[Investment] CIMB-RHB-MBSB Three-way Merger

This is a continuing blog from my previous post on Why mergers fail to unlock the expected synergy?. The three-way merger somehow garnered my interest since it has been on the news headlines for almost half a year and it is by far the biggest corporate deal in Malaysia (up to RM94 billion) - although the deal didn't come through.

For ease of understanding and to cut a long story short, so here's the compiled news headlines for the proposed three-way merger ranked by chronological order. 

Date	News Headline
09-Jul-14	Stocks trading suspended
10-Jul-14	BNM approval to commence negotiation and exclusivity agreement between CIMB, RHB and MBSB
08-Sep-14	EPF: Right to vote on merger critical to protect members’ interests
09-Sep-14	RHB Cap unlikely to be priced at significant premium if EPF allowed to vote
30-Sep-14	Abu Dhabi reaches out to M’sia
08-Oct-14	RHB and MBSB boards agree to proposed merger
09-Oct-14	Mega bank merger terms concluded to see share swap between CIMB-RHBCap, formation of mega Islamic bank
10-Oct-14	CIMB’s shareholders to hold 70% stake in enlarged banking group
13-Oct-14	Malaysia's three-way bank deal is far from done
13-Oct-14	Moody's: Mega bank merger credit negative for CIMB Islamic Bank, benefits RHB
14-Oct-14	Mega bank merger credit negative for CIMB Islamic Bank
15-Oct-14	MBSB will cause asset quality weakness in merged mega bank: Fitch
21-Oct-14	Bank merger plan can still proceed even if EPF is not allowed to vote
21-Oct-14	CIMB, RHBCap, MBSB share trade suspended pending annoucement
23-Oct-14	RHBCap shares fall 0.2%, CIMB down 0.6%, MBSB drops 1.5% after EPF disallowed from merger vote
24-Oct-14	Abu Dhabi state fund asks for more in $22 bln Malaysia banking deal
30-Oct-14	EPF will not trim stake in CIMB
30-Oct-14	Bursa to decide on EPF vote
31-Oct-14	CIMB-RHBCap-MBSB post merger integration to cost RM1.4b
03-Nov-14	Merger valuations seem fair, but will Aabar accept?
20-Nov-14	Aabar now in favour of mega merger
01-Dec-14	Merger will go through “with or without EPF”, says Nazir
10-Dec-14	Bursa says no to EPF’s appeal to vote in banks merger
17-Dec-14	Potential revision in Malaysia Building Society’s offer price
14-Jan-15	Merger deal is off, confirm CIMB, RHBCap and MBSB
15-Jan-15	Aborted mega bank merger highlights tougher environment, says Fitch
16-Jan-15	Market relief on aborted merger

(Sources: Financial Daily The Edge)

The implications on stocks performance

It's late and I'm starting to counting star, so here's a chart that explain all:-

Shares performance (return in %) of MBSB, RHB and CIMB from 01 Jul 2014 - 20 Jan 2015

(Click image to enlarge)

• Three key events (based on the date of Bursa announcement) are highlighted as it had triggered the stocks to move more than +-10% (i.e the start of negotiation, the proposal of the merger, the appeal for EPF's voting rights was rejected and the cease of proposed merger).
• MBSB: As a target company of the three-way merger, the shares performance had been fueled with positive momentum since the negotiation started and proposed merger announced. The surge of shares price was due to the fact that investors are chasing after the arbitrage over the proposed cash offer price of RM2.82 vs. market price. However, the stocks started to head south after the EPF (major shareholder) voting rights was rejected and the deal was ceased.
• CIMB: The shares performance is worst off since the start of the merger's negotiation as there were negative views on the asset quality and credit rating post-merger. Market relief with sign of stocks rebounding prior the announcement of the withdrawal of the proposed merger.
• We can see that the market actually reacted significantly for all three stocks days (or a week) before the official Bursa announcement on the withdrawal of three-way merger. Was there some noise in the market or was there any party who had the advantage of superior information?
• So who is the biggest loser? From the chart above, CIMB is the biggest loser with its market value depreciated -19.5% since the 1 Jul 2014 (vs. RHB: -8.5%; MBSB:-2.4%). 
• However, investors who are emotional and acted on news flows could also be the biggest loser as well, i.e. investors who bought MBSB shares after the announcement of the proposed merger and hoping the deal to seal (to receive the offer cash consideration) may lose of up to -24%.
• Of course with high trading volume and liquidity during the period, it did provide a good opportunity for traders as well.

Thoughts of the day:

Propose transactions are just proposal, anything could happen.
There's no done deal, until Bursa Announcement say so.

