Maybulk POSH Acquisition Stirs Emotions
In my previous post on the Baltic Dry Index, I made a mention of Malaysian Bulk Carriers Berhad or MAYBULK.
I first bought into this company in June 2006 when the share price was hovering at RM2.00 – 2.10 (pre-bonus basis). Adjusted for bonus issue, I believe it works out to be less than RM1.70 per share.
Maybulk share price has had a nice run throughout 2007 reaching a high of over RM5.00. It started tanking at the end of 2007, hitting a low of RM2.06 in December 2008.
Dividends
In just the last 2 years, I’ve collected RM0.78 worth of dividends… and most of it has been tax free.
Sep-08 Interim Dividend of 10 sen
May-08 Final Dividend of 30 sen
Sep-07 Interim Dividend of 8 sen
May-07 Special Dividend of 18 sen
May-07 Final Dividend of 12 sen
Needless to say I was happy with the company’s management.
So in September 2008 when Maybulk dropped to RM3.00, I decided to add a few more shares to my holding.
A couple of days later on 15 Sep 08, Maybulk announced that it was looking to fork out between RM517 million to RM862 million to invest in a company called PACC Offshore Services Holdings Pte Ltd (or POSH). Maybulk would buy a 22% interest from Pacific Carriers Limited, its own mother company.
SHOCK HORROR!!! I had completely no idea this was coming.
Since then I’ve been looking for an opportunity to sell some of my Maybulk shares. I finally sold some shares at RM2.73 yesterday.
Is Maybulk a Good Company?
I have no doubt that Maybulk has top management in running a dry bulk shipping business. After all that is why I bought Maybulk shares.
Furthermore their acumen in buying and selling ships is exceptional to say the least. But I must say I’m not keen on the POSH acquisition at all. Here’s why:
1. It is a purchase of a minority stake – only 22%. It is not a 100% controlling interest and Maybulk does not have access to POSH’s cash flow.
2. Management never foreshadowed such a large investment in its previous reports. It’s a nasty surprise.
3. From what I read, POSH has quite a bit of borrowings. Furthermore the capital expenditure requirements could be high. An article in The Edge reported of unhappy minority shareholders who helped to shed some light on POSH’s high borrowings and capex obligations.
4. Cash is King. Consider the opportunity cost. I’m sure you’ll agree that RM800 million is a lot of money in such times. There’s no shortage of what you can buy now. Now that the Baltic Dry Index is low, why not buy more dry bulk tankers at distressed prices? This is really why I bought Maybulk shares in the first place. If I want oil & gas sector exposure, I’d certainly be buying some other share and not Maybulk. Even if no suitable investment opportunity is found, I would have preferred if Maybulk continues to pay 25-30 sen dividend every year which it could well afford to do for many years even in this distressed environment. This would make it a very enviable company which stands out from the crowd. Management would look very smart to me because it shows they are concerned about capital management and removing excess cash from the balance sheet.
5. Related Party Transaction – Any concerned investor cannot help but wonder what is really driving this deal?
So I’m somewhat surprised when TheEdge included Maybulk as one of its’ 20 stock picks for 2009! It quoted a report by OSK Research:
“Considering the acquisition and lower earnings, OSK Research believes Maybulk could still afford to maintain a dividend yield (based on its share price of RM2.31) – a return that is substantially higher than fixed deposit. Furthermore, the 22% stake in POSH, a provider of offshore support vessel services for the oil and gas industry, could be a re-rating catalyst for Maybulk’s share price in the future”
Hmmm… I’m glad there are some eternal optimists around.
For now I’d be happy to offload more shares if it does run up again.
Remembering Warren Buffett in this Lesson
As I thought about my little loss on this investment, some of Warren Buffett’s investment tenets came to mind. Buffett applies three tenets about a company’s management:
1. Rationality
2. Candor
3. Resisting the Institutional Imperative
The third point is the one that struck me. It refers to the lemming-like behaviour of managers to blow large amounts on acquisitions because everyone else is doing it and the market is demanding it.
