PE is not 4.61 times as shown. You need to apply diluted EPS by assuming all ICPS are converted to ordinary shares. The trailing-twelve-month PE is about 9 times.

@dumbMoney,
I agree with you that ICAP return should be based on market price. My analysis above is in fact based on the ICAP market price which was extracted from the Trading View website.

It is misleading for the TTB to promote measuring ICAP performance based on NAV rather than market price return. As you have put it well, when an investor, due to his own financial circumstances or other reasons needs to sell ICAP, he can only sell at market price and not NAV!

ICAP's latest published NAV is RM2.83 per share. But the closing price is only RM1.91. The market places a whopping 33% discount on ICAP NAV!

Potential investors who have studied ICAP long history of underperformance knows the risk of buying into ICAP today. Despite its apparent deep discount, new investors are likely to get trapped with the same if not growing discount in the future years. Therefore almost no one, not even the ICAP fund manager himself, wants to buy ICAP! The only established buyer is the City of London who buys in the hope to force through changes to unlock ICAP value, which is resisted by the board and TTB.

ICAP remains a value trap until the Board of Directors steps up to demand better performance from TTB (unlikely), or until the board is voted out (difficult since a segment of long-term shareholders has been instilled with fundamentally wrong concepts that are actually detrimental to their own interest!)

There is another way to look at this fallacy. TTB believes his fund is undervalued because he urges investors to measure the fund by NAV and not by the market price. But if ICAP is indeed under-valued, why TTB who holds more than 60% fund asset in cash has never bought back ICAP shares? Why not exploit this market “mispricing” at his own fund as any true value investor would have done?

If TTB is a value investor, he needs to act like what he claims to be. Unless, of course, ICAP fully deserves its deep NAV discount, which means TTB is wrong for claiming ICAP is under-valued.

The absence of buyback over these years for a fund that is flush with cash speaks louder than words!

@ cnman53
If you still don’t like to use KLCI index as a comparison, my suggestion is to compare against “cost of equity”, as public listed companies are subjected to.

The idea is straight forward. Assume an investor has capital that can be invested over a period of 10 years.

The lowest risk investment will offer the lowest rate of return, called the “risk-free” rate. In the Malaysian context, the "risk-free" investment is the 10-year bond issued by the Malaysian government. It is “risk-free” because we assume that the Malaysian government won’t default.

Currently this risk-free rate is slightly under 3%. In the past 10 years, it averaged around 3% to 4%.

For any other 10 year investment that is riskier, the investor will rationally demand a higher return. For example, one may invest in freehold property in a prime location with the expectation that net rental yield + appreciation over 10 years is at least 6% to 8%.

For the KLCI stock market as a whole, I would demand a slightly higher return, say around 7% to 9%. This is the “cost of equity” for the stock market. Note my 7% to 9% target is slightly higher than the 6% to 7% that KLCI has delivered (after dividend reinvestment) between Mar 2009 to Mar 2020.

What is the right “cost of equity” for ICAP?

Given it is a captured closed-end fund, personally I see it as equally risky, if not riskier investment, than a diversified 30 component stock of KLCI 30. I would at least demand a return of 7% to 9% per annum, like what I demand from KLCI.

But ICAP only returned 3.6% over that period!

Given that, one may as well park the money in a Malaysian government bond, which is safer. If buying bonds is difficult, one may just place 12 months FD and roll the FD over every year for over a decade. The FD still matches ICAP return!

@ cnman53
I agree with dumbMoney. For Malaysian funds, open or closed-end, the best comparison is still the widely followed KLCI index after dividend reinvested.

I agree that benchmarking against the index over a short period of say 6 months, 1 year, or even 3 years could be misleading/ unfair to managers. Value fund managers usually underperform the benchmark when growth stocks are in favor and vice versa.

However, for a longer period of one cycle (defined as from one market top to the next top, or one bottom to the next bottom), all fund managers should be measured against the index. Even Warren Buffett’s Berkshire Hathaway is compared against S&P500. Berkshire lagged S&P500 in the late 90’s tech mania but more than made up after the bubble burst.

For Malaysia's case, one may define the cycle of bottom to bottom as Mar 2009 bottom (Global Financial Crisis) to Aug 2015 bottom (oil rout, 1MDB, Ringgit depreciation…). If you don't accept 2015 as a bottom (it was a bear market with more than 20% drop), surely Mar 2020 would have qualified as a bottom.

How did KLCI perform over this market cycle?

Mar 2009: 837
Aug 2015: 1,504 --- 80% growth (before dividend) since Mar 2009, or 9.6% CAGR
Mar 2020: 1,208 --- 44% growth (before dividend) since Mar 2009, or 3.4% CAGR
(Source: Trading View, Excel RRI formula)

How did ICAP perform during the same period?
Mar 2020: RM1.25
Aug 2015: RM2.10 --- 68% growth (before dividend) since Mar 2009, or 8.4% CAGR
Mar 2020: RM1.85 --- 48% growth (before dividend) since Mar 2009, or 3.6% CAGR

Comparing KLCI to ICAP:

ICAP clearly underperformed KLCI during the cycle of Mar 2009 to Aug 2015, even before dividend reinvestment of KLCI is considered.

During the longer cycle from Mar 2009 to Mar 2020, on appearance ICAP outperformed KLCI by a whisker. But that was before dividend reinvestment is considered.

ICAP only paid a miserable one-time dividend throughout its 15 years in existence. While I don’t have the full data, on average KLCI 30 component stocks (which consist of many high dividend yield banks) have about 3% dividend yield.

Therefore during the 11 years from Mar 2009 to Mar 2020, while ICP CAGR is 3.6%, the compound annual growth rate of KLCI is about 3.4% + 3%, i.e. in the range of 6% to 7% per annum.

If ICAP is an open-ended unit trust it would have been closed down long ago.

