Friday 13 December 2013

Heads or Tails, you lose

Asiasons Capital Ltd’s proposal to acquire a 20% stake in Black Elk Energy Offshore Operations (Black Elk) from US-based hedge fund Platinum Partners Value Arbitrage (PPVA) is a one way bet to lose money for the Company. 

The Deal
The unaudited 30 September 2013 accounts for Black Elk shows a negative shareholder value of US$104.6 million with cumulative losses of US$86.7 million for FY2013. The Company is also faced with the prospect of defaulting on US$149 million in secured notes by end December. Large investments are also required to increase operating capacities. Whichever way you look at it, it is a black hole that will need a lot more cash. And shareholders of Asiasons will end up carrying this load.

Additionally, the acquisition will result in heavy dilution to existing shareholders. Based on its 2012 Annual Report, Asiasons had 973,213,529 shares outstanding. On top of a US$45 million promissory note to be issued to PPVA by Asiasons, the proposed deal will also see a staggering 494,230,769 shares issued at $0.13 to purchase 20% of PPVA’s stake in Black Elk. 

This values Black Elk at US$482 million. Black Elk has never made any money, with negative US$104.6 million in shareholder value. As such, Asiasons is valuing Black Elk with a goodwill of US$587 million. Not bad for PPVA that bought an 84.3% stake in this company for US$100 million. It also allows PPVA to now recognise a revaluation gain of US$210 million. A brilliant move to achieve an abnormal performance for an investment that has not done well.

A further 46.5 million shares will be issued as an ‘arranger fee’ to Jett Capital Advisors LLC (Jett Capital) if issued at $0.13. The new shares issued will be equivalent to 56% of the current outstanding shares. Post-acquisition, PPVA and Jett Capital will own a combined 35.7% of the enlarged share base. Furthermore, the theoretical ex-issuance share price will be approximately $0.09 due to the influx of new shares.

We think this deal will likely not close. It is conditioned on the Securities Industry Council waiving PPVA from complying with Rule 14 of the Singapore Code of Takeovers and Mergers, which relates to mandatory takeover offers for a company. 

Further, it will be surprising for SGX to approve the listing of the new shares to be issued to PPVA considering the heavy dilution and the poor quality of the assets to be acquired.

Asiasons currently has net assets of $235.6 million or $0.24 per share. Of this, $121.3 million is in ‘financial assets’. However, the collapse in the value of its holdings in LionGold Corp Ltd results in an unrealised loss of $106 million or $0.11 per share. Adjusted NAV is therefore $0.13 per share, and likely to fall further given its equity portfolio. 

The current stock price is $0.144, up from $0.123 before the news announcement. If the deal fails, the stock price should fall to a discount to adjusted NAV. If the deal succeeds, existing shareholders of Asiasons get heavily diluted in exchange for an asset that will continue to bleed.

Updates on Mont'Kiara Traffic Congestion

The following was the conclusion of the Community Dialogue on Mont’Kiara traffic congestion which was held on Tue, 10 December 2013 at Mont’Kiara Meridin.  Some of them were agreed with Dewan Bandaraya Kuala Lumpur (DBKL) and/or Ireka, the developer of 1 Mont’Kiara mall.

Immediate :
  1. Traffic light at Jalan Kiara in front of 1 Mont’Kiara to be switched off and instead be manned. (Ireka agreed)
  2. DBKL will strengthen enforcement of illegal car parking all along Jalan Kiara (DBKL agreed)
Near Term :
  1. Create a left turn into 1 Mont’Kiara just before the police station (DBKL agreed)
  2. Introduce a left turn into Plaza Mont’Kiara by creating a third lane from traffic light junction. (subject to further study)
  3. Look into solutions on the traffic congestion at Mont'Kiara International School (MKIS) as huge volume of cars dropping-off / picking up children to / from the school
Mid Term :
  1. Complete Jalan Kiara 4 as a 2-lane road by working with landowners (DBKL agreed) 
  2. Look into a solution at the intersection of Jalan Kiara and Jalan Duta Kiara, in front of Mont’Kiara Meridin, in anticipation of Jalan Segambut Dalam connection to Jalan Duta Kiara (subject to further study)  
  3. Create another direct access into 1 Mont’Kiara via Sprint Highway.  Create a direct exit from 1 Mont’Kiara into Sprint Highway, with the removal of traffic light in front of 1 Mont’Kiara, ie no right turn when exiting 1 Mont’Kiara into Jalan Kiara.  (subject to further study)  
  4. No exit from Sprint Highway into Hartamas roundabout. Exit at the Bukit Kiara/Science centre roundabout instead. (subject to further study)

