Friday, July 25, 2008

Temasek reduces Merrill Lynch stake - True or False

A total of 87m shares have been sold off at a loss, according to US recorded filings.
Temasek Holdings has sold off half its ill-timed investment in Merrill Lynch - or about 87m shares, according to a mutual funds report on institutional trades on US stocks.
The online report, MFFAIRS (Mutual Fund Facts About Individual Stocks), reported it sold off 86,949,594 shares (50%), leaving a current holdings of 86,949,594 shares (50%), according to the filings made public.
The report gave no exact date or price of the sale.
Neither has there been any confirmation from Temasek, which had paid US$48 a share last year. Last week Merrill Lynch was traded at $31.
At that price Temasek would have suffered a loss of $17 a share - or a total loss of about US$1.48b for the 87mil shares.
The company's equity capital position is weak relative to competitors, said Brad Hintz, a New York-based analyst at Sanford C Bernstein, reports Ambereen Choudhury.
"With $19.9b in CDOs still frozen on the balance sheet and with counterparty risk rising on the hedges underlying these troubled positions, the potential for additional material write-downs remains a concern,” Hintz said.
The third-biggest US securities firm probably will report a loss of $6.57 a share this year, compared with an earlier forecast of $1.07, Hintz said.
The revised estimate assumes the company generates no earnings in the second half.
Merrill may have to take an additional $10 billion of pre-tax write-downs related to its holdings of mortgage securities, Moody's estimates.
Huge paper lossesThe disposal leaves Temasek Holdings and the Government Investment Corporation (GIC) still holding substantial parts of big troubled Western banks.
Its remaining investments in UBS (Switzerland), Citigroup, Barclays and Merrill Lynch - at an original cost of US$21.88b - have declined on by some 47 percent in value.
Some experts believe that Temasek has made an error of judgment.
Investment guru Jim Rogers said in July he believed that US bank stocks could fall further and predicted that Singapore's state investors would lose money on Citigroup and Merrill Lynch.

Comments:
Before you come to the conclusion that Temasek has made a lousy investment decision which has resulted in losses, it seems like nobody can verify on the accuracy of this news. According to the Mutual Fund Facts website, they have sold off 50% of their stake. That means at the start, Temasek should own about 174 million shares. However, I am inclined to think that this piece of news is untrue. The numbers simply do not add up. I did a simple search online and found the following:


On 3rd Jan 2008, in a 13G filing on Merrill Lynch, Temasek Holdings disclosed that they hold a 9.4% stake, or 91,666,666 shares, in the investment bank. In December, Merrill, hit with massive write-downs due to the submprime debacle, said they would raise up to $6.2 billion in a deal with Temasek Holdings and Davis Selected Advisors. Under the plan, Temasek Holdings was to invest $4.4 billion in Merrill Lynch common stock, with an option to purchase an additional $600 million of Merrill Lynch common stock by March 28, 2008. Under the deal, Temasek's ownership position will at all times be less than 10% of Merrill Lynch's outstanding shares. Temasek made the initial investment of $4.4 billion at $48 per share (91,666,666 shares). Temasek has an option to buy an additional 12,500,000 shares, also at $48.


Currently, Merrill Lynch's share price is hovering at around US$34. So assuming Temasek exercises the option to increase its stake, the extra $600 million will net another 19 million shares. Taking into consideration that Temasek has bought an additional 12.5 million shares at US$48, the total amount of shares it is holding should be in the region of 123.5 million (92+19+12.5).

How did Mutual Fund Facts website get 174 million???????
Never take news report at face value. Always double check.

Saturday, July 12, 2008

RTO = Ready to offload

In the Business Times on Thursday:
Backdoor listing is the flavour of the season as companies are taking the reverse takeover (RTO) route to the stock exchange instead of initial public offerings (IPOs).
In the first half of this year, the value of announced reverse takeovers (RTOs) on the Singapore Exchange surged to US$969 million - an all-time high that even exceeded the amount raised through IPOs, year-to-date.
Some US$797 million worth of RTOs were announced for the whole of last year - a record by itself - data from Dealogic shows. The first six months of the year have already surpassed this amount. The RTO trail saves time. In contrast, the IPO process involves roadshows, and lodging a prospectus which is then made publicly available on the Monetary Authority of Singapore website Opera for investors to pore over.

My comments in RED.
I have never been a fan of the RTO process and the new business that comes along with it. In my opinion, the greatest beneficiary of such arrangements are the vendors and owners of the new business. Perhaps for the long suffering shareholders, the only good thing is that they are now able to sell their shares in the open market as a result of an increase in trading volume caused by the buzz surrounding the impending RTO deal. I will dissect the numbers in the RTO recently announced by Showy International to illustrate why it is a lousy deal.

On 7 july:
Showy International Limited is pleased to announce that the Company has entered into a conditional sale and purchase agreement (the “S&P Agreement”) dated 7 July 2008 with Newest Luck Holdings Limited (“Newest Luck”), Leap Forward Holdings Limited(“LFH”), Tan Hoo Lang and Tan Fuh Gih (together with Tan Hoo Lang, referred to as the “TanBrothers”) (collectively referred to as the “Vendors” in this Announcement), for the proposed acquisition by the Company of the entire issued and paid-up capital of Fortune Court, and the allotment and issue of shares in the Company as consideration for such acquisition, resulting in the reverse take-over of the Company.