Late Tan Sri Lee Shin Cheng's son, Lee Yeow Seng, has moved from the position of CEO to Executive Vice Chairman. Dato' Voon Tin Yow from SP Setia/ Eco World has taken up the CEO position in Apr 2020. What is the implication of this reshuffling of position?

@cnman53,
The recognition of the RM6.68 million dual-listing expenses also happened at an interesting time.

The project was said to have been shelved some years back. But the expenses were only booked during the height of the pandemic. The expenses were recognized for the quarter ending 29 Feb 2020 and were published on Jun 10. There was only a one-sentence mention, buried under Note B1 of page 14 in the quarterly report. The Commentary by Fund Manager made no mention of this project and the reasons for its failure.

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3057502

I’ve been waiting for a good explanation in the 2020 Annual Report but again none has been offered.

Why book the expenses at the height of the Covid-19 pandemic? Did the pandemic deal the final blow to the project? Or was it given that many listed companies also reported awful results during the same period, it was an opportunistic moment to quietly slip in the cost of a failed project long ago?

The board of directors owes shareholders an explanation.

Closed end fund is a good for the manager, but less so for the fundholders. The fact is well known in the US.

Way back in 1992, the legendary Fidelity Magellan Fund Manager Peter Lynch wrote in his book Beating The Street:

*quote*
From outside Fidelity, I’d gotten numerous offers to start a Lynch Fund, the closed-end variety listed on the New York Stock Exchange. The would-be promoters said they could sell billions of dollars’ worth of Lynch Fund shares on a quick “road show” to a few cities.

The attraction of a closed-end fund, from the manager’s point of view, is that the fund will never lose its customer base, no matter how badly the manager performs.

That’s because closed-end funds are traded on the stock exchanges, just like Merck or Polaroid or any other stock. For every seller of a closed-end fund there has to be a buyer, so the number of shares always stays the same.

This isn’t true of an open-ended fund such as Magellan. In an open-ended fund, when a shareholder wants to get out, the fund must pay that person the value of his or her shares in cash, and the size of the fund is reduced by that amount. An unpopular open-ended fund can shrink very fast as its customers flee to other competing funds or to the money markets. This is why the manager of an open ended fund doesn’t sleep as soundly as the manager of the closed-end kind.

A $2 billion Lynch Fund listed on the NYSE would have continued to be a $2 billion enterprise forever (unless I made a series of horrendous investment boo-boos and lost the money that way). I would have continued to receive the 75 basis points ($15 million) as my annual fee, year in and year out.

It was a tempting proposition, monetarily. I could have hired a bunch of assistants to pick stocks, reduced my office hours to a leisurely minimum, played golf, spent more time with my wife and my children plus gotten to see the Red Sox, the Celtics, and La Bohème. Whether I beat the market or lagged the market, I’d still have collected the same hefty paycheck.
*unquote*

The essence is in the last sentence. “I beat the market or lagged the market, I’d still have collected the same hefty paycheck”.

And Lynch spoke of only 75 basis points (0.75%) in annual fee.

@ahhuat56,
You said majority of Malaysian investors don’t know how to take advantage of closed-end funds.

Pardon my ignorance. I have no idea too on how to take advantage of this Malaysian closed-end fund that only paid out a token dividend in past 15 years; with poor stock picking records; and park most of its asset as bank FD’s for over a decade; and charges shareholders 1.5% annual fee for the huge pile of cash parked almost permanently in the banks; and watsing close to RM7 million of shareholders' fund on a dubious dual listing project which led to nowhere.

Instead of lamenting on the ignorance of Malaysian investors, shouldn’t the fund manager shoulder the responsibility for giving closed-end funds such a bad name in Malaysia, such that no more closed end funds have been set up since 2005 after the bad experience with ICAP?

@enigmatic,
The name “iCapital” means nothing given the fund has underperformed for years, during good time as well as bad. Yet the fund charges a 1.5% annual fee (not to mention other expenses), on not just invested shares but also the cash hoard which is worth more than 60% of fund assets. If changing the fund name is the price to pay for better performance and shareholder value, so be it.

You said TTB is synonymous with ICAP. That is precisely the problem! There is a cultivated impression of TTB being indispensable while Buffett and Munger have groomed capable successors who could take over any time.

In fact, I cringe at the comparison of TTB to Buffett. Despite TTB’s frequent quoting of Warren Buffett, and have never shied away from being compared to the Oracle of Omaha, the two of them can never be more different. The difference goes beyond one being a true value investor who walks the talk, while the other a market timer who speaks the lingo of value investing.

1. Buffett’s Berkshire Hathaway grows 25,000 times from about USD20 million in 1965 to the current USD500 billion, representing a compound annual growth rate (CAGR) of 20% over 55 years. TTB’s ICAP started at about RM140 million in 2005 and has grown to just 270 million after 15 years in existence, representing a CAGR of 4.5%. ICAP underperforms KLCI after considering dividend reinvestment of KLCI.

2. Buffett's total compensation from Berkshire in 2019 was $374,773. Buffett has not set up a management company to charge a 1.5% annual fee for running Berkshire as TTB does to ICAP.

3. Buffett demonstrates humility and admits mistakes while TTB blames others. When challenged by CoL, TTB threw up the idea of dual listing to narrow the ICAP NAV discount. After billing ICAP shareholders for close to RM7 million this year for the failed dual-listing, TTB did not even explain, let alone apologize for wasting shareholders’ money.

I don’t mean for TTB to pay just a token dividend to placate shareholders. If the ICAP board genuinely wants to close the discount gap, the board should simply return ALL the cash to shareholders.

Failing that, TTB’s company should at least forgo the easy money which is the 1.5% annual fee imposed on ICAP cash holding that it has enjoyed over the years.

If TTB threatens to quit again, shareholders should just let him quit. The fund can then start afresh.

I would envision the following. The new board can select a replacement fund manager from a long list of capable fund houses in Malaysia – Eastspring, Kenanga, KAF, Affin Hwang, to name just a few. Anyone of them will be happy to manage at an annual fee of no higher than 1.5% currently paid to TTB’s company.

