Short Position - The big sale is on

  • Markets
  • Saturday, 26 Oct 2019

It cannot be helped but be noticed that Lembaga Tabung Haji (TH) has been selling down its stakes in listed companies. The divestment of its shares in companies such as Cahya Mata Sarawak Bhd, Ranhill Bhd, Malaysia Resources Corp Bhd and several other listed companies is quite obvious

EVERYBODY knows that it is never the right time to sell stocks when the market is bearish. However, when one sees funds divesting in a bearish environment, it reflects their poor asset profile and risk management.

It cannot be helped but be noticed that Lembaga Tabung Haji (TH) has been selling down its stakes in listed companies. The divestment of its shares in companies such as Cahya Mata Sarawak Bhd, Ranhill Bhd, Malaysia Resources Corp Bhd and several other listed companies is quite obvious.

The fund has a stake in Eastern & Oriental Bhd that is undertaking fundraising, which it is not likely to subscribe to.

It should not come as a surprise to anyone who has been following the developments at the fund, which is going through a major overhaul after it was found to have paid out dividends it could not afford. Among others, an audit revealed that the fund was paying dividends when it could not afford to in the years 2016 and 2017.

For 2018, TH declared a measly dividend of 1.25%, following a restructuring that involved the government setting up a special-purpose vehicle (SPV) that raised up to RM20bil to buy over its assets.

The SPV is to dispose of the assets, which include shares in listed companies, gradually to allow the fund to recover its money. Hence, the current divestment by TH of its equity stakes.

More than paying the yearly dividends, TH also needs money to meet redemptions.

The fund used to pay hefty dividends, attracting many investors who put in an extremely high amount of their savings to take advantage of the superior returns. The highest amount was RM190mil that was put in by a former minister.

The original purpose of the savings function of the fund was to encourage Muslims to put aside some of their earnings for their pilgrimage. However, because of its superior returns compared to banks and the government backing it, many took advantage of the fund.

TH’s disposal of its stakes in listed companies will bog down the share price of these companies, unless their fundamentals change and there is a major buying interest to absorb the fund’s selling.

WeWork and PropertyGuru

SOME three months ago, office space and sharing solutions startup WeWork was about to reinvent the market for office space and elevate the world’s consciousness. It was touted to go public with a valuation of US$47bil.

How things have changed in a matter of weeks. Its initial public offering (IPO) was scrapped, following scorching criticism of its debt levels and its complicated shareholding structure, which saw founder Adam Neumann having enormous control over the company.

In a matter of weeks, the company was running out of money and needed a bailout. Neumann was forced to resign on increasing negative backlash.

Earlier this week, WeWork’s backer, Softbank, came to the rescue when it took over the company. The takeover value was, however, a measly US$7bil compared to the US$47bil Softbank had estimated it to be earlier in the year.

Closer to home, Singapore-based startup PropertyGuru abruptly halted its planned IPO just two days before it was due to list on the Australian Securities Exchange (ASX).

The IPO was estimated to raise as much as A$362.6mil, according to the ASX. The board of PropertyGuru decided to withdraw the listing due to uncertainty in the current IPO market.

Over the last few months, high-profile Silicon Valley darlings such as Uber, Lyft and Peloton have fared poorly, with their share prices trading below IPO price.

Sure, the early investors in the game made a tonne of money, but those who came in later haven’t prospered.

This could be a sign of the times. Unicorns with huge valuations are no longer the flavour of the month, as investors are focusing more on margins rather than growth.

Investors are no longer willing to throw money at companies that command a large premium simply for having a big market share but with no signs of profitability.

The traditional way of fundraising for an IPO may not be suited for growth companies that require long years before they turn a profit.

Perhaps a new platform is needed to cater to investors with a higher risk appetite and are willing to sit through years of losses. This could be in the form of a digital asset.

Once the company matures and makes a profit, then perhaps the company can revert back to the traditional IPO route.

Imaspro’s dividend poser

IMASPRO Corp Bhd, a company which produces pesticides, plant micronutrients and distributes other agrochemicals, has seen its profitability on the decline in the last five years. For the financial year ended June 30,2019 (FY19), it reported a net profit of RM577,000, a significant drop from the RM5.73mil recorded in the previous year. This is a substantial decline from the net profit of RM10mil made in FY15, a chart in the company’s recently released 2018 annual report shows.

Correspondingly, earnings per share (EPS) has come down from 12.5 sen five years ago to a mere 0.7 sen in FY19.

The company attributed its poor performance to the continued pressure seen in crude palm oil prices, which in turn has implications on it as a manufacturer of agricultural chemicals. Its profit margins also continue to be squeezed, as global players aggressively fight for market share. The company added that both its domestic and export markets are exposed to aggressive price pressures that had led to margin compression.

Interestingly, Imaspro has continued to pay a gross dividend of 3.5 sen in the last five years. Can the company keep paying this amount with profitability on the downtrend?

However, in its management discussion and analysis, the company sees opportunity in the growing demand for durians outside the country.

This comes following the recent Malaysian government initiative that provided the green light to export whole fruits for durians in frozen packs.

“Given that the quality of fruits for export is of fundamental importance and a basic requirement under the export standards, the use of insecticides for prevention is absolutely necessary and inevitable, ” it says in the annual report.

The company says it is well prepared for this and has ready products that can cater to the anticipated surge in market demand for whole durian fruits in the future. Whether this will reverse its fortunes, the coming quarters will show.

Its shares traded unchanged yesterday at RM2.17 – down about 5% year-to-date.

At this level, its market cap stood at RM173mil.

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