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Steinway Capital Inc is a New York based proprietary investment research firm with a focus on opportunistic long-term investments. The firm focuses on spin-off related investment strategies, distressed and post distressed investments, and event driven special situation investments. Steinway... More
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  • Contrarian M&A: A Deal That Falls Apart For The Right Reasons Is A Good Deal To Buy 11 comments
    Apr 22, 2013 12:32 AM

    Last time I participated in a deal that fell apart was Primero Mining.

    A small synopsis for the motives of engaging in contrarian M&A investment was provided here:

    As it turned out, Primero Mining survived the arbitrage related carnage unscathed. Participation in arbitrage sell-off to levels of $3.25 and even lower in the following months allowed a decent entry point to participate in the solid operations of Primero which would propel the stock later to levels of $7 and beyond. There was an added twist with Primero inasmuch you could invest in warrants that post deal carnage were traded at 40 cents. Luckily we were able to dispose the Warrants about 1 year later at $1.60 for 3 fold gains. This was a lucky opportunity as the existence of warrants in such contrarian M&A situation is not always a given. In this case though it was a nice low cost turbo charger.

    A very different contrarian M&A opportunity is now provided with MISC Berhad in Malaysia. This security trades in Kuala Lumpur under MISC MK or 3816.KL (on yahoo finance). It is a 63% controlled entity of Petronas, the state oil and gas company of Malaysia. Historically, MISC Bhd and Petronas have evolved as separate organizations, MISC Bhd was founded 4 years before Petronas. Petronas on January 31 of 2013 announced a takeover bid to take over the rest of MISC Bhd at a price that the market didn`t like. They didn`t like it to such a degree that not even a deal sweetener of 4% made a difference. Accordingly the deal got voted down by minorities for what appears the right reasons, namely valuation. In the ordinary course of business, this would be a reason to jubilate as shareholder democracy has prevailed and a bad deal was thwarted.

    In the context of arbitrage investments the opposite is true. Even a bad deal ought to pass shareholder approval, if the purpose is to make some short term gain of a few basis points, or so the thinking goes. Certainly you would not expect arbitrageurs to contribute to the worthy cause of investing in the democratization of societies in the way that George Soros does.

    I would thus not be surprised if an investor such as George Soros might be a contrarian arbitrage investor. It could very much suit his style, while for 90% of arbitrage investors it clearly would not fit their style.

    Brief arbitrage comments on the MISC Berhad deal now falling apart are provided below. All things look very scary since Friday. Another deal is falling apart and woe thee if you are holding the short end of the stick.. I already like the usage of the word "plunging" by Reuters or the word "revolt" used by Bloomberg in below articles. In reality, shareholder groups revolting and looking at a plunging stock now wanted higher value and they will have to be patient for a little while to get it.

    Investors reading this are encouraged to be likewise patient on this name and on this evolving story. Before continuing with the story, here are the enclosed journalistic sound-bites, irrelevant as they are for the further elaboration of the thesis underlying an investment in MISC Berhad.;rpc=43

    The prima facie reason why MISC Berhad shareholders have been revolting against a deal engineered by an omnipotent controller is that it wasn't enough and they didn't like the scaring tactics employed by Petronas who painted a bleak picture on MISC Bhd suggesting that the stock could plunge to MYR 2 without a Petronas deal. At the time of this writing, the MISC Bhd stock only plunged to 4.75.. Thus, the fear-mongering rethoric of Petronas has been proven wrong and this in and of itself could be reason to treat this story very serious as it promises to be a strong source of lucre, just as the last such deal that I had a chance to witness which was Primero through its warrants.

    The superficial reasons for looking for higher value were among others that shareholders in MISC Bhd are generally a very patient pension fund oriented crowd. In fact the impatient folks are only believed to account for 10% of outstanding shares, or less. The shareholders in MISC Bhd have been strong believers in their company for well over 25 years. The business exists for 43 years. In fact they were so loyal to their company that they willingly participated in a capital raising exercise in early 2010 at MYR 7. This capital raising exercise raised in excess of 5 billion ringit and was broadly subscribed by all shareholders with no meaningful exception. As a result of the rights offering, Petronas did not increase its ownership position further but it remained at 63%. Thus for very legitimate reasons, loyal shareholders of MISC did not feel like they should be parting with their shares at levels of 5.30 or 5.50 if they just recently paid MYR 7, when the stock was trading at 8.50. This is a very logical argument and we do not wish to argue with long term shareholders who know the company better than we do. They have their good and valid reasons for rejecting a bad deal and its safe that we just want to sense this and acknowledge it rather than swimming against the shareholder sentiment. As contrarian arbitrageurs we can never be unhappy with a democratic shareholder vote. It would be a lot worse if the deal fell apart as a result of an earthquake, tsunami, breaching of a MAC or something similar. A shareholder votum is the last thing we want to worry about. Acknowledging that it can happen is the first step towards lucre realization. Fighting it and having a hissy fit over it would lead to almost certain realization of loss.

    The story of MISC as contrarian arbitrage gets even better as the independent financial advisor opinion on the deal has declared not just one time but two times that the deal is "not fair" to shareholders, from a financial perspective, but nevertheless they declared it as reasonable, given that it apparently is not advisable to fight Petronas as dominant shareholders. However, since Petronas was not the founder of the company to begin with, lets just say, that shareholder logic prevailed.

    I like in that context the opinion of DBS Vickers who advised shareholders not to tender, two times. That is a lot of backbone to show for a regional brokerage firm and investment bank. Their price target for MISC Berhad is much higher. IN fact, most of the 14 international and regional brokerage firms covering the name had much higher price targets on this name going back all the way to 2008.. IN the time period 2003 to 2008, the stock traded at a multiple reaching as much as 2.3x book value.. Prior to the deal being announced the stock had fallen to 0.8x book value, despite it being a company with USD 8 billion in equity..

    To the best of my knowledge, the company has grown book value since 2008.. There is a rights offering the clouds the picture a little bit but not very much.. The rights offer raised around $1.7 billion. In the not too distant future, MISC will potentially sell one of its assets on its balance sheet, or a 50% portion of it for $1.7 billion. We expect this event to further surface book value and at a minimum reduce the gearing ratio from a net debt to equity of around 30% to about 10%. This upcoming transaction or divestiture is to be approved by shareholders of MISC in upcoming June 2013 AGM. It is definitely what you could call a catalyst embedded into the investment thesis.