After that, the board should call an EGM. Shareholders will vote on two items. The first item is to approve the replacement fund manager. The second item is to decide whether ICAP should give back the cash hoarding to shareholders in the form of a special dividend.

Based on the latest quarterly report as of 31 Aug, the cash hoarding is 242.778 + 5.744 = RM248.522 million. Divided by 140 million shares in circulation, each share at today's closing price of RM1.93 is entitled RM1.78 of special dividend.

Ex-dividend, ICAP share will only consist of stock investment worth about RM1.05 per share (based on the latest published NAV at RM2.83 minus cash RM1.78 = RM1.05).

Ex-dividend, the share just needs to trade at a price higher than RM0.15 to outperform the sorry state today (special dividend RM1.78 + ex-dividend price RM0.15 = today closing price at RM1.93)

With a new manager, the share could easily trade anywhere from RM0.80 to RM1.00 per share. Adding back the RM1.78 special dividend received, at a stroke ICAP is worth RM2.58 to RM2.78 a share, i.e. a share price increase of about 40%.

Why go through the charade of dual-listing purportedly to narrow ICAP NAV discount, which generated nothing except burning a RM7 million hole in shareholders’ pocket?

As I’ve argued, just distribute the entire cash hoarding as special dividend will drastically narrow the discount. Of course, while shareholders may benefit, the fund manager will collect a lot less money after the cash hoard is returned to shareholders.

Ultimately my question to the board of directors, whose remuneration is paid by shareholders, is this, WHERE YOUR LOYALTY LIES?

I see a third problem developing now. ICAP has filed a judicial review against Securities Commission and CoL as it accuses CoL of breaching 20% shareholding limit. But who will pay for the legal fee if ICAP loses the legal challenge? At the courtesy of ICAP fundholders again ?!

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3092802

Is it a coincidence that director Siah Li Mei, who joined in July 2019, resigned on Aug 2020 on health reason?

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3074128

Is it also a coincidence that the other director Leong So Seh, the Chairperson of Nomination Committee, resigned on “personal and health issue” in Feb 2020 after just being reelected a few months earlier in Sep 2019?

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3026283

I anticipate a few bogus forum participants whose only track record in this forum was to defend TTB will accuse me for being paid by CoL. Let me say it again, I’m not. I have no relation with CoL. I just comment based on public information published by ICAP. Refute me with facts if you can. Otherwise don’t waste your time.

When releasing ICAP quarterly result in Jul 29, the fund manager commented in the report that “"As this year’s AGM approaches, shareowners should watch out for a new round of negative comments on your Fund in the social media. Please be aware of this and not to be misled. "Lies, damned lies, and statistics" is a phrase describing the persuasive power of numbers, particularly the use of statistics to bolster weak or false arguments."

Rather than succumbing to this under-siege mentality, it’s better for the fund manager to spend his time already paid for by fundholders to improve his stock-picking skill!

It’s also the time for those well-paid directors to wake up. Carry out your fiduciary duties for shareholders or make way for others!

ICAP’s under-performance over the years is one thing. A bigger problem is poor corporate governance.

As I’ve mentioned in my comments in July, and others have also pointed out, the fund manager holds more than 60% of assets under management in cash. Its cash position was even higher in earlier years.

ICAP shareholders get zero return for those cash position. Why? Even if ICAP gets a 2% FD rate, it has to pay a quarter or 0.5% as profit tax to the Malaysian government. The remaining 1.5% return goes to the fund manager. This leaves fundholders with nothing! The large cash position basically offers the fund manager a stable stream of fees!

The second problem is buried in the ICAP 2020 Annual Report. The fund wasted almost RM7 million of fundholder’s capital on the futile dual-listing project. But this is all the directors got to say “The results of the operations of your Fund during the financial year were not, in the opinion of the directors, substantially affected by any item, transaction or event of a material and unusual nature other than the dual-listing project expenses as disclosed in the statement of profit or loss and other comprehensive income.”

Hello! Can the directors at least give some indication of whether the Fund Manager, Capital Dynamics Asset Management Sdn Bhd (“CDAM”), shared some of the cost for promoting this failed idea when it was challenged by the City of London (CoL)? Or was it an impromptu diversion tactic then with the cost borne by ICAP shareholders?

@dangerzone, I also have the same question.

There are many listed companies around the world producing industrial hoses, sometimes as part of their wide range of product offerings.

I've listed a few below. However I'm not familiar with this industry. So I'm not sure whether they are direct competitors, or potential future competitors for the Trelleborg JV.

1) German listed Continental AG, which doesn't just produce tyres

https://www.continental.com/en/products-and-innovation/product-finder?...
https://finance.yahoo.com/quote/CON.DE?p=CON.DE&.tsrc=fin-srch

2) US listed Parker-Hannifin

https://finance.yahoo.com/quote/PH?p=PH&.tsrc=fin-srch
https://ph.parker.com/my/en/high-pressure-hose

They have an office at Shah Alam.

3) US listed Gates Industrial Corporation

https://finance.yahoo.com/quote/GTES?p=GTES&.tsrc=fin-srch

https://s22.q4cdn.com/277773419/files/doc_presentations/2020/GTES-Inve...
(Read slide 8 and 9. It claims to be one of few scaled players in a large, fragmented $29B addressable market)

It seems that Wellcall is just a small fish in the big ocean.

If anyone has info about industry please share.

@Felicity, @myinvesting,
Thanks for your input.

According to this article, the ICPS was created to repay a loan extended by Allianz SE for an acquistion.
https://www.theedgemarkets.com/article/allianz-proposes-rights-issue-icps

I agree the ICPS should be at a premium given dividend is 1.2X. However the low liqudity works against it, especially if there are more ICPS sellers than buyers, who are mostly long term investors.

May be that explains the continous conversion over the years. But the ocnversion pace has slowed since 2019.