Longer term :
  1. UEMSunrise to connect its existing shuttle service in Mont’Kiara to the MRT station at Phileo Damansara. (subject to UEMSunrise’s agreement)  
  2. Connect Jalan Kiara and Jalan Kiara 4 through the connecting roads at Arcoris and next to Mont’Kiara International School (MKIS). (subject to further study) 
  3. Complete upgrading of Jalan Kiara 4 into 6-lane arterial road (subject to the developments on the adjacent lands)
A committee is proposed to follow up on the progress and implementation of the above proposals.  The committee members are :-
  1. Tong Kooi Ong of 11 Mont'Kiara
  2. Mr. Lum Weng Loy of The Residence
  3. Dato' Maznah of The Residence
  4. Mr Ong Chou Wen of Mont'Kiara Bayu
  5. Mr David Lee of 10 Mont'Kiara
We are open to more members.  The roles of the committee are :-
- Work with professional traffic consultants
- Facilitate the execution of the proposed solutions
- Raise funding to conduct traffic studies etc
- Solicit ideas/comments from residents and communicate with residents

Monday 9 December 2013

Tenaga powers up

Long shunned by investors in favour of the independent power producers (IPPs), Tenaga Nasional Bhd (TNB)’s prospects are now powering up nicely. Investors have historically preferred the IPPs over Tenaga for their earnings certainty and consistent dividends. Much of the IPPs’ appeal, ironically, has been at the expense of Tenaga.

This week’s tariff hike is only one of many re-rating catalysts. More importantly, we believe the government is becoming more receptive to tariff hikes to ensure that the national utility has the financial capability to sufficiently invest for the country’s growing power needs. Thus, we expect more gradual tariff hikes ahead.

On its own, Tenaga is employing a more aggressive approach in expanding its own generating capacity, and is taking on more market share after having lost out to the IPPs over the last two decades. Its cost outlook is looking good, as the company controls its fuel cost mix and benefits from low coal prices.

Tenaga is also shaping up to be one of the market’s cheapest large cap stocks with a decent yield to boot. The tariff hike announced this week, combined with higher capacity, will give earnings a major lift over the next two years. The stock is currently trading at P/E multiples of only 13.2 and 10.8 times for FYAug14-15, with a net dividend yield of 3-3.7%, comparable to bank deposit rates.

Demand for electricity is expected to grow by between 3.5-4% per annum going forward. With the tariff increase, Tenaga’s turnover is estimated to grow by some 10% pa, on average, for the next two years.

Cost-wise, things are also looking good for Tenaga.

Thermal coal prices have fallen well off their peak. They averaged as high as US$142 per tonne in January 2011, and are currently selling for around US$85 per tonne. Prevailing market forecasts for the next few years are modest, with prices ranging from US$80-US$100 per tonne. This will help keep a lid on Tenaga’s future fuel bill.

Coal is the cheaper fuel compared to gas and oil. Its per unit cost is roughly 11 sen compared to about 13 sen for subsidised gas and up to 35 sen for imported LNG.

Tenaga is building proportionately more coal plants. The coal-fired Manjung 4 and 5 with total capacity of 2,000MW are slated to commission in FY15 and FY18, respectively, while only 1,000MW of gas-fired plant is planned for FY16. It is also commissioning two hydro plants which have zero fuel cost. These have a total capacity of 637MW and will be commissioned in FY16.

In short, the overall fuel cost per unit generation is expected to be relatively steady while the company builds up its own capacity.

We forecast Tenaga’s net profit will rise to nearly RM4.7 billion in FY14 and RM5.7 billion in FY15 – up from RM4.12 billion in FY13, excluding unrealised forex gains. At the current price of RM10.94, its shares are trading at 13.2 and 10.8 times our estimated earnings for the two years.

In line with the higher earnings and operating cash flows, we expect Tenaga to raise its dividends to about 33-40 sen per share in FY14-FY15, respectively. That will earn shareholders net dividend yields of 3-3.7%. Based on our forecasts, its balance sheet will remain strong with gearing estimated at 39% and 36% for the two years.

A more detailed analysis is carried in The Edge Malaysia this week.