    Apart from the deal with Petronas having fallen apart because of democratic shareholder vote through a tender, the same shareholders get now to vote, whether they want to sell a 50% interest in a nice and very modern floating oil and gas processing asset to the same Petronas who wanted to stiff them out of their ownership interest..

    And what would happen if MISC Bhd shareholders came back to Petronas and told them in June to forget about it? How would that feel to Petronas. After all, this floating oil and gas processing platform can be deployed profitably in any number of geographies at any number of dayrates. Its completely ludicrous for Petronas to assume that MISC can have no other customers than Petronas, But I am pretty sure that it wont get to this level of shareholder acrimony. I think one slap in the face of Petronas CEO is enough. For all we know and after many strategic blunders he may be on his way out of the door by the time the next parliamentary elections are over in Malaysia. There is a very high likelihood that his days will be counted and as a result, MISC shareholders can get to enjoy once again their company without having to fear that someone will steal it from them at the wrong price with a coercive offer.

    Companies like MISC Bhd who ship LNG globally generally are valued by the market at a premium. IN fact, Golar LNG backed by John Fredrickson trades at 3x book value, versus a current valuation for MISC Bhd of less than 1x book value. MISC Bhd incidentally is the second largest LNG shipper with 27 vessels owned or leased and since Fukushima the dayrates have tripled. From a strict sum of the parts valuation perspective, parts of MISC`s business ought to be valued at a very strong premium to book value and not at a doggish value as the Petronas CEO seems to be suggesting in his scare tactics.

    There are of course the assets that are no longer part of MISC such as the passenger liner business and container shipping business. All that was recently known about these businesses was that they contributed to cumulative USD losses of 789 in the years 2009 to 2011 and that is quite some amount that would readily be believed to mask operating profitability of the remaining businesses. All these businesses have now been fully divested with the last 400 million Ringit writedown occurring in 1H 2012. As of June 30, 2012, all divestitures and vessel scrappings have been completed.

    In fact the operational profitability and after tax profitability have been nicely progressing in year to year comparisons over the past 3-4 quarters and even more impressively over the past 2 quarters.

    The sad thing of the ill-motivated Petronas bid is that when it was published in January 31, 2013, it was published before the very impressive Q4 2012 results were presented. These were presented in February 2013 and reported a tripling of operational results. However with a bid in for the company, this put a lid on potential price appreciation. Which consequently didn't happen. One can only wonder how MISC stock would have reacted with no bid being in the market and with a tripling of earnings being reported. We have to wait now to see how the market will react to stellar Q1 2013 earnings, soon to be announced.

    The typical reaction of most brokers is to stop covering a name adequately, once a valid and or irresistible bid has been tabled. Most brokers indeed recommended to their customers to accept the offer, even though it was widely acknowledged to be a low-ball offer that Petronas had tabled.

    Now that shareholders have voted with their feet, I guess the brokerage community will be back to covering this name and before long may even raise the price target on this name.

    There are a number of catalyst here and I am right now at a loss to even describe all the different categories.

    There will be a deleveraging catalyst once gearing goes from 30% to 10% and Moody`s has already pre-announced that this would be a positive development on the credit.

    There will be earnings fireworks ahead.

    There will not be further blood on the streets.. other than today and the next couple of weeks till earnings are to be reported..

    There should be a resumption of dividends in due course pressurized by the pension fund holders owning this name.

    The last dividend declared dates back to calendar 2009 in the annual amount of 35 sen. At the time this represented a 4% yield relative to the 9 plus ringit stock price.

    Mean reversion in the price to book value multiple is a legit catalyst since not even during the asian crisis of 1998 did this name trade at below 1.5x book value and we see no reason that this name should be trading now at such levels, when financial turnaround of the business is well under way. IN fact, MISC management which is separate from Petronas, has stated that 2013 fiscal year should be better than adjusted 2012 fiscal year. Adjusted for the significant charges still taken in the earlier part of 2012 on the exit of business. Generally speaking even the doggish oil tanker business is expected to recover by late 2014, in a view that is also mirrored by Wilbur Ross who has heavily invested in that turnaround through his controlled entity Navigator Holdings..

    Nuff said about catalysts. The risks are worth pondering. I think they are those of a cyclical business. Or various different cyclical businesses. Fortunately, we have a diversified business with different overlapping cycles that are not in sync. The bad part of this is that MISC will never be valued at 3x book value, but it also should not be valued at 0.45x book value as the Petronas CEO has been suggesting in his scare tactics.

    There is the risk that Petronas will shun doing business with them which would be self defeating given their 63% interest. The most likely circumstance is that dividends will start flowing again and that there will be a peace and love fest at the next annual meeting or at the latest by 2014 annual meeting in June 2014.

    Could Petronas come back with another offer? Possible but given the slap in the face it may be unlikely in near term. This just shows the risk of operating a business with an emotionally insecure leadership. The best thing for Petronas would indeed be to offer 50 sen more and get it over with before the stock reverts to its historic mean of 1.5x book value. Something is telling me though that this is not likely to happen, even though it would be a good deal for Petronas and they probably would secure shareholders holdouts. Petronas wanted to get 90% acceptance rate, and they got 86%, aside from the 63% that they own, which are included in that number. Petronas was simply too greedy and this opens an opportunity for more opportunistic investors. Petronas essentially is telling us that this is money-good.

    The reason petronas could not accept the 23% of shares tendered to them is that this would have left only 14% shares out there and there is a legal requirement in Malaysia to leave a free float of 25% in a listed security at all times. Petronas could have accepted up to 12% of shares, but they didn't stipulate any pro-ration to that effect in the deal document and thus were not able to proceed with a partial uptake or shares. IN the end they got stiffed with all the costs of undertaking the tender offer. No doubt, the CEO will be hearing not so nice things at the next upcoming board meeting.. After all, Petronas is the biggest company in Malaysia at its most prominent figure just got a slap in the face from an irrelevant retail shareholder base..

