shareholders increased.

The AGM approved the Directors’ 2018 compensation.

With some 3.6 billion shares, if board compensation were reduced to zero and the amount "saved" devoted to increasing dividends, USD 3.5 million when rounded up would equal USD 0.001 per share. 

That being said, for what GFH shareholders are getting this compensation seems high.  See my earlier post on comparative board costs.

That was the end of shareholder discussion in the AGM.

Shortly I’ll post on the EGM but that will be more an accounting lesson for shareholders than an extensive translation.

Why?

There wasn’t much discussion and what there was seems to AA to be off point. Some very crucial issues were missed.

The EGM illustrates that GFH's shareholders need more understanding of sources of information on company performance if they are to protect their interests and discharge their responsibilities for corporate governance. AA suspects they are not the only ones.