Sunday, 12 November 2017

Sime Darby: what happened after its merger? (2)

Long article in The Star: Sizing up Sime Darby’s demerger

But what is missing?

First of all one simple number, how much will this demerger actually cost? Surely this number should have been disclosed in a transparent manner.

The previous exercise in which Sime Darby was merged with Golden Hope and Kumpulan Guthrie was rumoured to have cost RM 500 Million, that is a lot of money. Most likely this demerger will cost a similar amount of money. This cost is certain to happen, possible benefits are just projections, there is a large difference between a certain cost and possible future benefits.

Secondly, were the expectations of that previous merger met? According to this link:

Were those annual benefits of RM 400 - 475 Million ever realized? I strongly doubt it, Sime Darby's results have been disappointing since the merger. But would it not be better to analyze first what went wrong the last decade, and communicate these findings in a transparent way to the shareholders?

Thirdly, if this demerger really makes so much sense, why was it not done ten years earlier, when the merger took place? It could have saved hundreds of millions of fees and costs with the company having the possible benefits over the last decade.

Monday, 6 November 2017

China Ouhua: red wine and red flags (5)

I have written several times before about China Ouhua Winery, and not exactly in "glowing terms". To be more exact, I haven't found a single positive aspect regarding this company.

I was therefore rather surprised when I noticed the following:

According to the website of The Edge, Fundamental Score is defined as:

The Fundamental Score is a snapshot of a company’s fundamental strength, derived from historical numbers. For those who are not familiar with financial jargons, we have condensed some of the most often-used ratios into this "Score" to reflect a company’s profitability and balance sheet strength.

The Fundamental Score ranges from 0 to 3 for easy understanding. A score of 0 means weak fundamentals and a score of 3 means strong fundamentals.

The definition of the Valuation Score is as follows:

If you are unfamiliar with financial jargons, we have condensed several of the most-often used valuation benchmarks into a Valuation Score of 0 to 3 – to determine if a stock is attractively valued or not, at this point in time.

A Valuation Score of 0 means valuations are not attractive. Vice versa, a score of 3 means valuations are attractive.

That means that China Ouhua has a fundamental strength (1.80) that is better than average and a somewhat attractive valuation (0.90).

Somewhere in the database and/or algorithms of The Edge, something must have gone horribly wrong.

Surely both the fundamental and valuation score for China Ouhua have to be 0.00.

For more background on the company and to get a flavour what this company is about (hint: managing the winery is not exacty their forte), please check the previous articles.

Saturday, 4 November 2017

Bots can give "annual returns of over 40 percent" ......?

There is a lot going on in the fintech world and while I am hesitant about certain directions (I am definitely not convinced about digital currencies like bitcoin), I do agree that I might simply be wrong (some would say: "too old to understand this").

One new direction of fintech is regarding robot programs that place automatically trades based on programs provided and certain parameters that the user chooses. My eye caught the following announcement on TechInAsia's website:

Robo-investor AlgoMerchant begins trading after $2m-plus funding

Everyman securities trading platform AlgoMerchant will officially launch this month after raising more than US$2 million in funding from East Ventures and a “network of prominent individuals in the fund management and broking industry.”

The Singapore-based startup offers a range of robo-traders that allow investors of all shades – from part-time retail investors to professionals and high-net-worth individuals – to automate securities trading through their personal trading accounts.

The robo-traders use data analytics and machine learning tech to automate trading, while also avoiding delays and human error. The basic service is free, while a range of premium packages can be paid for.

AlgoMerchant said it collaborates with freelance quantitative traders  – in other words, those that specialize in automated trading – and data scientists from around the world to discover profitable investment algorithms. More than 1,000 traders tested out the service during its nine-month beta phase.

So far so good, it definitely sounds interesting.

But I almost dropped out of my chair when I read the following:

Forty percent returns

The startup claims that its bots can give everyday retail investors “an edge similar to resource-rich top quantitative hedge funds,” securing projected annual returns of over 40 percent.

Annual, consistent returns of over 40 percent are simply from another world. Even Warren Buffets returns would pale in comparison to those.

Just as an example, $ 10,000 would turn into $ 8,360,000 over 20 years using 40 percent returns. I guess we all would love that, it would for instance solve all pension problems of the world.

But worrisome, there is no basis whatsoever given in the article for these kind of returns, it looks like they are plucked from the sky.

On the company's website the only thing I can find regarding returns is this:

The majority of retail investors’ portfolios follow the returns of the market. AlgoMerchant’s strategies, however, are alpha-seeking and target upwards of 20% per annum.

Suddenly the "over 40 percent returns" has changed into "upwards of 20% per annum".

Following the same example, $ 10,000 would turn over 20 years into $ 383,000.

Not bad at all, but a rather far cry from the $ 8,360,000 based on 40% returns.

The graph supporting these claims is as follows:

Two obervations:

  • The starting point of any simulation is very important. In this case the company used January 1, 2008, in other words exactly at the start of the global recession. Thirteen months later equity markets are down 47%, the company claims Paladin (their algorithm) would theoretically be up by 45%, a huge outperformance by all means in a rather short while. But that crisis is a "one in a generation" event, it is very tricky to start a simulation exactly there.
  • After the crisis, the central banks started the largest financial "experiment" (QE, quantitative easing) ever, driving interest rates down to a level not seen in 5,000 years. Again, the question is, how would Paladin have theoretically performed under more "normal" circumstances?

My guess is that these hypothetical results are derived from optimising on the data itself, causing over optimisation (especially given the rather unique circumstances of the last ten years), and thus generating much too rosy projections of future returns.

Friday, 3 November 2017

Sapura Energy: excessive remuneration for Directors? (3)

Article in The Star: Sapura Energy tumbles on Mokhzani’s exit

One snippet:

Shares of Sapura Energy Bhd tumbled more than 9% in early Thursday trade following report that Tan Sri Mokhzani Mahathir is disposing off his entire stake in oil and gas services company.

This is the second time Mokhzani is offloading its stake in an oil and gas firm. In 2015, Mokhzani’s private vehicle, Khasera Baru Sdn Bhd sold off a block of 190.3 million shares in SapuraKencana Petroleum Bhd for close to RM820mil in total.

Industry players said Mokhzani’s exit did not come as a surprise. They added that Mokhzani believed the oil and gas industry was a global issue and prefers to redeploy his resources in other investments.

Mokhzani through Khasera Baru has a 10.10% stake in Sapura Energy. 

According to a term sheet, Mokhzani is looking to sell up to RM905.1mil of Sapura Energy shares.

The bookbuilding range for the offer represents 605 million Sapura Energy shares was between RM1.42 and RM1.49 a share.

The price range represents an 8% to 12.3% discount to Sapura Energy’s closing price of RM1.62 on Wednesday ahead of the bookbuilding launch.

Khasera Baru will not own any Sapura Energy shares after the sale.

"Industry players" said "Mokhzani believed the oil and gas industry was a global issue and prefers to redeploy his resources in other investments".

May be, but could this (yearly renumeration of RM 84M, most likely by the CEO) or this (RM 70M yearly fees, most likely to a company linked to the same person) while the company was losing more than half a billion RM over the last two years have to do with it?

Also taking into consideration that two resolutions were voted against by 18% and 22% of the votes, rather unusual in the Malaysian context.

The sale is suprising given that the share price is roughly at its lowest point of the last five years. Why would anybody want to sell now, especially since it looks like the price of oil has turned and oil inventories are running low?

I guess there is more to the story than "Mokhzani believing the oil and gas industry was a global issue".