@ kywoo, I read you comment on 23/03/2020. You mentioned "Thirdly, on conversion to ordinary shares you will get conversion rate of less than 1 to 1 basis."

I've tried to figure out the ICPS conversion ratio. The Annual Report of 2019 seems to imply conversion ratio is 1 to 1. It said "During the financial year, the Company increased its ordinary shares to 176,887,639 by the issuance of 199,200 ordinary shares pursuant to the conversion of 199,200 ICPS"

However, according to the circular below, Clause 4.10 (B) in page 9 states "that number of new AMB share(s) that holder of each ICPS is entitled to receive .... shall be multipled with the following formula:- revised number of AMB share/ original number of AMB share".

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=2950250

Do you refer to this formula? I have no idea what it is talking about. If you do can you explain? Is there any cost involved in conversion?

Clause 4.10 (A) also mentions the tenure is perpetual. So I think you're right that there is no time limit for conversion (unless it's forced conversion during winding up/liquidation).

That brings me to another question. 23 millions ICPS have been converted since 2011. Why did ICPS holders want to convert to ordinary shares?

Did it have to do with price? I note in certain years ICPS price tended to transact at a discount but at other years at a premium.

Or ease of selling? But that only make sense for large quantity selling. For a small quanitty, selling the ICPS directly in the illiquid market may still be faster than waiting for conversion into ordinary shares.

Any thought on that?

Basic EPS is 94.82 sen (diluted EPS 48.45 sen) versus 66.57 sen (33.99 sen) a year ago. On appearance a 42% increase is an extraordinary result.

However, the consolidated P&L shows that there is a fair value gain of RM368 million (versus FV gain RM128 million a year ago). This is probably contributed by the fixed income investment due to lower interest rate.

Part B Note 1.3 also mentions higher PBT for the general insurance segment is mainly due to lower motor claims ratio during MCO period. This is likely to be a one-time effect too. Claim ratio in Q2 is 54.5% versus 61.1% a year ago.

But it is still good result. Gross earned premium at RM1,228 million is higher than a year ago, although slightly lower than RM1,306 million in Q1.

And my last comment -- on your statement that ICAP “1.5% fees is lower than open-ended fund's fees”

That is not true.

Since Lipper does not provide fee info, I looked up Malaysia equity funds listed in Fundsupermart. I checked out the top 5 funds with highest 10-year annualized return. I picked the best long-term return funds because they are in a better position to raise fee.

These is the data:
1. Eastspring Investments Small-Cap Fund: annual return 13.87%, annual mgmt fee 1.50%
2. Kenanga Growth Fund – annualized return 12.29%, fee 1.50%
3. KAF Vision Fund – annualized return 11.19%, fee 1.50%
4. Kenanga Growth Opportunities Fund – annualized return 10.87%, fee 1.55%
5. RHB Thematic Growth Fund – annualized return 9.88%, fee 1.50%

Conclusion: 4 out of 5 top equity funds charge a management fee of 1.50%, similar to ICAP 0.75% +0.75% = 1.50%.

Actually there is a little bit more than management fee. On average there is another ~15 basis points which make up the full expense ratio. But ICAP also incurs other expenses on top of its 1.5% fee.

The other expense of buying open-end unit trust is the one-time sales charges. Fundsupermart charges 0.75% to 1.75%, while banks charge about 3% after rebate. It's slightly more expensive than the two times stock brokerage fees of buying and selling ICAP, given online brokerage fee is about 0.1% to 0.42%. (However fundsupermart supports free switching)

But spreading over a holding period of 10 years or more, the cost incurred in owning open end unit trusts is comparable to owning ICAP.

On top of the better performance (albeit I picked only top funds) at 9.88% to 13.87% p.a., versus ICAP 1.4%, unit trust investors also get their full NAV when redeeming their funds. They don't suffer a 30% discount when they selling.

A clarification of my return calculation. What I’ve stated is the cash portion, which made up on average about 2/3 of NAV in the past several quarters.

For each RM100 of cash parked in bank, ICAP receives about RM3. Management & advisory fee for that RM100 cash principal is about RM1.50. The roughly RM3 annual interest received is taxed at 24% i.e. RM0.72. In other words, for the 2/3 of NAV parked in cash, each RM100 of cash returns only RM3 – RM1.5 – RM0.72 = RM0.78, or less than 1% of principal.

Thererfore the other 1/3 of the NAV tied up in equity investment has to work very hard to increase overall return. This explains the underperformance in the past decade.

Curious to find out the overall annualized return, I’ve extracted the following data:

Inception: Oct 2005: NAV RM1.00, Price RM 1.00
10 years ago: 22 Jul 2010: NAV RM2.25, Price RM1.83
Special dividend: Sep 2013: RM0.095
Latest weekly update 22 Jul 2020: NAV RM2.88, Price RM2.00

Applying Excel formula XIRR, this is the results:

Annualized NAV return since inception 7.8%, price return 5.3%
Past 10-year NAV return 2.9%, price return 1.4%

Money is not free. Any students of Discounted Cash Flow know equity capital has a cost, commonly defined as risk free rate + equity (share) market premium.

The risk free rate can be assumed as 10Y Malaysian government bond yield. It averaged about 4% in previous decade. Equity risk premium is typically 5% to 7%. Taken together, typical stock investment in Malaysia should have a hurdle rate of about 4% + 6% = 10% per annum.

ICAP return since inception or in past 10 years was clearly below hurdle rate.

Besides, price return rather than NAV return should be used as performance yardstick. This is because investors who need to raise cash now by selling in stock market can only sell at market price, not selling NAV.

(For the same reason Star Media investor can only sell at 35 sen today, not at the net cash of 50 to60 sen, or its net tangible asset at 109 sen).

ICAP (price) return at 5.3% (past 15 years) or 1.4% (past 10 years) are clearly not acceptable.

Has the board been sleeping?