Thursday 5 December 2013

Community Dialogue on Mont'Kiara Traffic Congestion

To those of you who reside in Mont'Kiara or frequent this vicinity, you would most likely have experienced the bumper to bumper crawl when entering or exiting Jalan Kiara especially during peak hours.

There is an urgent need to resolve the traffic condition in Mont'Kiara especially in anticipation of more future completed properties in this area such as Arcoris.

There are a few reasons for the congestion and there are practical ways to resolve it, as advised by a traffic consultant I have commissioned.

As a concerned resident and owner of Mont'Kiara properties, I am initiating a community dialogue on this matter and I invite all residents and members of the community who are concerned about the Mont'Kiara traffic condition to join us and share their views.

There will also be a presentation by the traffic consultant on the traffic issues and proposed solutions.

Formal invitations have also been extended to the local council; DBKL, nearby building owners and property developers.

Tuesday, 10 December 2013

What time?

Mont'Kiara Meridin Retail Promenade (location map attached)

A copy of the final adopted traffic proposal will be uploaded after the dialogue session. Readers who wish to support the proposal may then retrieve the form from this blog.

Monday 2 December 2013

Can politicians honestly live on low salaries?

Recently, there has been much debate about the salary increments for the Selangor Mentri Besar, speaker, state executive councillors and assemblymen.

Most agree that some salary increment is necessary. After all, the current salaries are incredibly low. You cannot expect your elected representatives to be honest and dedicated if they are not even earning enough to survive and provide for their families with a decent livelihood.

But there are many who argue over the large quantum of the salary increase. Worse, some even suggest elected representatives should do “national duty” and be paid pittance to serve the people.  

Thus, the question really boils down to what is the “right” salary. We have already noted that despite a doubling of the Selangor Mentri Besar’s salary to RM30,000 a month, or RM360,000 per year, he would still earn far less than a CEO of a listed company, who typically earns RM1 million to RM5 million annually, many even over RM10 million. 

Let us take the example of a federal cabinet minister, who officially earns about RM15,000 a month – or RM14,907 to be exact. The cost of living for members of parliament and state assemblymen are harder to simplify due to the varying size of constituencies and where they live. 

The attached table shows that despite living a frugal and simple life – like many squeezed middle income urbanites today -- they will still be grossly out of pocket. 

A cabinet minister earning RM15,000 per month will receive about RM12,311 net of taxes.

On the expenses side, we have included a simple frugal lifestyle centred around a family with a house wife and two school going children, a Toyota Camry family car costing RM150,000 (for the wife and family to use, apart from the official car for the minister) and a suburban home costing RM900,000. 

Much of the monthly expenses will go towards servicing loans for the home and car, both assumed to be taken with about 85% margin of financing. Monthly instalments for the two will cost RM7,425. Other major monthly expenses include food (RM4,500), education (RM4,000) and maid (RM1,200). 

Using these assumptions, there is a monthly deficit of RM10,067, or RM120,806 per year. 

Obviously, the table is neither comprehensive nor completely accurate for a minister. But I believe it represents a conservative picture of a typical urban middle class family faced with the rising cost of living and asset prices. 

As senior politicians with responsibilities for running the country, surely the ministers – by extension all elected representatives -- deserve to be presentable. They must have a clear mind to do what they are entrusted to do. They must be financially comfortable, such that they can enjoy a comfortable, albeit frugal lifestyle totally funded from their salaries, and not from other sources. 

Some argue that we could opt for rich politicians who do not need to be paid. One example cited by a local newspaper was Michael Bloomberg, the mayor of New York, who is reportedly entitled to a US$225,000 annual salary but waives it for a token US$1.

There are a few major holes in this argument. 

Firstly, don't we want the best person to serve the country, including those who are not wealthy? To attract those who are not already wealthy, we must pay a salary sufficient for their livelihood, even if they want to sacrifice for the good of society. 

Secondly, in certain countries where the rich are elected to positions, like Bloomberg in New York, he will never be able to benefit personally from the position. 

Are we ready for the same? Will we have a way to make sure that tycoons who become ministers and PM's do not abuse their positions to promote their own business interests?
Are not the business elites already too powerful, making decisions as king makers, often at the expense of the public?

If so, then what we need are honest, dedicated and capable people to become our elected representatives, to serve the people and the country. And in order to do so, surely, we must provide them a decent livelihood for their families. 

So, let us be realistic and bipartisan, and not be hypocritical or delusionary. 

We should not set government salaries so unrealistically low that the honest cannot even survive and therefore do not see a future in serving the people.