JCorp: Biting the Bullet?

Mohd Farhaan Shah and Risen Jayaseelan tell us about an impending debt at Johor Corp in the online STAR today. I have taken the liberty to abridge it accordingly to be brief.

Are there really viable options? Will Johor Corp bite the bullet?

New CEO of Johor Corp (JCorp), Kamaruzzaman Kassim said that the Corporation  will not be selling any of its assets to repay bondholders' RM3.6bil when the papers are due on July 31, 2012. That route is now out of the question,so it seems.

This is suppose to put a market dampener on speculation that key assets in the JCorp group, such as QSR Brands Bhd (that owns KFC Holdings (M) Bhd) and London-listed New Britain Palm Oil Ltd (NBPO), will be up for sale at any time soon.

Kamaruzzaman, named JCorp CEO last week confirmed that JCorp had appointed CIMB Bank and Maybank Investment Bhd as advisors.

Kamaruzzaman said that both these banks were the biggest lenders to JCorp. This means that both banks may own the bulk of the RM3.6bil bonds that are due in 2012. [Does it not remind you of the EPF-RHB thingy?]

The financial advisers apparently have suggested some ideas including the issuance of new bonds. [Expecting some form of haircut here?]

The CEO  has explained that the RM3.6bil debt was due to JCorp's aggressive investment since 2000, mainly in landed property and industrial areas.

JCorp has been in the news in recent weeks after it rejected two bids to take over QSR Brands Bhd. One was by a company linked to tycoon Tan Sri Halim Saad and another by the Carlyle Group.

While JCorp has a number of prized assets in the group, it doesn't own most of these assets directly. JCorp owns 53% of Kulim, which owns 50% of NBPO and 57.5% of QSR. QSR then owns 50.6% of KFC.

So if these assets were to be sold, the sale proceeds would be trapped at Kulim.

What that means is that if the money Kulim got from the sale of NBPO or QSR were to be paid out in dividends, JCorp would only get half of that, with Kulim's other shareholders enjoying the proceeds as well.

This is likely the main reason for JCorp opting not to divest its assets to repay the loan. When JCorp-controlled Kulim rejected the two bids, it said that it believed more value could be realised in QSR and KFC in the long run.

According to JCorp's 2009 annual report, it had RM705mil in cash but a whopping RM6.62bil in debt and with hardly any free cash flow.

It also paid around RM500mil in interest payments and RM1.7bil in loan repayments. Despite being perceived as asset rich, it only booked a paltry RM5mil in dividend receipts in financial year 2009.

So, it would be interesting for QSR and KFC shareholders what JCorp will do come 2012 when the bonds are due for payment. Will they be paying out bumper dividends  at QSR and KFC so that JCorp can survive a cash crunch? Good question.

JCorp is one of the country's largest state economic development authorities and has around 250 companies.

Rollover, Rover?

Bursar KL: Information for the Potential Retail Investor

Jagdev Singh Sidhu analyzed the buying and selling patterns of both local and foreign investors on Bursa KL throughout 2010 excluding December.

Here is his report from the online Star.

"Local retail investors have been net sellers of stock for all but one month up to November this year, but the pace of buying has slowly caught up with selling as the stock market rose towards its record high levels at the end of the year. [ So local investors are net sellers]

According to trade statistics from Bursa Malaysia, retailers bought RM8.93bil worth of stock in November and sold RM8.99bil worth of shares. In terms of purchases, the highest amount of shares bought or sold was in January when retailers bought shares worth RM9bil but sold RM9.1bil.

The pace of transactions declined thereafter but started to pick up in September when purchasers rose to RM5.58bil versus selling RM5.72bil worth of equity.

In October, buying and selling rose to RM7.57bil and RM7.73bil respectively and in November, when the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) hit a record 1,528 points, retailers bought RM8.93bil worth of shares and sold RM8.99bil worth.

The pace of purchases also reflected the monthly value of trade done on Bursa Malaysia. Data for December has not been released.

In terms of value, the highest month of transactions based on value was November when RM39bil worth of trade was conducted. The month also saw the entry of the largest IPO in the country, Petronas Chemicals Group Bhd, which attracted a great deal of interest among institutional investors.