I compare TTB to Buffett only because TTB likes to quote Buffett TTB likes to mention Buffett’s words to rationalize his position.

The ICAP annual report describes TTB as
“As a result of his fascination with investing, he has the unique ability of blending his investing skills with his business experiences. As Warren Buffett, the world renowned investor, said, “It’s been awfully good to have a foot in both camps.” “

With such overture, it's only fair to invite comparison.

I agree ICAP is not exactly the same as Berkshire, even though both are traded in stock market and both are in the business of investing money (with Berkshire having an extra insurance business)

Yes, ICAP is much smaller than Bershire. But the small size should have worked towards ICAP’s advantage.

ICAP could invest in companies without immediately revealing its position as long as its stake is below 5%. ICAP can also invest or dispose a small stake in small companies without moving the market price against it. Not for Berkshire. Any small bet for Bershire moves the market.

Rightfully, skilled fund managers who manage small funds should be able to outperform. Usually they only become mediocre when their fund sizes grow too large.

But we don't see that in ICAP.

Second, I agree technically it’s the fund manager’s prerogative to keep most of ICAP asset in cash, even for over a decade. Technically the fund prospectus does not forbid TTB from holding as much cash as he wants, and as long as he feels necessary.

Having said that, holding a large cash position is a market timing behavior. Holding large cash poisition for years is a long term market timing behevior in anticipation of stock market crash.

Market timing is common among macro, top-down money managers. But large cash position for over a decade is at odd with bottom-up, value-oriented managers. TTB’s past commentaries give the impression that he is in the latter camp. But his action shows he is the former.

It should be the board of directors’ duty to review and question this contradiction. But I doubt they do.

I also don’t agree with your analogy comparing ICAP investment strategy with an individual with 10 million dollars. Yes, an individual should diversify and should have an asset allocation plan. But an equity fund should not (note we’re not talking about a balanced fund here, which has a pre-defined bond to equity ratio). An equity fund like ICAP should not put another layer of undefined asset allocation on top of individual investors' personal allocation.

For example, ICAP average cash holding is about 2/3 for the past few quarters. An individual may have an allocation plan of 50% cash and 50% equity. If he invests all his equity with ICAP, ICAP has effectively altered his allocation to less than 20% equity and more than 80% cash.

@iPilot50,
I appreciate your view. Although I may not agree with your conclusion, at least we seem to be able to engage in a civil conversation, a discussion based on facts and reasons.

Pardon me because I’m going to write a page full arguing against your position. But nothing personal. This is my approach. I welcome opposite and contrarian views that prove me wrong and point out my blind spot.

First, I agree that the fund long term return is more important than dual listing project expenses. If last quarter RM6.68m was a one-off expense (the quarterly report didn’t spell out), the expense represented ‘merely’ 1.6% of net asset, or about 1 year in fee.

The reason I raised the dual listing expenses was about transparency rather than the spending. But my criticism is reserved for the board of directors rather than fund management. It should be company directors’ duty to demand and ensure a high standard of disclosure.

@vidusaka,
Another baseless accusation?

I readily admit that I’ve made a mistake in my spelling. Sadly, I see some people are still in denial mode despite years of contrary evidence.

This is your second comment ever in this forum. Both are attempts to deflect legitimate criticism against ICAP.

“Paid by posts or by words?” This question probably suits you.

Apart from spelling, any other factual mistakes that you have found in my posts?

I’m an admirer of Warren Buffet too.

Like ICAP, Buffet’s Berkshire Hathaway can be also be thought of as a closed end fund, one with an insurance business bolted on. But the similarity ends there.

(1)
Warren Buffet draws an annual salary of US Dollar 100,000 per annum despite managing a half a trillion-dollar company. Buffet’s interest is aligned with Berkshire shareholders because almost all his net worth is tied up in Berkshire shares. Buffet becomes one of the richest men in the world because of outperformance in Berkshire shares. Not because of management fee.

https://www.investopedia.com/ask/answers/020915/what-warren-buffetts-annual-salary-berkshire-hathaway.asp

(2)
Berkshire Hathaway share price has traded at a premium of 20% or more to its book value.

https://ycharts.com/companies/BRK.A/price_to_book_value

(3)
Berkshire has a portfolio of superior companies. Those companies generate cash faster than Buffer can find suitable investment targets. What does Buffet do with Berkshire fast accumulating cash pile? He buys back Berkshire shares. Berkshire might have bought back more than $5 billion in recent weeks.

https://markets.businessinsider.com/news/stocks/warren-buffett-likely-spent-5-billion-on-berkshire-hathaway-buybacks-2020-7-1029387230#

By the way, I have not even mentioned that stock exchange filing shows ex-director Madam Leong So Seh, the member of Audit Committee and Chairperson of Nomination Committee, resigned on 24 Feb 2020 on ‘personal and health reason’.

The resignation came just 5 months after she was reelected on 21 Sep 2019.

Further to my comment above. Note when I started commenting on ICAP here, I've avoided questioning management investment strategy. I talk about its strategy now only in response to comments from others.

What prompted me to comment on ICAP in the first place is the RM6.68m dual-listing project expenses incurred in Q3 FY2020. No explanation was given regarding the project, which many have assumed to be dead long years ago. No written explanation can be found over these years on how the dual listing is supposed to work, and how it could close the discount gap.

In my view, the lack of disclosure and lack of transparency is more troubling than ICAP investment strategy.

But I don’t blame TTB and his Capital Dynamic for that. After all, TTB/ Capital Dynamic is just a fee collecting service provider to ICAP. What I question is how well the company directors have carried out their fiduciary duty and with shareholders’ interest in mind!

@ahteck85,
Many company AGMs are attended mostly by retirees anyway.

But I agree with your point. ICAP shareholders are mostly long-term followers of iCapital. Some have been subscribers to its newsletter before internet has even become available in Malaysia. Capital preservation ranks high for these retirees.

