The short position


  • Business
  • Saturday, 18 Oct 2014

October market blues

OCTOBER is not the most auspicious of months for the stock market, is it?

Investors call it Black October, cross their secular selves and pray for a dry, dull month.

Why?

Because the Great Depression of 1929 began in October. As did the sharp short fall of 1987. The mini-crash of 1989 which led to the junk bond market collapse, too. And the subprime meltdown of 2008.

Well, October is upon us again, and – as if on cue – global markets duly sail into choppy waters.

First the IMF trims its global growth forecast for 2015. Then Germany’s monthly industrial production figures disappoint. Next, oil prices stumble, prompting fears the world’s growth engines are slowing.

And then came the unquantifiable threat of Ebola.

Do we have the making of another perfect financial storm?

Brokerage Schroders thinks market reactions in the past few days have been disproportionate. It says the fear of low level inflation turning into deflation in Europe, for example, is not new, and there is little evidence of things having changed.

There is also, of course, the hope of the European Central Bank initiating a Quantative Easing ala the Federal Reserve, if indeed things should go south.

MIDF Research is also of the opinion that the recent excitement is a cyclical correction, suggesting that “the ensuing recovery may be nearly as swift.” Its advice is for investors to buy on weakness, picking stocks with solid fundamentals.

CIMB Research says Malaysia’s “defensive market” should weather sell-downs better than the rest. In fact, it says, the market pullback has started throwing up significant value, especially small caps.

So do you sell, buy, or sit tight?

By and large, the consensus seems to be that the bull run is still on and that there are pickings to be had. Of course, nobody is really sure if we are seeing portents of tumultuous times, or just a hiccup; whether it’s a time of bargains or bear traps.

Remember, before the crash of October 1929, the market was still surging in September. And the bottom fell out.

Warren Buffets says: “Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” Michael Lewis, author of Liar’s Poker adds: “Those who know don’t tell and those who tell don’t know.”

It’s your call. Caution required.

Minorities in a quandary

THE proposed takeover offer by OSK Holdings Bhd of OSK Property Bhd (OSK Prop) and PJ Development Bhd (PJD) may not go down well with minority shareholders of the latter two companies.

While the concept of merging all three companies into a first tier property developer has its merits, the takeover price, to start with, is something that most minorities are not likely to be happy about.

That is because it is below the market prices of OSK Prop and PJD. Before the proposed takeover, PJD was trading at RM1.67 while OSK Prop was at RM2.27. Typically, takeovers that are priced below market prices don’t get anywhere.

In this case, the deal is complicated by the presence of the major shareholder Tan Sri Ong Leong Huat in all three companies. Ong and his family own about 41% in OSK Holdings, 74% in OSK Prop and 32% in PJD.

Following the announcement, investors have sold down OSK Prop and PJD shares, on fears that their company will be bought out and taken private at those offer prices.

The offer prices of RM2 per share for OSK Prop is above its net tangible asset (NTA) per share of RM1.87 but the assets in the company have not been re-valued for some time now. The offer price of RM1.60 per share for PJD is at 37% below its NTA per share of RM2.54.

Minority shareholders though ought not to panic because they have the option to hold out for a better price, if they feel the offer is not right.

Under the Takeover Code, the buyer will have to secure 90% of the remaining shares (excluding the buyers’ own stake) before compulsorily buying out the remainder shares. What this means is that minority shareholders collectively holding more than 10% of the shares in the company can prevent it from being delisted. They can hold out and ride with the company.

This is not the first time Ong has made an offer that would be challenging for minorities to accept.

Just last year, two of Ong’s takeover bids were rejected -- he attempted to take OSK Holdings private at RM1.68 per share and OSK Venture International Bhd, for 58 sen apiece.

Returns of property SPAC

IT was long speculated that a property Special Purpose Acquisition Company (SPAC) would be attempting to make its debut on Bursa Malaysia.

So it has happened in the form of EcoWorld International. The proposal has not gone into the Securities Commission yet but it has already got the sector chatting.

It is with good reason.

SPAC are known as blank cheque listings or company that raise funds first from the public before securing assets that give high returns. The idea of a SPAC is to allow entrepreneurs a chance to build up listed companies

A key criteria for SPAC is the yields that it can deliver to the minorities. Because the structure of the SPAC is such that the management gets free shares up to 20% of the listed company, yields have to be attractive.

So far the only SPACs that have got the blessings of the SC are those involved in the oil and gas sector. The reason is oil and gas companies tend to generate high returns – of more than 25%.

But can property SPACs give high returns? That is the area that would be closely watched in EcoWorld International’s draft prospectus.

Generally, within the country, the yields on property are low, probably less than 5%. But in some countries overseas, returns are still double digit. For instance in the US, buyers of properties a year ago are enjoying handsome returns of more than 15%

That is probably why EcoWorld International is looking beyond local shores.

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