The value of transactions has also mirrored the FBM KLCI’s ascendency to its new peak.

Total value of trade in October was RM36.5bil and RM31.6bil worth of share transactions were done in September.

Trade value has been consistently rising since July when total transactions were RM26.1bil. The value of transactions has somewhat tracked the rising amount of foreign investor interest in the stock market.

Foreign institutions have been net buyers of Malaysian shares since June but over the last couple of months, the amount of the net purchases by foreign institutions has been shrinking.

As foreign investors have been net buyers of Malaysian shares over the past 6 months, most of that extra liquidity or shares available for purchase has come from local institutions.

Local institutions have been net sellers of shares on Bursa Malaysia since June and only emerged as net buyers in November.[Sell low, buy high? Or have they bought into Petronas Chemical?]

One of the highest months of purchases by local institutions was in March when local funds bought RM12.8bil worth of stock and sold RM13.1bil in shares.

Total transactions by local institutions dipped thereafter but started to pick up once again in September when such funds bought RM9.7bil worth of shares and sold RM14bil worth.

The net selling gap then dropped as interest in Malaysian shares picked up again and in October, local institutions bought and sold RM12.8bil and RM14.2bil worth of shares.

In November, local funds reversed their selling trend of previous months when it bought RM12bil in stock and sold RM11.5bil in shares.

Foreign investors have also increased their buying of Malaysian shares in recent months and in August bought more shares than local institutions.

Foreign investors continued to buy more shares on Bursa Malaysia compared with local institutions in September but in October, as the market continued to charged towards its record high, local institutions poured more money into Malaysian shares compared with foreign institutions.

In November, local institutions’ purchase of stocks at RM12bil was higher than foreign institutional funds which snapped up RM11.5bil worth of shares."

So it looks like local buyers are net buyers for all months except in November. My guess is that the local buyers are just the same local funds particularly EPF, Pension Funds, SOCSO, Khazanah, ValueCap and so on and so forth. There is some action on some penny stocks that are dividend paying and  those affiliated with political interests.

That second liners are hardly moving is indicative that the common retail buyer is not in the market.

New Malaysian Code on Takeovers and Mergers 2010

Well, maybe in some small ways, investors may have the feeling of  getting better protection. with the enforcement of the new Malaysian Code on Takeovers and Mergers today.

The last major review of the code was in 1998.

Given the number of developments in the capital market in the last 10 years, the commission felt that it was time to reissue the code, industry observers said.

Its major changes also came from extensive consultations with various parties, they added.

"The 2010 Code replaces the Malaysian Code on Take-Overs and Mergers 1998," the SC announced yesterday.

"The 2010 Code, together with its Practice Notes (PNs), provides protection to a wider group of investors, enhances transparency and improves efficiency in line with capital market developments, locally and abroad," it added.

Key changes in the 2010 Code benefiting shareholders included protection for investors of foreign companies and real estate investment trusts (REITs) listed on the local bourse, shorter settlement periods and enhanced disclosures in offer documents and independent advice circulars.

Effective immediately, all companies, including foreign incorporated ones and REITs listed on Bursa Malaysia, are subjected to the code.

In the past, the code only regulated public companies incorporated under the Companies Act 1965, regardless whether they were listed or not.

The 2010 code now allows a voluntary takeover offer to be carried out with a higher acceptance threshold as a condition.

The new code has reduced the settlement period in a takeover offer to 10 days from 21 days for settlement via cash consideration, and 14 days for settlement via shares.

Schemes of arrangement, compromise, amalgamation and selective capital reductions now have the same effects as takeover offers.

The Securities Commission believes that there should be parity in the protection afforded to shareholders in the implementation of such schemes.

Another major change in the code relates to the announcement on potential takeover offers.

The 2010 Code requires a potential offeror or offeree to make an announcement on possible offers where there are unusual changes in the price of the potential offeree's shares.

If the offeror denies that he is making an offer for the offeree, he will be barred from making any takeover bid within six months.

The code now requires only one-stage application to be made, instead of two stages previously, for exemptions from mandatory offer obligations arising from the issuance of new securities and share buyback schemes.

It also waived the need for the Securities Commission's approval for the appointment of independent advisers by the board of an offeree.