However, on the other hand, I would also argue that regular income distribution is equally important for retirees. That is why many retirees will hold portfolios of blue-chip dividend stocks on long term basis.

But I reckon not all retirees are comfortable with stock picking. They entrust ICAP, the only closed end fund in Bursa for their investment. Sadly, ICAP has never paid dividend since its inception in 2005, except once in 2013.

There is nothing wrong for companies that don’t pay dividend as long as the companies can invest their accumulated cash wisely in high return growth business, generating more cash in the future. The market rewards such companies by paying a premium for its share. Investors who need to raise cash can just sell a portion of their shareholding.

Sadly, ICAP is not one of these growth companies. ICAP management chooses to park its huge cash pile in banks for over a decade, now yielding annual return of 3% or even less.

In fact the 3% bank interest has to be net off against 0.75% + 0.75% = 1.5% management and advisory fee on the cash principal; and the bank interest itself incurs 24% Malaysia corporate tax. Shareholders’ return on the cash in bank is actually less than 1% annually!

Following this strategy, the shareholders have waited for 13 years for the great market crash as anticipated by the fund manager. Like a broken clock that forever points to 6 'o clock, the great crash will eventually come, if the dip in Mar 2020 did not count as one. Yes, when the great crash comes the fund manager could pick up cheap stocks. But what about the opportunity cost lost in the 13 years interval?

In fact, any retiree who is not comfortable with stock picking will be better served by keeping say half of their cash in FD (where interest is tax free), and invests the other half through open ended unit trusts on dollar cost averaging basis.

@vidusaka,
I lay down my reasons, backed up with facts extracted from ICAP filing with Bursa, on why the company disclosure is lacking.

Instead of challenging my with counter facts and reasons, you accused me of being paid by City of London (CoL) without evidence. You went on to accuse me of conning other investors!

I probably touched a raw never just because I questioned ICAP management practice!

For record, I have no relation with COL. I also know none of their management and none of their staffs.

I’m a believer in value investing. I dive deep into individual companies. You may check my profile and past comments. Although I don’t usually comment in this forum, you can still find dozens of my past comments discussing on other companies financials, strengths and weaknesses.

You, on the other hand, has posted your very first comment in this forum accusing me of being paid by CoL. That makes me wonder whose interest you’re trying to protect!

Curiously, a few other forum participants have also commented exclusively on ICAP but not other companies. But I give the benefit of doubt that their investment may be mostly or even wholly tied up with ICAP.

But your case is interesting.

Such observation has aroused my curiosity. Now I’m going to study more about ICAP past saga with CoL. I’ll be back with another writing.

@jeydan89,
You said ICAP is undervalued. Yes, it might be undervalued considering its NAV as of Jul 24, 2020 was RM2.88 per share, but it was traded at a closing price of RM2.00. A 30% discount to its NAV!

The trouble is ICAP has been traded at increasing discount since 2008. Based on the filing to Bursa, in the last week of 2008 it was traded at 10.9% discount. By 2013 the discount grew to 20%. By 2018 it was 23.3%. Now it is 30% discount.

ICAP is a classic example of value trap. That is why it attracted activist investors like City of London to accumulate in order to enter the board, hoping to unlock the value by forcing management to return excess cash to shareholders, which the management has resisted for years.

If you like these types of investment you may want to own Media Prima and Star Media. Their current share prices are substantially below their net cash position. By such yardstick, they are even more undervalued than ICAP!

@ahhuat56,
You said shareholders were the one asking TTB to do dual-listing. TTB merely executed their wish. So there is nothing for them to complain about paying the RM6.68m recorded in Q3 FY2020.

Sorry you got it the other way round. Refer New Straits Times article on Nov 7, 2012. It reported that

quote
Capital Dynamic Managing Director Tan Teng Boo said the fund will be listed in both Kuala Lumpur and another country … “As a fund owner, you will have double benefits of narrowing the discount of iCapital.biz share price as well as allowing shareholders to invest globally. However the fund, which has been our baby for the past three years, will not be launched if the three new directors (from City of London) are elected to the board,” Tan told reporters at its headquarters here yesterday.
unquote

Need I say more?

@ahhuat56,
An update about dual-listing project is not price sensitive. For example, if you go to Petronas Chemical IR websites, you can find presentation and webcast where management updates status of on-going RAPID project and their plan for plant shutdown in coming months. The key is disclosure. Companies with good corporate governance will make sure such important information is publicly available for all investors.

If quarterly update is too much of a hassle, companies can still update their shareholders in the Chairman’s statement and CEO’s/MD’s statement section of Annual Report. This is the norm for companies with good corporate governance.

@ahhuat56,
I’ve already searched through every annual report since 2010. Not a single word was mentioned about the dual listing project. No written explanation on how it worked. No progress update.

You mentioned you heard of it in the AGM. I don’t dispute that. I know shareholders asked about the project in AGMs. A NST article in 2012 also reported it. Another article in 2014 mentioned the project was still in “final stages”. But none of the articles could tell how dual listing was supposed to work.

Why the explnation was not provided in the annual reports, which is the most important document for management to communicate to shareholders annually?

Why such an important project had to exist in the memory of shareholders who happened to attend the AGM? And how much details had been revealed?

Can anyone give the definitive account of how dual listing is supposed to work and how will it benefit shareholders?

All my comments above may be irrelevant if the dual listing project was dead years ago with no consequence today.

But this is not the case.

In the latest reporting quarter ended on 29/02/2020, ICAP registered a loss after booking dual listing project expense of RM6.68m or close to 5 sen NAV per share.

Mind you this is no false accusation. You can check out yourself in Note B1, page 14 of the quarterly report. There was just a one liner that ‘recognition of RM6.68 million of dual listing project expenses’.

Has the project been restarted recently? If the answer is yes, what form will it take? How much additional spending in future quarters is expected?