    Imagine that this happened to the Exxon CEO.. priceless..

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Comments (11)
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  • Clemens Scholl
    , contributor
    Comments (634) | Send Message
    why wouldn't Petronas take up the 23% tendered and force MISC to become an unlisted entity?
    Tagus (de Mello group) is using this tactic to crush the minorities in Brisa SA in Portugal currently. Loss of public company status and an insulting lowball offer, much lower than even their previous bid which did not get full acceptance. Oh, and of course they used their votes at the AGM to block the 10% dividend that was proposed to make sure that the remaining insolent shareholders really get nothing at all.
    24 Apr 2013, 10:32 AM Reply Like
  • SteinwayCapital
    , contributor
    Comments (219) | Send Message
    Author’s reply » haha. that's interesting clemens.. in malaysia the rules are a bit different and closer to FAIR PLAY..


    there is actually a free float rule in force in malaysia that requires any listed company to at least maintain a 25% free float.. the amount of tendered shares would have increased petronas holdings from 63% to 86%, not enough to do a squeeze out.. What would have been a possibility is to accept shares on a pro rata basis all the way to 75%, but their tender offer doc didnt call for that.. Also, I have seen some companies invoke a mechanism to redistribute shares to create free float of 25%.. This was the case of SP Setia which accepted all shares, even though their intention was to keep the real estate company traded in Bursa Malaysia. so they found a way to place shares with institutions to maintain the free float at 25%,, Since Petronas all along had the intention to take this company private, they werent incorporating free float creation mechanism into their consideration.. .. Had they known about the possibilities they may have done it.. But hey,, i think the outcome of the failed offer is in and of itself somewhat suprising.. 3 of the 5 business units seem to do well, while 2 are suckign wind in a major way.. they do have some exposure to tankers and chemical shipping and this spoils the earnings party a little bit. unless you have particularly bullish views on tanker rate turnarounds and vegetable palm oil shipping rates. .. i just read a report today authored in 2011 predicting 5 years of oil tanker glut.. optimists view that tanker rates could recover by end of 2014.. frontline in 2011 believed that I guess May 2016 may be the time when this space recovers.. .. i have yet to get a good handle on tanker biz and how it has been trendign and sensitivity.. my feeling is that its not the tanker biz contributing thus far to a sense of turnaround. But the overall biz constellation of MISC is also not so as to equate the company with one poorly performing sector exposure.. until the sector turns aroudn though, the analytical community may care very little about their business diversification.. The people covering this name in Malaysia are mostly transportation analysts and they cover one or two national shipping companies.. Maybulk run by Kuok and MISC.. controlled by Petronas.. in the short term you simply have here the wash for shares that remains to be absorbed by market.. .. Malaysia rules i believe dont allow a bid for another 6 months.. and it woudl be very curious if the business gained part of its former glory back..


    oddly enough, the company started US dollar reporting on January 1 and the Q4 quarter was reported in USD, as the sole quarter of 2012 year reported in USD.. makes a lot of sense, doesnt it.. that is a surefire way to confuse investors when you report first 3 quarters in ringit and the next in USD..


    I have no thoughts on the near term dividend and if they will hear pressures from shareholders to restore it.. for as long as they maintain dividend capability that is fine. i think deleveraging and or keeping cash on hand for them makes a lot of sense so as to be able to pounce when the opportunities arise. do it like Wilbur Ross or Mr. Kuok.. and this entails not selling vessels in tanker division at ridiculous prices.. The time to do that was 6-7 years ago.


    Evidently the 1, 2 exposures of this company to bad sectors keeps the analytical sentiment subdued, even though theoretical sum of the parts considerations posit the value at this and that level.. it remains all theoretical and subject to change until an actual deal surfaces and with petronas deal off, you have to now carefully triangulate what this name can offer.. the knee jerk selloff i guess has happened to a high degree but may continue for next 2, 3 weeks till maybe earnings are disclosed and shareholder meeting happens in June.. although i hold my breath about how low it can go, the book value per share and low gearing gives it ample staying power, particularly in the face of ongoing positive earnings. The EPS numbers in Q4 at 6.2 sen were higher than in Q1 2010 at 4.6 sen. That is what I derived from a JP Morgan report when they upgraded the stock in April 2010 giving it a 10 ringit value, projecting near term turnaround in tanker biz and charter rates, when rates were around 30,000 per day for aframax or something like that.. instead of turning around, all new vessels were delivered and the tanker market collapsed. 30,000 per day is about break even for any of these tanker cos.. and at this point the guys running tankers are far away from break even. so suckign wind.. 3 years into a prolonged downturn.. lots of tanker ships anchored. lots of bankruptcies.. i dont think theere are green sprouts as of yet, but once it starts sprouting the lessenign of losses already would boost eps numbers.. .. since they have a heavy marine engineering and conversion business they are also banking of converting more tankers to O&G offshore vessels but those conversion projects arent particularly cheap.. I am currently assessing the permanent loss of value that one could ascribe to tanker biz, simply because even an aging tanker fleet is not worth what people think it is.. and for conversion projects you first have to pull in enough customers for paying for the projects.. Some of these convesion projects take years to develop.. 4-6 year lead times are not unusual.. The most logical thing in this environment would be of companies stop ordering ships from the Asian shipyards. even cancelling orders. Shipyards going bust if that is a possibility but somethign is telling me that the local subsidies in Asia must be too strong for that possibility to be real. today I learnt that even Cargill wants to invest now in its own fleet, and rather than buying existing ones in the market, they are ready to order from a chinese shipyard. Maybe they are just talking to keep the rates low.. There seems to be an all out war going on in the most commoditized areas of the shipping industry.. and i think more bankruptcies and more scrapping is still needed.. lots more.. going bust and emerging from BK is not enough.. going bust and liquidating for scrap value is more what is needed..


