This is what I suppose one
might from a shareholder’s perspective call adding insult to injury. Or more accurately “insults” to “injuries”. For details of the "original" insult look here.
At its FY 2018 EGM, GFH shareholders accepted
the Board of Directors’ proposal to cancel some 207,547,170 of Treasury Shares.
According to the published minutes, there was no discussion on this topic. A fool and his money …
Now you may be
wondering why AA thinks this is an “insult” to shareholders.
After all, the Treasury Shares have
already been deducted from shareholders’ equity and so canceling them will not
affect shareholders’ equity.
There
will just be a set of accounting entries within shareholders’ equity to remove
these shares from the Treasury Shares account in shareholders equity to other
accounts within shareholders’ equity.
The net accounting effect is zero.
AA agrees.
But, and there’s always a
“but” with AA. It will also involve the
legal cancellation of these shares. They
will no longer exist.
GFH did not conjure these shares out of air. It paid hard cash—shareholder cash—to acquire
them.
And, thus, there is a real
economic effect to canceling them.
One thing AA
learned in business school was that if you have to choose between economic and
accounting effects, choose the former.
Unless, of course, you’re part of management and your bonus depends on
the accounting. “If you can’t fix the
business, fix the accounting”.
If GFH
retained the shares, it could sell them in the market or use them as
compensation in a transaction with a third party in lieu of cash or other
assets sometime in the future.
So by
cancelling the shares what are GFH’s shareholders “losing”? They’re losing those future potential uses of
Treasury Shares.
But you object GFH’s Board are prudent stewards of
shareholders’ interests. It’s probably a
de minims amount.
At FYE 2018 GFH
held 255,455,953 in Treasury Shares valued at USD 85.424 million, giving an
average cost of a T/S at roughly USD 0.33.
GFH and through SICO its market maker have been busily buying and selling Treasury Shares since then, but we don’t have the data to compute an average price per share
for a more recent date. So we’ll use the
USD 0.33 FYE 2018 average price per Treasury Share with the knowledge that the average price may be lower,
particularly as GFH shares are now in the USD 0.20 range.
The 207,547,170 in T/S--that GFH most
likely canceled in May or June this year—are (or more precisely “were”)
therefore worth some USD 68.5 million using USD 0.33 per share.
At USD 0.20 per share average price the pain
is less but still a considerable USD 41.5 million.
Think of either of these amounts as a percent of
reported net income
Unless we assume
that GFH could have only sold these shares for zero in the future and that no
one would have assigned them any value in a transaction, GFH has just thrown as
much as USD 68.5 million down the proverbial drain.
Suppose, for example, that it could have
sold the shares for roughly one-third of their FYE 2018 price. That would be very roughly USD 23 million for
the shareholders. If it sold them at
current prices, somewhere in the USD0.20 range, that would be USD 46 million.
It would have incurred a loss on the transaction but nothing near the loss from
cancelling the shares.
You’ll
remember that GFH’s excellent 2018 and 1Q19 misadventure in share trading cost
its shareholders some USD 37.4 million. And if you don't, here's the link to an earlier post. Add the cost of cancellation and that number together and you have an
amount almost equal to FY 2018 reported income.
USD 68.5+USD37.4= USD 105.9 million.
Or, if we assume the average price per Treasury Share in May this year
was around USD 0.22, a total of USD 78.9 million.
But there’s more.
GFH appears to have continued its Treasury
Share transactions in 2019 past 1Q19. Here
are the links to the disclosures for April and
May.
There’s little need for AA to detail this topic.
Dr. Sabah Al
Binali has already done so with an excellent
analysis in Zawaya on this activity. He notes that the activity is not consistent
with “making a market”. A market maker
provides temporary liquidity to bridge gaps between supply and demand in the
market. Thus, a real market maker should
be running a roughly balanced position with some inventory on hand in case
there is excess “buy” demand.
AA
thinks it is highly likely that in the case of GFH such inventory need be only
minimal. It seems from the trading numbers
that “supply” far outweighs "demand". To add
another insult, despite all this spending, GFH’s price has continued to drift
downward.
Now having incurred the losses of FY2018 and 1Q19 what business
logic would then decide cancelling Treasury Shares with a value of USD 68.5
million was a good idea?
And having
proposed the cancellation of these Treasury Shares, what sort of logic (if we
may use that term in this connection) would have continued Treasury Share
transactions?
It’s hard for AA to think of a sound business reason.
Those more suspicious than AA might
surmise that GFH is desperately trying to maintain its share price because
someone important to it has used GFH stock as security for a loan or has
created a fund which contains GFH stock.
And GFH needs to clear out the “old” Treasury Shares so it can continue
buying its shares and still remain within the 7% limit in what appears to be
losing effort to prop up its share price.
Those same people would probably think that only something like that
could persuade the Board that piling more losses on top of USD 105.9 million
was an “idea” much less one that should be considered. There is a logic here because according
to the CBB approval SICO, GFH’s “market maker”, is limited to
holding not more than 3% of GFH stock.
And GFH restricted to holding 7%.
One other point. In its FY18
annual report, GFH touted the use of its Treasury Shares as follows:
“To manage the liquidity risk arising from financial liabilities, the Group aims to hold liquid assets comprising cash and cash equivalents, investment in managed funds and treasury shares for which there is an active and liquid market.”
Some observations:
- GFH Treasury Share transactions in 4Q18 which were roughly 39.7% of all transactions in its shares on the Kuwait, Bahrain, and DFM during that period and ended the period holding more of its shares. That’s clearly not an “active and liquid” market, but rather an artificial market.
- Investors are generally advised to carefully consider the liquidity of the securities they purchase before they purchase. Getting in to an investment is generally remarkably easy. Getting out may be another matter entirely. Also investing in securities whose price is being artificially supported is a recipe for losses.
- On a positive note GFH’s liquidity position apparently has remarkably improved as it no longer needs to use its Treasury Shares to provide liquidity. It can therefore cancel some 207 million of them.
- Not only that but GFH’s liquidity allowed it to spend between USD 78.9 million (USD0.20 per share) to USD 105.9 million (USD 0.33 per share) on the cancellation and Treasury Shares trading during FY 2018 and 1Q19.
- Kudos to GFH’s management for strengthening GFH’s liquidity!
- Based on just these two achievements, I’m certain that very few will argue with AA’s assertion that USD 3. 5 million in 2018 compensation for GFH’s Board just isn’t fair when all they have done for (or is that “to”) shareholders is considered.
Amidst this gloom, there is perhaps hope on
the regulatory front.
Sometime in
2019, the Central Bank of Bahrain mandated that market making transactions be
disclosed.
AA thinks, but doesn’t know, that his was likely the CBB’s
reaction to GFH’s 2018 Treasury Share transactions. If AA’s conjecture is correct, then hopefully
the CBB is aware of the situation and taking whatever action it deems
appropriate.
As for GFH’s poor and as each day passes
apparently poorer shareholders, الله يوفقهم
Though
as AA learned in school, it’s best to tie one’s camel first ….
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