Could it be that the project expenses were capitalized years ago and this was a write-off (given time is bad why not get all the bad news out in one go)? The problem with this explanation is ICAP has zero non-current asset to write off other than investment holding.

But my point is why don’t the management be forthright about the spending and give at least a brief update on the project in the quarterly report? Having spent a sizeable amount of shareholders’ money recently, the project has more relevance to shareholders than repeating the wisdom of Benjamin Graham!

Isn't management transparency a quality treasured by value investors?

@Nepo,
It will be better for ICAP shareholders if the dual listing just dies a natural death.

I suspect TTB floated the idea of dual-listing in 2012 to fend off the attempt by City of London to control the board, which would have forced the company to return excess cash to shareholders. It was probably a not well thought through diversionary tactic by TTB at the time.

Asset management companies grow by expanding internationally. That was why Aberdeen Standard, Franklin Templeton, Nomura, Principal and the like expanded into Malaysia. The expansion benefited their company shareholders. However, their unit trust/ mutual fund investors did not benefit from the expansion. Their fund investors certainly did not pay for the expansion.

For ICAP case, due to the lack of transparency, I see only confusion and potential conflict of interest.

ICAP shareholders are fund investors. The company ICAP engages the service of a fund manager called Capital Dynamics Asset Management Sdn Bhd, where TTB is the founder and MD.

ICAP shareholders do not share the profit of Capital Dynamic, which is another private company and a separate entity. ICAP shareholders do not benefit from Capital Dynamics gaining more business overseas.

Without explaining how the whole scheme works, why should ICAP shareholders pay RM6.68m or close to 5 sen NAV for the dual listing project? Besides, the information is buried in one sentence in the Q3 report footnote! This is not good corporate governance.

ICAP board of directors, headed by Chairman Datuk Ng Peng Hay, have the fiduciary duty to protect shareholders’ interest and explain how the spending will benefit shareholders. They simply cannot outsource the job to TTB or Capital Dynamics Asset Management, which legally is just a fee collecting service provider to ICAP.

I look forward to a full disclosure in the next quarterly report, annual report and AGM.

I hope whoever working in ICAP who happens to read this message will convey back to ICAP management and its board.

@Nepo,
Instead of leaving it to trust, let's focus on the specific subject of dual listing. As value investors, let’s approach it dispassionately based on the facts we already know and debate over the merits.

To recap, the dual listing project incurred RM6.68m in the last reporting quarter. The expense was 1.6% of net asset value then, or close to 5 sen of NAV.

This was a sizeable sum for a small fund like ICAP. Given the importance, curiously, I could not find a single word mentioned about the project plan or progress in the annual reports of the past 5 years. After reading 5 annual reports I just gave up.

It is also amazing that no update was given in the latest quarterly report after 1.6% of net asset had been spent. Instead TTB chose to talk about Covid-19, Malaysia politics, Benjamin Graham and 1929 Great Depression in his long commentary.

I bet if Graham were alive today, he would not have approved such a lack of disclosure. What more this was from a self-styled bottom-up value investor who supposedly would demand the highest disclosure standard in his invested firms.

My second concern is about the merit of dual listing. After further digging, I found a 2012 NST article where TTB said dual listing would narrow the fund NAV discount. I note TTB only mentioned his idea before 2012 AGM in response to the threat of City of London gaining board seats.

But how would dual listing narrow the discount? TTB did not elaborate. Another sign of insufficient transparency.

But we can walk through his idea. Let’s assume ICAP has a second listing in Singapore. New shares are created in SGX. Will all the new shares be distributed to existing Malaysian shareholders, such that they can trade in both Bursa and SGX? But if trading in one bourse could not close the discount, how could dividing the trading volume in two bourses do the trick?

OK, may be new shares will be sold to new Singaporean investors through an IPO. But how could ICAP justify raising fresh money from new investors when it has not made use of its existing cash pile that has been sitting in the bank for over a decade? And I also don’t see how having another set of shareholders could narrow the discount.

If TTB acts in the best interest of ICAP shareholders, he owes them a detailed explanation before spending their money on the project!

He should also tell shareholders how much more he needs to spend after the RM6.68m expenses.

Can anyone explain the background of the dual listing project?

According to Q3 financial results (quarter ending Feb 29, 2020), ICAP registered a loss after taxation of RM6.3m, or a loss of 4.52 sen per share.

The main reason was found in note B1 (page 14). Expenses of RM6.68m were recognized for the dual listing project. However no explanation or progress update were given by the Fund Manager.

The Fund Manager was more keen to remind "market-timing investors" about Covid-19, most serious global economic contraction since 2019, and Malaysia political turmoil (refer Note B3, page 15-16).

But applyng my own value investing approach to ICAP, I'm more interested to read ICAP plan on the dual listing. I want to know the progress and how it might be affected by current situation.

Can anyone explain this dual listing stuff?

How can dual listing possibly turn around ICAP fortune given until the last reporting quarter ICAP still had 60% of asset tied up in cash?

Being cynical, I do notice cash also pays towards the management and advisory fee of 1.5% per annum.

I have a question.

Refer 2019 annual report (page 38). Interest and dividend income were RM9.8m and RM4.9m respectively. After deducting RM8.7m expenses (including RM7.2m to fund manager), profit before tax was RM6.1m. Income tax was RM2.1m. Effective tax rate was 34%. This was higher than the 24% statutory tax rate.

More details were provided in Note 12 (page 45). It showed the dividend income RM4.9m was tax exempted. But there was no exemption for the RM9.8m of interest income.

The bulk of ICAP taxation was contributed by the non-deductable expenses of RM1.8m. Any idea what it is?

Quarterly dividend is reduced from 3.5 cent to 2.5 cent, reversing the previous trend of increasing dividend. Quarterly paytout ratio is reduced to 23%. But I think it's fair that the management wants to be conservative around this time.

After adjusting for gain/ loss of forex, derivative and PPE disposal, profit before tax for 2020Q1 is about the same as 2019Q1. However I agree it's a commendable result.