    in a way you can understand petronas for not wanting to pay top dollar for what looks like an industry with skyhigh excess. The part of teh biz directly tying into Petronas is the LNG biz.. one possibility that I foresee is that a spinoff could happen at MISC carvign out the tanker, tank terminal and chemical shipping biz appropriately capitalized, while leaving the strategic parts within MISC. its not like Petronas is a big excess supplier of oil and palm oil on global markets and the whole biz of storing oil in global trading hubs may also be somethign that doestn align well with its core mission. That is though one speculation too much.. Maybe they do like the trade of shipping palm oil across teh world after all. or trading oil in different hubs. But I kind of wouldnt see it as their core competency..And if they are not willing to pay top dollar value for those assets, then spinning them off could be a viable solution.. or next time they come back with a deal, offer 5.50 plus 1 spinoff share like a contingent value right and the market can figure out for itself what it is worth.. Petronas must have been very confident that the deal would go through as is that they didnt picture the eventuality of some valuation dispute.. its obvious that not everyoen wants to admit that tanker and chemicals shipping biz is dead... now we are smarter.. a lot though depends on the macro outlook... a little global security risk increase can change things all of a sudden.. The right way to proceed would be for banks to stop funding crazy ship building projects.. I mean i look at all the LNG ships orders by Golar and I am just wondering how it will be paid for.. or Teekay.. the companies could be considered leveraged as they are and i guess if bankers throw more money after them they will even become more leveraged.. at least MISC has long term LNG charters.. 20 year in some cases.. I can foresee possibilities that LNG tanker deliveries could spoil party in 2015-16, when LNG export projects are not yet up to speed.. Petronas like nobody else knows how long these projects take to materialize and with what setbacks along the way.. .. for the moment though things should be stable.. 3 years ahead one shall see what the market for any of these services looks like..


    anyway... gotta go..
    24 Apr 2013, 06:22 PM Reply Like
  • Clemens Scholl
    , contributor
    Comments (634) | Send Message
    Thanks for the long reply.
    However I still don't get it:
    you say "there is actually a free float rule in force in malaysia that requires any listed company to at least maintain a 25% free float"
    So what? They take all the stock that was offered to them, get over 75%, and then the company is in violation of that rule and LOSES ITS PUBLIC COMPANY STATUS. Thus the remaining shareholders are stuck with untradeable shares, leaving the acquirer in the strong position and basically able to offer whatever price he may like (the alternative for the shareholder being that he is stuck forever with an untradeable share).
    The fact that the acquiree can issue "poison pill" shares to ensure a free float of 25% is nice, but it must have the authorisation to increase its capital in this way, and I don't know if that is always the case.
    Due to some experiences I've had I am strongly opposed to stock exchange rules requiring a certain amount of float to remain listed. What's wrong with having a 1% of 2% float? The shameful Brisa takeover is just the latest example of how these rules can be used to take advantage of minority shareholders.
    25 Apr 2013, 02:05 AM Reply Like
  • SteinwayCapital
    , contributor
    Comments (219) | Send Message
    Author’s reply » Under Paragraph 8.02(1) of the Listing Requirements, a listed issuer must ensure that at least 25% of its total listed shares (excluding treasury shares) are in the hands of public shareholders ("Public Spread Requirement") to ensure its continued listing on the Main Market of Bursa Securities. Bursa Securities may accept a percentage lower than 25% of the total number of listed shares (excluding treasury shares) if it is satisfied that such lower percentage is sufficient for a liquid market in such shares.


    I guess from the language it is not a hard rule but one at the discretion of the exchange.


    Compulsory acquisitions by offeror or puts by shareholders are regulated under Section 222 to 224 of CMSA. IN order for the company to invoke a compulsory acquisition under Section 222 it requires the tender acceptance level of 90% of desinterested shareholders. So in this particularly case the disinterested shareholders constituted 37% and change, in order to have invoked Section 222, the company would have needed to secure 96.27% of shares, including its own. There are ways for the company to get delisted with just 90% of shares including the shares held by offeror, whereby Section 223 confers the right to holder to put the shares to offeror at offer price or at whatever price the parties might agree (this comes close to exercise of dissenting rights). Section 223 and 224 go hand in hand inasmuch it delegates the determination of value to the court on application made by the dissenting shareholder. So a 223 applicant who doesnt want the regular consideration has to check extra boxes for section 224 and then leaves it up to the court what the price should be with possible appearances before the court.. and I wouldnt be surprised if section 224 is rarely ever put to the test. bla bla bla.


    The free float rules thus seem to affect the twilight zone from 75% to 90% where shareholder would not be able to invoke a compulsory squeeze out on their own. And or where the company may have to offer special assurances of a working market... in the 90% category its really up to the shareholder to decide whether to commiserate in a small club and the decision of mandatory squeeze by offeror can only be done with overwhelming support of desinterested folks. and not against their will. when company gets approve of 90% of desinterested shareholders, section 223 and 224 do not apply. So, its only when you get 90% of total shares in support but less than 90% of desinterested shareholders as part of this overall 90% number that the 223/224 stuff kicks in..


    And as it turned out, there wasnt even a consensus to get the company to 90%, the condition of this deal.


    i have to pass on the comparative study of listing rules and takeover codes and corporate acts in various countries but there must be KPMG yearbooks comparing different country rules with each other and I remember having seen some. Portugal is a screwed up place, but i liked my S&B Minerals MTO in greece.. Toyota recently left the shareholders of a french car distribution company in Africa (listed in France) listed with a remaining 2% float. Lets see how they like it. Toyota had the right but not the obligation to squeeze them out and chose not to squeeze them out. which for a 2% float seems ridiculous... at some point I will hopefully have lots of time on my hand to track all these stubs of controlled companies.. There are too many of them and I dont know if there is a time proven way to play them. of if this becomes the galore of value traps.. CVR Energy (CVI) the fertilizer company controlled by Icahn Enerprises as a minority stub worked out well with tender occurring at 30 bucks and holdout minorities have experienced a hell of a run. I dont think you are going to see the same turbobooster run at MISC.. although in the immediate aftermath, the CVI stock also went down from 30 bucks to as low as 24 only to double in price. .. at 1.5x book value, which is closer to the 10 year valuation range, MISC would be getting into the range of a stock that doubles. but for that to happen fast the dynamics of shipping and LNG industry and offshore oil and gas developments have to fall into place fast and I think realistically lits looking more like 2014 to 2016 play.