If a company generates high returns, management has a duty to reinvest those earnings back into the business for the benefit of shareholders. If the money cannot be reinvested at such high rates of return, it has 3 options:
1. Ignore the problem and continue to re-invest at lower returns
2. Buy growth (acquisitions)
3. Return the money to shareholders, who then have a chance to re-invest the money elsewhere at higher rates.
In Buffett’s mind, only one choice is rational and that is option 3.
As we attempt to assess a company’s management, the decision made at this crossroad provides us with a good clue. The choice management makes will prove either valuable or disappointing for shareholders long before the results appear in an annual report.
I would normally agree with you but comeon, we are talking about...
January 13th, 2009 at 4:13 pm
thanks! I managed to pass though.
Not so good, but it’s okay. 
January 13th, 2009 at 6:22 pm
Yes, totally agree, the acquisition of POSH for such a high price was absolutely horrific. The report by the independent advisor was the worst I have ever read, they even had the “courage” to upgrade the NAV (from about 200m USD to 800m USD) by including revaluation of assets (ships) that were being built and would be delivered in the next few years. And that while prices of ships were coming down, and we are entering the worst recession (depression?) in the last 50 years.
Independent advisor, independent directors and SC have been caught sleeping on the job, and not for the first time I am afraid, a prime example of a horrible related-party transaction.
I have since also sold my Maybulk shares, a cockroach normally comes alone, but I was not so lucky with the price as you.
January 13th, 2009 at 10:01 pm
What I don’t understand is that sometimes so called excellent companies in Malaysia would drop a bombshell and do an RPT? Look at Resort, out of no where, it suddenly announce an RPT which hit its share price. I think Buffet investment style of buy and hold, doesn’t work here in Malaysia. Comments?
January 13th, 2009 at 10:50 pm
Elora – Congratulations, keep up the good work
MAW – Yep the revaluation is a big joke. Remember Maybulk has powerful shareholders, they can do anything they want but someone above is watching. Sorry to hear about your loss, but I am still holding on to some shares haha! waiting to for a good time to offload the rest. There are so many other companies which are more certain bets compared to Maybulk.
MBGE7CLT – It’s a bit sad with Maybulk and Resorts but remember there have been a lot of hanky panky in the US too. Do not let this discourage you from being the best investor possible, I still believe in Buy and Hold but only in very exceptional cases. See http://www.horizon.my/2008/11/oriental-holdings-bhd-the-buy-hold-advantage/
And honest management is so important.
January 14th, 2009 at 12:11 pm
“What I don’t understand is that sometimes so called excellent companies in Malaysia would drop a bombshell and do an RPT?”
Ahhhhh, easiest question ever asked, the one and only answer being: $$$$$$$$!
For PCL, they propably were desperate, they loaned already hundreds of USD to POSH, propably went to the banks for more loans, and were turned down. So then they had a look at the juicy balance sheet of Maybulk with its 1 billion RM plus cash, and decided to take a stab at it.
With the independent directors, the independent advisor and the SC all caught sleeping on the job, minority investors just dont stand a chance to fight this kind of deal, the best you can get is to expose it.
Regarding Genting, they do this kind of lousy deal every few year, couple of years ago the issue with the Star cruise company, couple of years back again the issue with Genting International, etc. They already dont have a very good name, they dont care.
For people who stay invested in Maybulk, please consider that the 1 billion or so they made from selling ships, that will not be repeated the next years, ships are going down in value, not up. Their operational profit will be much much less because of the drybulk index falling from a clip. And the juicy 1 billion RM cash with which they could do cheap acquisitions (for instance just now a shipping company in Singapore went bancrupt, also lots of shipping companies trading at very low prices), that cash is gone.
Still, I am not to sad, I invested my Maybulk money in Evergreen Fibreboard, a company MalaysiaFinance wrote about in the past:
http://evergreengroup.com.my/
PE of about 3, dividend yield 12%, price is about half the NAV, decent balancesheet, no dillution, no issues, cant get much cheaper than that can you? There are some macro concerns though, their business is linked to construction/property development which will globally contract these years.