Information asymmetric do exist, you may be too slow to react.
Life is not fair, same goes to the market.

[Investment] Exchange Traded Funds (ETFs) vs Unit Trust

Exchange Traded Funds (ETFs) hold a basket of securities to track performance of a specific index. Unit trust funds also hold a portfolio of assets. Nevertheless, both funds have marked differences.

The main differences between ETFs and unit trust funds are:

Investing Objective

ETFs	Passively managed. Designed to follow performance of an index. No active selection of underlying securities and returns made by ETF fund manager. ETF fund manager will closely follow performance of its benchmark index.
Unit Trust Funds	Actively managed. Investors pay fund managers to select stocks (or other securities) in order to outperform a selected index. Performance of unit trust funds depends on the fund manager's skills and the supporting structure provided by the fund management company.
Index Funds	Index Funds Employ the same investing strategy. The main difference is in the cost of investing (sales fees vs. ETFs brokerage charge) and the annual management fee.

Buy and Sell Transactions

ETFs	Listed and quoted on a stock exchange. ETFs are bought and sold like stocks throughout the trading day.
Unit Trust Funds (including index funds)	Buy and sell via agents working for a fund management company or through institutional unit trust agents such as banks. Purchases or redemptions are done at a single price at the end of a trading day as the price of units in a fund depends on the closing price of its components.

Cost to Invest

ETFs	There is a brokerage fee, clearing fee and stamp duty, similar to trading shares. The annual management fee usually is less than 1% of the fund's NAV.
Unit Trust Funds (including index funds)	Usually impose an upfront sales fee between 3% to 5%. Both funds typically levy a back-end charge or exit fee which investors pay when they redeem the fund. Fund's annual management fee can be between 0.75% to 5% per annum of the fund's NAV.

Minimum Investment Amount

ETFs	Like shares, there is no minimum investment amount for ETFs.
Unit Trust Funds (including index funds)	Most unit trusts usually require an initial minimum investment of RM 1,000. Subsequent investments are lower, typically RM 100.

More Similarities and Differences between ETFs and Funds listed here.

	ETFS	Unit Trust Funds
Continuous trading and pricing throughout the trading day?	Yes	No
Prospectus available?	Yes	Yes
Can be purchased online?	Yes	Yes
Redemption charges for withdrawals	No	*Yes
Possible to view the underlying securities?	Yes	**No
Possible to receive dividends?	Yes	Yes

* Only for specific unit trust i.e. through a bank
** Only for specific unit trust funds, typically bond funds.
*** Most funds only reveal their top ten holdings.

(Source: Bursa Malaysia)

[Investment] Guide for REITs - Part 3

This is a continuing blog from Guide for REITs Part 1 and Part 2.

What are the investment considerations for REIT?

REITs vs Property Companies

	REITs	Property Companies
Earning Profile	A REIT is driven by recurring rental income	A property company seeks a combination of property sales, development profits, rental income and property investments
Capital Structure and Cash Flow	A REIT has low and defined level of retained earnings, low debt level defined by the regulators and strong cash flow from operations	A property stock has a high gearing ratio due to high capital expenditure required for property development and sometimes negative cash flow; and low dividend payouts
Dividend Distribution Policy	A REIT will distribute 90% – 100%of its retained earnings before tax	A property stock has no certainty of a dividend payout
Risk Profile	A REIT is a low risk, passive investment vehicle with a high certainty of cash flow from rentals derived from lease agreements with tenants	A property stock has a high development and financial risk
Corporate Governance	REITs are governed by multiple layers of stakeholders – unitholders, manger, trustees, regulating authorities ensuring that interest of minority unitholders are protected	A property stock is often dominated by a controlling shareholder which raises conflict of interest issues with minority shareholders

(Source: Bursa Malaysia)

[Investment] Guide for REITs - Part 2

This is a continuing blog from Guide for REITs Part 1.

What kind of returns can be expected from REITs?

• Typically, the returns to unit holders of a REIT can be in the form of:

1. Income distribution based on the distribution policy stated in the REIT's deed; and/or
2. Capital gains which may arise from appreciation of the REIT's price.

What are the performance indicators of REITs?

• Distribution Yield (DY):
• DY = Income distribution paid to a REIT unit holder/ REIT's price paid by the unit holder

Other indicators include the following which are available in annual reports:

• Net Asset Value (NAV):
• The value of a REIT is based on its tangible real estate holdings. This is calculated by the total assets of a company after subtracting all its liabilities.
• Management expense ratio:
• The percentage of operating expenses (management fees, etc.) incurred to the NAV.
• Total return:
• The change in a REIT's price for the period under review plus any income distribution received during the period.