    MISC has set itself up to beat dismal 2011 earnings hands down.


    I find in this context experimentations such as the Tsakos Energy contemplated spinoff interesting. This is part of a value exercise, where LNG carriers are valued in market at 2 even 3 x book value and 17-20x earnings.. While less glamorous divisions get nothing.. in the case of MISC, you have an LNG division producing on its own 450 MM USD in pre-tax profits which the way the sector is capitalized would be suggestive of a 5 ringit share price plus you get all the other breaking even grab bag for free as the 2014 to 16 to 18 growth optionality when finally certain sectors start to take off or suitable acquirers are identified. that is the conundrum of all these holding companies with diverging business fundamentals.


    Hal Trust which i highly value as a long term oriented shareholder recently got involved with SBM Offshore in the Netherlands.. part of the business of MISC is like SBM's.. in fact it is called Offshore services.. in fact, SBM Offshore is JV partner in the first FPSO floating vessel that become operational in offshore Malaysia, the Kikeh field operated by Murphy Oil.. Something is telling me that with FPSO number two just having been rolled out and MISC having a total of 12 such FSO/FPSO units in their fleet, this mustnt stay forever at a cheap holdco discount. The narrowing of operational losses in the troublemaker divisions would let the remaining businesses that stand up well on their own shine. This whle Kikeh field and FPSO floating vessel is being upgraded from around 70,000 bpd to around 140,000.. .. All of this will only start to kick in gradually and inperceptibly... this is I think an end of 2013 floating vessel upgrade.. If all these offshore production comes into place from just the existing two operators Shell Sabah and Murphy Oil, we would be talking about 250,000 BOPD and that is 90 million barrels a year and I am sure the offshore revenues of MISC will continue to ramp up nicely.. While there is no direct way to invest in petronas, this logistics unit they tried to acquire is a very valid proxy on the many things that go on locally and that are likely to increase utilization rates of assets. Granted, the price of oil isnt stable..


    So beyond the technical understanding of minority squeeze out rules there is a shareholder votum that just happened and if the 5.50 ringit deal was such a heck of a great deal in exchange for the optionality given up, they wouldnt have accepted it.. What I realize now is that the top two investment banks Maybank and CIMB have been coopted by Petronas as bankers while another third one got the independent appraisal which is an interesting evidentiary document to begin with just to understand how a sum of the parts valuation is derived and what discounts applied. This is even a longer reply but starting here a little information thread in the blogosphere. .. I think the market is in part looking here at the wrong comps to understand their evolving biz model. And maybe there isnt any interest for the time being to position the company in the market attractively.. What can be said though that without the 2004 acquisition of American Eagle Tankers AET from Neptune Orient Lines (NOL), this company now would not be valued where it currently is at a 8 year low. MISC never was historically in the tankers biz but this was one of these glorious decisions to diversify from LNG into tankers at what appeared the top of the market.. when tanker rates were 180,000 per day for aframaxes, versus 8000 now. of course the analytical community must be kicking and screaming at the size of the corporate M&A blunder. The reason why these tanker rates are so low is that the AET aframaxes are all deployed in the Gulf of Mexico where US demand of imported oil is markedly down due to lack of a heavy import reliance with all the shale abundance in US. I guess it doesnt look liek these assets could be profitably deployed into other regions such as West Africa and even if as floating storage and offloading vessels...


    food for thought..
    26 Apr 2013, 09:31 PM Reply Like
  • SteinwayCapital
    , contributor
    Comments (219) | Send Message
    Author’s reply » And I think we have reached a bottom and the rebound can start...


    now off from its lows of 4.20-4.25 stabilizing at 4.60.... in post election Malaysia knee jerk rally...


    the really interesting thing will be to see the Q1 2013 results once reported and see how all the wonderful developments in Malaysia start to kick in in the near term.


    - Melaka regasificaiton plant with two floating storage and offloading ops owned by MISC, starting up ops in July 2013.


    - Exxon already started up one peninsular Malaysia field in Q1 2013 (this one is probably unrelated to MISC)


    - Watch Kikeh first offshore field expansion driven by Murphy Oil. MISC owns 50% of Kikeh FPSO, SBM Offshore of Holland owns the rest. this is being upgraded to around 120,000 BOPD from current level of 60,000.. Murphy also started to pump 20,000 BOPD from Kakap recently..


    - Watch Gumusut Kakap field coming on stream with FPSO slated for a 135,000 BOPD capacity.. This is a Shell, conoco, Murphy project.. seeing is believing.. MISC owns 50% of FPSO the rest owned by Petronas. This could come on stream as early as Q3 2013. Watch for related news.. and see previous item that Murphy is tapping into 20,000 BOPD of Kakap oil ahead of FPSO becoming operational. they do it through s separate feeder pipeline.


    - Watch Kimanis oil and gas processing plant to become operational in June July 2013.. all oil and gas volumes will be processed.


    - Watch Bitulu LNG liquefaction capacity upgrade to be completed expanding exportable LNG quantities from 1.1 TCF to 1.7 TCF. Time will tell who will supply the extra 70% in supply. Malaysia currently exports 1 TCF.. Time will tell and this ties in directly with MISC.


    - Watch Kimanis-Bintulo 500 km pipeline to be completed.


    - Watch Johor petrochemical complex to be pushed forward


    Other than the Johor petrochemical complex most of the major drivers should fall into place anywhere from Q3 2013 to Q4 2014.