Dividend is cut from 35sen to 25sen to "preserve" cash!

@Gemstar, thanks for your sharing.
I also use discounted cash flow model for the purpose of double checking. I’ll vary the assumed initial FCF, growth rate, perpetual growth, discount rate to get an idea of different fair values under different assumptions. I also reverse calculate from the current price to understand what are the assumptions implied in the current share price.

After doing one company, the exercise can be extended to other companies (although very time consuming). While I don’t believe in a precise fair value (that doesn’t exist), I think such exercise helps to understand relative attractiveness across different companies.

But back to your valuation, I have a few questions/ comments:

1. Your stage 1 is based on 10-year period, not 5 years as mentioned

2. Your discount rate of 9.8% seems fair. I’m wary of using beta to calculate discount rate, as beta changes over time when share price swings. But I think a 10% discount for a conservative company with a huge net cash position is fair.

3. I’m skeptical about the year 2020 FCF projected by the analyst you mentioned (BTW which analyst?). I guess the projection RM515.72 million is related to the trailing 12 months FCF which is RM512 million. But during the MCO of at least 8 weeks, sales & factory operation across all businesses will be severely impacted. There is also potentially weak demand post-MCO. Vietnam associate may face similar challenges. The company may bounce back in 2021, but I think 2020 will see a much lower FCF than the past 12 months.

4. Your FCF growth rate assumption starts at 2.93% in the first year, and it grows faster and faster until 3.4%, and the perpetual growth rate is the highest at 3.42%. Such an assumption is unusual because all businesses face increasing competition over time. A prudent approach might be to start with a higher growth rate, but settle with a lower perpetual growth rate at the terminal stage.

Try varying those assumptions and the fair value can differ substantially.

Having said that, I myself cannot avoid such psychology. What I do is to compile a total paper profit/ loss on each stock based on current price. Looking at number, I will know average down does not reduce any paper loss.

Average down is a risky psychology. Better to treat each new buy and sell decisions on individual basis. Forget about past sunk cost.

BAuto doesn't delay its financial results announcement. Its quarter ends on Jan31. That's why it releases in March instead of Feb. Anyway the result is weak, and this is the quarter after its pricing issue has been resolved, but before being hit by Covid-19. Expect worse results in Jun.

Agree. For long term investment, the focus should be on the fundamentals; that the company's long term prospect remains healthy and is not affected by current events.

Speculators probably won't buy this stock on margin given its share price is slow-moving? May be fund managers need to dump the stock to meet redemption demand or raising cash to buy more attractive bargains?

Today the closing price is RM6.78. I wonder what kind of scenario it has priced in. Factory and dealer shops' closure due to Covid-19 outbreak? Deep recession?

It's impossible to predict the bottom. But given HLIND's strong balance sheet, it should survive even a deep recession.

As of the lastest quarter, net cash is RM1,254m - RM32m = RM1,223m, or RM3.9 per share. FCF is RM1.6 per share. Even if it just breaks even this year, but recovers next year, I believe there is still a good margin of safety.

For long term investors, the dilemma may be prices for other stocks have also fallen a lot. It's hard to judge the relative attractiveness among them. But HLIND at current price seems quite attractive.

The share price of HLIND has been solid until today. While the market panic, HLIND stock price remained firm. But today it dropped 15%. In contrast Oriental dropped about 3%.

It's unclear what might be the firm specific reason contributing to the sharp fall other than general market panic and pessimism over the economy.

What's the possibility that both active & passive fund managers who tracked the MSCI index did not fully dispose their holdings when HLIND was excluded from the index a few months ago, and are forced to dump now?

@enigmatic ¯\_(ツ)_/¯, you might be right. Grabfood and the likes must have contributed to some of the volume. But I'm not sure by how much. Wonder if there is any industry data that we can refer?

Yes, deflation is not only bad but much worse than inflation in my view. While inflation might be bad for consumers, businesses can usually pass on the rising cost to customers. With deflation the economy might just get sucked into a downward spiral, where consumers don't spend --> business contracts --> workers retrenched --> consumers have no income to spend ...

But I don't think deflation is a worry for Malaysia. Although the official inflation rate has been low for several quarters, I don't think it will turn into deflation. Afterall we keep hearing people complaining about the rising cost of living.

If the oil price stays low, it will function a one-off tax cut for importing countries. It shall benefit oil importers like India. India Reserve Bank can cut rates with less worry about inflation.

But low oil price is a double-edged sword for Malaysia. Although the government saves from reduced petrol subsidy, its oil revenue from tax and Petronas dividend declines faster. Lower USD revenue from oil export will weaken MYR. The weak MYR, if persistent, can cause higher inflation due to rising import costs. It also constraints BNM's ability to cut OPR further to stimulate the local economy.

The more expensive Yen is not good for BAuto. However given the stock price has dropped so much, may be the worst-case have already been priced in? The historical dividend yield is 14%. Even if the dividend is cut by half in the coming 12 months, forward DY is still 7%. Can we assume that as long as the economy doesn't get into a recession, BAuto will be able to stay profitable and continue distributing dividends?

The Malaysia motorcycle data revealed in Annual Reports are Malaysia industry sales volume:

Fin Year Volume Growth
FY2019 573,000 16.0%
FY2018 493,966 4.4%
FY2017 473,000 10.0%
FY2016 430,000 -10.4%
FY2015 480,000 -13.8%
FY2014 556,680 -6.0%
FY2013 592,126

Apparently Malaysia volume last peaked in FY2013. Then it contracted for the next 3 years before growing again in the recent 3 years. So HLIND impressive sales in the last few years are helped by overall industry growth.

However, what I don't know is what has driven the national growth in the past 3 years, and what has contributed to its decline in years before. Note the swing in motorcycle sales is larger than vehicle sales.

Without understanding the past contributing factors, it's difficult to project whether the tailwind enjoys by the company in recent years will continue.