Fortune Court is engaged in the property development industry in Chongqing. Fortune Court’s subsidiary, Chongqing Yingli Real Estate Development Co., Ltd (“ChongqingYingli”), is a premier property developer in Chongqing with a unique track record of old city reconstruction. It has since developed several major commercial buildings, such as Future International and New York New York. As at 30 June 2008, the total gross floor area (“GFA”) of completed properties held for investment by Chongqing Yingli is approximately 140,621 sq m, comprising commercial area of 78,985 sq m, office area of 22,668 sq m, residential area of 485 sq m and car park space of 38,483 sq m. In addition, the total estimated GFA of Chongqing Yingli’s land bank as at 30 June 2008 is 512,329 sq m. Chongqing Yingli engages third parties to assist in the project management of its properties and to provide project consultancy services.

Showy International shall acquire the entire issued and paid-up capital of Fortune Court for an aggregate consideration of S$545.39 million. The Consideration shall be satisfied by the allotment and issuance of a total of 1.65 billion new ordinary shares in the capital of the Company at the issue price of S$0.33 each. In the end, the total number of shares outstanding will be 1.779 billion.

So the million-dollar question is, is the acquisition amount for Fortune Court cheap or expensive?
Lets take a look at the 2007 financial figures of Fortune Court.
Revenue: S$49.2 million
Profit from operation: S$12.54 million
The fair value gain on investment properties is paper profit and non-recurring in nature. Thus it is not taken into consideration for the calculations.
Book value: S$206 million

Earnings went up by 30% between Y2006 & Y2007. Assuming Fortune Court can eke out the same amount of growth this year (very unconservative assumption considering the China real estate market was red-hot in the past few years), the earnings should reach S$16.3 million in Y2008.
In actual fact, Fortune Court is being valued at a PE of 33.4 (545/16.3). The return on investment is 2.99%! Wait, some may say that the value of Fortune Court lies in the properties and land they are holding. So lets see how much over valuation did Showy agree to pay.
The premium paid by Showy is a whopping S$339 million! (545-206). After this whole acquisition is complete, the forecasted EPS will be S$0.0092 (16.3/1773). If the above figures do not put you off, nothing will. The acquisition price of S$545.39 definitely do not look cheap.
But again, RTO deals are not meant to be cheap. Refer to my title for this posting again. Caveat emptor!!

Friday, July 4, 2008

Who's the real culprit?


Below are some of the versions we read about recently on the reasons behind the relentless price increase of commodities.

VERSION 1: Speculators
In the current global economic slowdown, it would be fundamentally reasonable to assume that consumption has gone down and prices have weakened. This indeed is the case for lead, zinc and nickel. Copper on the other hand has remained stubbornly resilient and is in striking distance of its previous all-time high despite the increasingly bearish fundamentals. The International Copper Study Group (ICSG) reported a production shortfall for 2007 of about 55,000 tonnes, which is the basis of the widely published conclusion that copper remains "tight". However, the ICSG also states that those numbers make the assumption that all copper imported into China was consumed (Chinese consumption would have had to have been up 37%).

To find out what was actually happening statistically in China, one would look at the National Statistical Bureau (NSB) numbers to see what was produced plus what was imported, and subtract what was consumed. Consumption (3,990,000 tonnes) Production 3,441,000 tonnes Net Imports 1,350,000 tonnes Surplus Balance 801,000 tonnes In 2007 world refined copper production substantially exceeded consumption, by at least 750,000 tonnes. The inventory overhang in China has caused its prices to be at a substantial discount to the rest of the world. In the first quarter of this year, the ICSG has reported that global consumption is down by nearly 1%. First-quarter average mine capacity utilisation was slashed to 82% from 89% in the corresponding period of 2007. This is a fundamental picture of slowing consumption, unreported copper inventories and producers reducing production in face of worsening consumption. In short, it is unrealistic for copper price to be trading at such a high level. Actions of the speculators maybe one of the main contributing factors.



VERSION 2: Demand increase
Unlike in the past, when rallies in commodity prices have tended to be confined to a select few commodities, over 2003‐2007 prices have risen for all raw materials across the board. Links between various commodities through the supply chain (including, for example, transport costs) typically result in positive co‐movements but correlation is at a historical high, pointing to the role of a common demand shock across the raw‐materials sector.

The remarkable rise in oil and metals prices has its origin chiefly in the strength of emerging markets demand this decade. The rally in metals prices has also been driven by the concurrence of strong demand growth from the developing world and weak production capacity. China, which consumed about half of all the increase in copper, steel and aluminium output, and nearly all the increase in lead, zinc and tin during 2002‐2005, has single‐handedly altered the demand side of the equation.

The demand for base metals began to rise at a juncture when supply was ill-positioned to respond, since investment had sunk to a 12‐year low in 2002, due to a steep decline in prices in the 1990s, and a wave of consolidation at the end of that decade caused exploration budgets to shrink.


Comments:
Depending on what you read and who you listen to, the above are 2 of the most popular reasons given for this surge in prices of commodities. In my opinion, both are valid factors behind the price increase. It is clear that as China and India progress, their need for commodities will go up. At the same time, the number of speculators and hedge funds having open interest in various commodities also went up in recent years. However, in the near term, it is unlikely that commodity prices will remain immune to the global economic slowdown that is underway.
A weakening US economy, coupled with the forecast slowdown in Chinese growth, which Fitch estimates will be the slowest in six years, is likely to take a further toll on metals demand.

On the other hand, US House of Representatives recently passed a bill that directs the Commodity Futures Trading Commission to use all its authority to curb speculation in energy futures markets. It seems like the stage is set for a period of stable prices.