    - FPSO Cendor should start to become operational later in 2013 in a new type of project whereby Petronas will be the 100% operator of 3 marginal fields. This is new territory for Petronas as they are accustomed to have others do the work for them as operators. Cendor is a notable departure and possible a sign of things to come once Petronas has mastered the offshore trade. Time will tell how well they do here on their own on fields that are small enough that the majors do not want to develop on their own.. The way it looks to me, Offshore Malaysia should soon look like Offshore Thailand or Offshore GUM.
    7 May 2013, 05:41 PM Reply Like
  • SteinwayCapital
    , contributor
    Comments (219) | Send Message
    Author’s reply » June 5, and the stock is now hovering at MYR 5.10... recovery in the stock price well under way... Malaysian Bulk Carriers reported earnings which showed partial recovery of their tankers division to profit.. they document improvements in the Baltic Clean Tankers index. bla bla bla.. all applied to MISC MK possibly looking at a MYR 8 stock in 2 years time.,, long story shore.. arbitrage deals that fall apart. just wait till the carnage clears out.. catch the falling knives with wide open buckets and enjoy.. with lots of patience and the buyout announcement day returns will sure enough return.. Want to play M&A in assymetrically rewarding ways.. just buy all the deals that fall apart for valuation dispute type of reasons with sound underlying businesses.. revaluation does happen and takes time.... MISC Berhad conference call was sometime May 21 .... Had the chance to participate and was quite entertaining, although the insiders got annoyed at my very pointed questions. In the meantime the Employee Provident Fund (EPF) has also put out some statements that they want to move on with their investment of 9.5%, because they are desirous to invest in real estate earning a 6% dividend yield or some number like that. They practice as a pension fund what I could call buy high and sell low. Having invested in past Malaysian real estate companies and knowing how overvalued they are (SP Setia for instance), I wouldnt even bother if I was EPF. just forgo the nice yield pig incentive to invest in Malay real estate and stick to the dividend restoration play. That would be MISC and not some wacko overvalued real estate play where dividend might be cut. MISC confirmed during conference call that they are looking at restoring the dividend. Nobody of the executives on the call could be forced to utter any positive statements about anything that was going on in the quarter. I took advantage of lambasting them for moving a total of 5 assets off balance sheet over the past 12 months. They didnt like the insinuation that something was utterly wrong about governance practices. Neither the CFO nor the CEO of the company were on the call. Nor have they been present on any of the conference calls over the past couple of years... Business though was really good for them with year over year comparisons based on some metrics up anywhere from 100-1200%. Yet they had nothing good to say about their business. Turn over to Malaysian Bulk Carriers which is controlled by billionaire Kuok which reported Q1 2013 earnings of 0.9sen versus 3.6 sen in Q1 2012 and analytical community is raving and upgrading the stock to outperform. Their earnings were only down 75% but its a screaming outperform. MISC had triple digit earnings improvement year over year. Despite all the balance sheet finangling and offloading of productive assets into off-balance sheet category.. They tried to hide the progress through off balance sheet gimmickry as good as they could, but still were not able to submerge topline and bottom line progress. Adding injury to insult they switched by to MYR reporting, just one quarter after switching to USD reporting, thereby causing all-around analytical modeling consternation. That is what I call a botched up, insider hack job. The insider here is Petronas and they messed this one up through their heavyhanded, not so invisible hand. There is an elephant in the MISC porcelain board-room and the pachyderm is called Petronas. Lets see how subtle they move forward on this as we press for higher value in round 2 or 3 of the revaluation exercise. There will be more to this story at upcoming conference calls and shareholder meetings. These guys have to really hear from shareholders how miserably they perform on governance. After 15 minutes of Q&A drilling, the 3 execs answering questions declared defeat. they ended up my part of the Q&A asking "what do you want me to say". I answered back that they should start strike out the name "Petronas" in their press release references and replace it by "shareholder value" and what they intended to do to create it in the face of triple digit improvements of earnings per share and a recovery that is well under way. Unfortunately, the execs of this company have made it a habit to talk down the company and its performance. Analysts on the call took though up the spirit of my line of questioning and asked them all the inconvenient questions of the off balance sheet items they were eager to dodge and not answer. By the time the call was finished it was evident to everyone how much revenue progress they had swiped under the carpet, without even providing one reference as to the present and future impacts of these financial shenanigans. The morality of this story though is that you cant keep a good man down, and MISC certainly has no intentions to stay submerged even as management would like shareholders to believe that the future is all doomed.. Based on the earnings reported, the future didn't look that doomed after all and a bunch of analysts who had previously downgraded on April 21/22 the name to underpeform with price targets of 4.20 to 4.60 quickly upgraded the name to 5.10 to. 5.30.. This is typical Malaysian or Asian knee jerk reaction of analytical community. They do like to be very subservient to management in these particular latitudes. IN all likelihood, this will be a very reactive, show me story... Analysts will upgrade the story only and if results become plainly apparent to the average Joe. This is what recently happened at Cahya Mata Sarawak where the ongoing trading price target was at 2.20 prior to Malaysian general elections, and it has since shot up to MYR 6, before releasing some of the steam to MYR 5. If I have learnt anything it is to ignore the consensus and go with what I have carefully researched.. No matter how far off the beaten path it might seem. There is a funky little name in London and Hong Kong markets, 73 HK or ACHL LN, going by the name Asian Citrus Holding ... The technical chart on this might be as good as it gets for an oversold type of asset...A fully recovery in this name could take 2 years while getting handsomely paid with a juicy 7% dividend in the meantime. These guys have been hit by excessive shareholder bearishness. No amount of proof that they can give investors that the company is for real seems to convince shareholders that this is indeed so. Reminds me a bit of although this one is an agricultural play. The company has gone to quite some lengths to document and publish evidence that their company is real, including 20,000 photographic pictures of their orange tree plantations... If only MISC Berhad management was going into such great length to highlight to their shareholders what they own and the prospects of it all. Asian Citrus Holding is a lot more conventional. Tons of cash on the books, core agricultural business. And this is where their troubles kind of start. Most agricultural businesses are highly variable from half year to half year and from year to year. In USA or even Europe very few of these types of companies are even publicly traded. Farmers and plantation owners, and even processors of agricultural products more often than not are privately held. There are a few exceptions though. However, by and large, the average Joe investors would in most cases be overwhelmed to even remotely estimate what next quarter or next half year or next years earnings would be. You have to be a weather and crop expert, by and large. I remember the wild swings of Imperial Sugar (IPSU) post bankruptcy over 10 years before being bought out, to end shareholder misery. Similar Bronco rides are the Diamond Foods and JB Sanfilippo & Sons (JBSS) agri processing businesses of this world. Even an overvalued company such as Limoneira (LMNR) will sooner or later dumbfound investors with operational unpredictability, if it hasnt alrady. Thus looking in very practical terms, which agricultural lemon and citrus company looks more appealing? a company such as Asian Citrus Holding at 4-5x earnings and trading close to its net cash position or a company such as Limoneira at 80x earnings and with massive net debt position of 97 million that actually exceeds the symbolic enterprise value of 80 MM USD accorded to Asian Citrus. Asian Citrus sports a current dividend yield of 7%, on a market cap of USD 450 million. The dividend burden of Asian Citrus is a full 32 million USD while Limoneira barely can scrape together the 2 million they pay out to shareholders. The market fortunately offers lots of these mis-pricing anomalies, and I just dont happen to see a lot of these in US markets. If Limoneira wasnt so terribly overvalued, it might be a great vehicle for a reverse merger into a more enthusiastic market, namely into the listed US market. UK listed shares of Asian Citrus have not been too enthusiastically received, nor the Hong Kong listed shares. Participants in these markets seem to be full of manic depressive conspiracy theories that appear not to hold up to the test of reality. The test of reality is the strong dividend flows coming out of Asian Citrus and backed up by 20,000 photos of their plantations to document to the outside world in the best fashion possible that their operations are just what they are.. love it or hate it.. Asian Citrus would be the one where I'd park my money. All the negativity in this stock might be fully priced in, just as all the negativity seemed fully priced into MISC Berhad stock at MY$ 4.30-4.60 levels. Catching stocks that are being trashed by the plebus is just about what contrarian investing boils down to.