January 14th, 2009 at 7:28 pm
MAW… I did hear the same thing about Genting. Agree with you on Maybulk coz the Baltic Dry Index will be low for some time yet. I did check out Evergreen some time ago, their revenue growth has been impressive, but capex spending has been high and their borrowings have gone up. We compiled their data some time back, you can check it out here:
http://www.horizon.my/investor/details.php?counter=evergrn
Click on Cash Flow.
January 15th, 2009 at 11:24 am
Hi Larry, thank you, your website with data looks very nice.
I agree, Evergreens balance sheet is less than rock solid. However, their profit (which I estimate to be about 90m in 2008) is good, they do have about 100m cash, and most of their borrowings are longterm (shortterm would really be horrible in these testing times). I really hope they can pull it through these testing times. My main concern is recent news that global trade almost is coming to a standstill, that would be bad for a company like Evergreen. So there are real issues regarding their profit in 2009 and possibly 2010.
The management is aware of the problems (according to their last quarterly report), so I really hope they wont expand anymore, and will go in “survival mode”. Companies like Mieco and Heveaboard are doing much worse than Evergreen, in the long run that would be good for Evergreen I think.
They are nicely located next to the PTP port, well focused, have ISO qualifications and do care about the environment, website is professional, dilution is 0%. They bought the Hume company (from Hong Leong) which had a good name, and Hong Leong agreed partly with payment in Evergreen shares (at more than double current shareprice), which is a good sign. Some concern is some subsidiaries are not 100% owned, but other than that, looks excellent.
But, all depends their ability to service their borrowings, agree this is a real risk, and propably explains why the share tades at just 1/4th of the price 1 year ago.
January 16th, 2009 at 12:50 pm
Hi MAW, don’t really know much about Evergreen but it looks like they’ve expanded aggressively with new production capacity… not sure if they can fill it, it looks like receivables have crept up and you need to watch the inventory levels carefully. I know there are so many cheap buys out there in the small caps, personally I like APM Automotive which has really proven itself over the years but like Evergreen they are facing tough markets. To the credit of management, two years ago when car manufacturing tanked, APM has managed to maintain earnings and cash flow. Check out how their Net Cash position have steadily increased over the last 4 years even when paying nice dividends and without raising new capital. But at this stage I still prefer large caps to lead any market recovery. Good to keep an eye on the decent second liners though.
January 17th, 2009 at 4:27 pm
The choice management makes will prove either valuable or disappointing for shareholders long before the results appear in an annual report. <<— i find not many Malaysian company has good decision on their business strategy which may sometimes cause more harm than benefit..
January 18th, 2009 at 11:21 am
“The choice management makes will prove either valuable or disappointing for shareholders long before the results appear in an annual report. <<— i find not many Malaysian company has good decision on their business strategy which may sometimes cause more harm than benefit..”
Yes, I agree very much. I think this is the reason why there are so few global succesfull Malaysian listed companies. Other reasons might be interest rates kept too low too long time (as long as you make more than the bank interest why bother, why try for a high return?) and the abundance of cheap foreign labour (why bother trying to increase productivity, just hire a few more workers?). Companies with a consistent ROE of 15-20% are very rare on the Bursa.
Larry, often a recovery is driven by largecaps, not smallcaps, I agree. But this happens not always, when smallcaps are really dirtcheap, and some largecaps are holding up very well (sometimes a bit too well, artificially supported), then the opportunity is in smallcaps. This happened for instance in 1998. I do not see that much value in largecaps at the moment, but I am a smallcap investor (actually more mediumcap, but in most countries in the world these would be called smallcaps), so I might be wrong and subjective.
APM is a company I followed from a distance for many years, will have a look at it again. I always saw it as a good but bit sleepy company.
May 11th, 2009 at 7:58 am
work with PCL for last 10years for bulk and now with oil n gas.believe me,its right move in long term in shipping sector.bulk always flipflop wth oil..its a good move for lonng term continuity for shipping.ship demand in oil n gas more higher rate then bulkers.