[Investment] Guide for Real Estate Investment Trust (REIT) - Part 1

What is a REIT?

• A Real Estate Investment Trust (REIT) is a fund or a trust that owns and manages income-producing commercial real estate (shopping complexes, hospitals, plantations, industrial properties, hotels and office blocks).
• A management company for a REIT is permitted to deduct distribution paid to its shareholders from its corporate taxable income. However, to enjoy this tax-free status, the REIT must have most of its assets and income tied to the real estate and distribute at least 90% of its total income to investors/unit holders annually.

List of Malaysia REITs 

Name	Dividend Frequency	Type of Property
KLCCP STAPLED GROUP	Quarter	Office, Mall and Hospitality
PAVILION REIT	Semi-Annual	Office and Mall
IGB REIT	Semi-Annual	Retail Mall
SUNWAY REIT	Quarter	Office, Mall, Healthcare and Hospitality
CAPITAMALLS MALAYSIA TRUST	Semi-Annual	Retail Mall
AXIS REIT	Quarter	Office, Industrial (logistics & manufacturing), Hypermarket
YTL HOSPITALITY REIT	Quarter	Hospitality
AL-'AQAR HEALTHCARE REIT	Semi-Annual	Healthcare
AMFIRST REIT	Semi-Annual	Office, Mall and Hospitality
HEKTAR REIT	Quarter	Mall and Hospitality
UOA REIT	Semi-Annual	Office
AMANAHRAYA REIT	Quarter	Hospitality, Higher Education, Office, Industrial and Mall
QUILL CAPITA TRUST	Semi-Annual	Office and Hypermarket
TOWER REIT	Semi-Annual	Office
ATRIUM REIT	Quarter	Industrial (logistics)

[Investment] Special Purpose Acquisition Company (SPAC) IPO

In tandem with the upcoming IPO of Reach Energy Berhad, a Special Purpose Acquisition Company (SPAC), this post attempts to address the lack of understanding on SPAC.

What is SPAC

• Basically, SPAC going for IPO is a shell company with no operation or income generating business raising fund from public to acquire operating companies or assets, known as Qualifying Acquisition (QA). 
• Below are the comparisons between a SPAC and an existing company going for listing:-

• Investment in SPAC has higher risk since the performance and financial of the business cannot be evaluated compared to existing company going for IPO. Thus, the key investment theme for SPAC is the experience of its management team to pursue the business strategy and complete QA.
• Currently, there are only three listed SPACs on Bursa Malaysia which are Hibiscus, Cliq Energy and Sona Petrolium. 
• According to The Edge (19 Dec 2013), the proposal to list two SPACs in the mining sector i.e Australaysia Resources and Mineral Berhad and Terragalli Resources has been rejected by Securities of Commissions due to the doubt of the returns would commensurate with the risk of investors.

SPAC Structure

• Investors in SPAC typically buy a unit of the SPAC shares (mother share) and receive a warrant which is only exercisable when the SPAC completed the QA. Both of the SPAC shares and warrant will be traded separately.
• A SPAC going for listing made up of three types of shareholders which are the management team, pre-IPO investors, and the IPO investors. Note: retail investors/ public are classified under IPO investors.
• The restriction and entitlement for each type of shareholders are as below:-

(Source: Securities Commissions)

SPAC is a high risk and high return investment. The completion of Qualifying Acquisition which is commercial and financial viable is the key success of a SPAC. However, in the event of a SPAC fails to complete Qualifying Acquisition within 3 years, the SPAC will be liquidated and delisted.

[Inforgraphic] Analyzing Initial Public Offering (IPO)

An initial public offering (IPO) is the first sale of stock by a company to the public and listing to the stock exchange.

Everytime there's an announcement of IPO, the retail (public) investors will be rushing for the application and place most of their money in the IPO. Most often the public perceived that all IPOs are good investment with many upsides since it is the first day of listing. But this is not always the true case!  Whether the IPO is priced at 10sen, RM1, or RM10 doesn't determine whether the valuation is cheap or expensive. IPO can be good or bad depending on the company position, valuation, financial, industry, intention of listing, and structure of the IPO.

Below are the inforgraphic on the key points that investors should analyze and understand before investing in an IPO, which can be obtain from the Prospectus. Always ask your broker for the IPO Prospectus (it's free) or retrieved it online from Bursa Malaysia. Yes it is a very thick book but it is definitely very useful information to evaluate an IPO.

*Click on the image to enlarge.

Stay tune, I will be explaining and blogging on the key points and how to make good use of the IPO prospectus soon.


Be a sound investor, be a diligent investor.