    5 Jun 2013, 09:01 PM Reply Like
  • SteinwayCapital
    , contributor
    Comments (219) | Send Message
    Author’s reply » Back at MYR 5.80 for the record.. .momentum is swinging in favor with lots of upgrades happening.. after everyone was bearish no 6 months ago.. . mind you not . not all arb deals that fall apart are good ones, but the ones that have real and reasonably stable cash flowing businesses that fall apart for the "right reasons" is something I'd go any day.. valuation disputes in companies trading close to book value that are cyclically out of favor as a tendency would have lots of upside if the momentum can be properly gauged.. MISC Berhad has quite a number of businesses slightly pulling in different directions so its not exactly a pure play on any particular cycle.. The positive momentum comes from a realization that many of the enabling infrastructure projects in Malaysia are coming close o completion and will start to produce revenues anywhere from Q3 2013 to Mid 2014.. FPSO Gumusut-Kakap was delivered June 24 to client Shell/Conoco/Murphy and should be hooked up as soon as the oil and gas processing plant in Kimanis and the pipeline from Kimanis to Bintulu and the Bintulu LNG export trains are up and running.. as of latest reckoning around December 2012 all these projects were 90% plus completed.. They need to undergo though testing and validation until they are put into commercial service.. I certainly expect there to be lots of excitement in this story.. Malay analysts have a price target of 6.40 but my longer range target on this is 8 MYR... stay tuned as contrarian arbitrageurs.. (on my current watchlist but staying out of harms way is DELL I want to see lots of eggs in the face, just the way I like it.. This situation reminds me a little bit of Dynergy and two unsuccessful M&A bids later the biz filed for bankruptcy.. Dynergy was in my opinion a valuation dispute that was not worth it due to excessive leverage... I try to stay out of the way of excessively leveraged companies where Private Equity firms are haggling it out over price.. a Management Buyout looks more interesting from the assymetry.. for as long as it falls apart.. A lot of arbs appear to be under water on Dell getting it at prices from 14 to close to 14.40 that will not make them whole at 13.75... instant cut reaction woudl be to vote down just like it happened at Dynergy and if this happens, watch out below.. Recently where was the falling M&A knife of EBIX where I am invested prior to the bid at 13 bucks. the deal with goldman was at 20 and after the deal collapsed for accounting reasons it went as low as 9 and change.. with a recovery now to 11 and change.. 2 bucks under water versus my original cost.. I had not really counted here on the buyout.. but was just starting a small position at 13 when things happened.. This is a stock that has had lots of short seller scares. my original small position set up was not yet enough researched to as of yet bother to write on this M&A blow up... Shortselling in software and business process outsourcing cos is nothing new. And the accounting practices in creative rollups evidently attract shortsellers . so EBIX is more than just a blowup that fell apart.. it got its own little accounting/IRS tax investigation intrigue.. something to put on the radar screen..I got attracted to it because of the substantial M&A where I saw them involved and some of their transactions seemed to make sense from an overhead reduction, accretion point of view.. with the failed M&A deal and the tax intrigue it has become even better, particularly since they have a business.. At this point though I am jsut involved with 8 shares.. my lucky number to put things on watch list.. The good thing is that they have a business that is doing well. The bad thing will be the distraction and noise responding to investigation. and the cost of it. Shoudl there be any sort of settlement, the price even increases. IN the past there have even been cases where execs of good businesses were indicted, and forced to be removed from the boards of public companies and such.. This is where the price of the operating business could become really cheap, plagued by all this intrigue.. History though is not always a good guide of how things will pan out.. if you have a stable operating business with substantial cash flows the idea that it can become a much lower sub 5 buck penny stock doesnt always naturally follow. The shortseller argument though is that this could happen and there are certainly no guarantees that it will not intermittently happen. for such a state of affairs to become permanent, the company has to reveal itself as a real fraud, which by my own assessment isnt the case. I havent seen any case that I am aware of where companies have been killed by IRS over tax questions of the past... Just sharing a bit of my work in progress radar screen.. there have been a few other deals that fell apart and some have an interesting look and feel.. Guoco 53 HK fell apart and this was trading at 90-91 HKD at deal vote time in mid April.. this was a minority squeeze out and minorities voted it down. with NAV north of 135 by some estimates.. they were lookign to buy it out for the cash value just the type of valuation disputes that look interesting. with the deal falling apart it went as low as 83 HKD by early June whereupon they implemented a spinoff deal that already became effective July 17 distributing a UK listed gaming biz Rank Group to shareholders. this was worth 5 HKD per share. The stock has recovered to 90 HKD.. all in all a 95 HKD package now.. definitely above where the name traded at the time a vote was contamplated and a lot higher than the low point.. The Guoco controllers have tried to do this squeeze out before almost 10 years go. they are disciplined savvy and value conscious.. They control Hong Leong Bank.... a the time of their last squeeze out attempt they tried to squeeze out for 58 cents and didnt get anywhere.. unfortunately for shareholders some disenchanted large shareholders subsequently sold to them. so the control level of the family has only grown over the years.. at this point we are almost in a final push for control.. I wouldnt expect them to wait for another 10 years with their next buyout put, but in the meantime I dont expect them to waste shareholder money either.. NAV per share should increase.. Currently Guoco is building a stake in Bank of East Asia which now sits at 15%.. Banking is something these guys understand. This doesnt look like it will be something that will burn a whole in the wallet.. admittedly I missed to take action on this in the low 80s.. i expected though the deal to fall apart.. because the cash consideration was just way too low vis a vis NAV.. 893 HK China Vanadium Titano also fell apart in a 2 HKD deal.. also in late april.. this one also occured at dscount to book and significant discount to IPO price not too many years back.. This was also a move by the controller to squeeze out minorities and this almost always does sit too well with HK investors.. although arbitrageurs get fatally attracted to these types of deals. This particular name is now trading at 1.11 HKD significantly below the deal price.. There have been a number of expansion projects going on at their iron ore mins. Since I expected for this deal to fall apart I havent really updated any of my models to know with precision what to expect from the significant mining capex that occured in prior years and that has yet to bear fruits on quantities produced.. time to reread my files at current trading prices .. There are huge overcapacities in steel production in China and certainly not the sweet spot.. the byproducts Vanadium and Titanium occuring in their mines are though the prime contributors.. If the idea is to get involved in such deals at pre-arbitrage prices rather than during arbitrage, this is a worthy target to explore particularly since the buyout disagreement with minorities solely focused on price.. Nobody in Hong Kong is fondly in love with this business and taking it private would make a lot of sense.. but the proud HK investors decided to overwhelmingly vote it down in the separate minority vote where things counted. More to come in the future... Difficult to write any of these foreign names up on this site other than through instablogs..
    25 Jul 2013, 07:18 PM Reply Like
  • Clemens Scholl
    , contributor
    Comments (634) | Send Message
    Reading today's headlines on the ADM/Graincorp fallout I couldn't help but remember your musings on MISC.
    So in your opinion is Graincorp a "deal to buy"?
    22% down it may be back at attractive levels, now that the arbitrageurs have been caught on the wrong foot.
    29 Nov 2013, 01:00 AM Reply Like
  • SteinwayCapital
    , contributor
    Comments (219) | Send Message
    Author’s reply » most definitely something i take a look at .. thanks for bringing it up. i was just printing myself this afternoon all the Q3 results of MISC and indeed its looking very bright there and also with my other Malay centric stories Murphy Oil and its spinoff Murphy USA. This latter one is not malay centric.


    Luckily I havent been slavishly following arbitrage at this point.. its too time consuming for the return you get by playing it in a non-alternative way.. my general impression is that more and more deals are falling apart which is just a reflection of where we stand in the cycle. easy money.. lots of frivolous deals being done that shouldn't be done.


    Graincorp assets are particularly nice as reportedly port capacity is only around 30-35% utilized. A key bottleneck in Australia is the train logistics which is underinvested and ownership by lots of mining firms. so port access to grain is tough because of rail infrastructure. meaning lots of quality deterioration till product even gets to port. Graincorp should be able to do very well on its own once they figure out the rail logistics, which wasnt something ADM wasnt even willing to get involved.. So.. great day for Australia to scuttle a bad deal. better day even for untarnished lovers of the Graincorp story. you really have to be an ignoramus to play arbitrage in the traditional way. small spread and get whacked on the supposed pre-science and omni-science espoused to clients. Been there, done that advising clients who thought that this was all that was to it.. and never again.


    Graincorp was the story with 60-80 cent upside and it turns out now 4 bucks downside.. looks like a favorable risk reward to me.. assymetrically so, to use this abused word... i even smell margin of safety. casino type margin of safety.


    I would frankly call it a top in value investing precisely because too many smartypants have been using words like "margin of safety" and "assymetrically favorable risk reward" without keen regard to real risks and real opportunity. Guys like Whitney Tilson command lots of "respect" in the value investors trade community, but its really really tough to know why that should be so when reviewing actual investment calls made.. calling it thus a market top in asinine investment strategies such as traditional risk arbitrage and market top in "value investing".


    The word special situations in and of itself is abused. Everything has become a special situation. Especially failed arbitrage investments.


    Contrarian signal apart... real disciplined Value Investing is so out of favor that Value Line recently renamed itself EULAV Asset Management inverting the letters in their name.. Go Value Line!. That is one publication I still respect when it comes to value investing.


    With regards to Graincorp, they bargained hard for the price they wanted to be sold for which was already one price detached from current earnings.. Its not an insult for this type of company to be trading temporarily sub 10 bucks because a bumper harvest in Russia does affect grain prices in Australia. its not like record profits are repeatable in this biz.. With the amount of infrastructure bottlenecks that exist in grain shipping domestically in Australia, the real margin of safety on this investment could come in when they figure out rail infrastructure over next 5-8 years. You bet that the Chinese will be most interested in investing in Rail. Genesee & Wyoming is exposed in no small part to Australian rail. The rediscovery of Australian Ag sector by Australians makes a lot of sense and there is no value add here by the tax arbitrageurs ADM. Zero. I think ADM was willing to invest like 200 MM in rail. chump change. that is why Aussies did what they had to do. Chinese rail projects should be watched here for signs of eventually more volume through Aussie ports.
    29 Nov 2013, 12:22 PM Reply Like
  • SteinwayCapital
    , contributor
    Comments (219) | Send Message
    Author’s reply » 6 MYR... for MISC...have to adjust this performance for development in malay ringit which I havent tracked recently..
    1 Feb, 10:24 PM Reply Like
  • SteinwayCapital
    , contributor
    Comments (219) | Send Message
    Author’s reply » now at 7 MYR with record volume.. must be some new deal in the works just judging by volume on 1 day..
    25 Mar, 11:19 AM Reply Like
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