Good Deals, Bad Deals, Win-Win Deals

The way a company handle acquisition and disposal of assets tells us a lot about management's savvy and the way they would handle corporate strategy.



London Biscuits / Lay Hong / QL

I like QL and London Biscuits, but following the deal, I would have to take London Biscuits off the list. I liked their expansion plans, but obviously London Biscuits had no inkling of how to leverage, improve, rebrand, strategise their acquisitions. I doubt there was any positive value add management input from London Biscuits. Since they acquired Lay Hong, which was a good deal relative to Lay Hong's NTA, nothing has changed, Lay Hong was still barely profitable but trades at a 50% discount to NTA. Its share price did not budge much from the time London Biscuits bought them a few years back. Why buy in the first place??? Yes, bought at a good price, so what, you loaded debt to do it, unless you think you can increase value in Lay Hong, or the earnings from Lay Hong would more than cover your interest cost, why buy?

Now, Lay Hong is a lot better than TPC, why two egg companies? Both also not profitable and you sell the more attractive one. How do shareholders of London Biscuits view your selling of Lay Hong, and then to see Lay Hong's share price double literally in a matter of days??? What does that tell you???

That was a good deal by QL but a very bad deal for London Biscuits. Was it to pay down debts? Your debt level was just as high a year ago, and almost the same as when you loaded debt to buy Lay Hong, what gives?

I don't think its necessary to bring down debts by selling Lay Hong. They have been poorly advised. If you know there is deep value in Lay Hong, you should be selling close to NTA. If the buyer is not willing, then take QL shares, not cash. At least you can ride the unlocking of value in Lay Hong. Now London Biscuits look very silly indeed. If anyone asks London Biscuits about the Lay Hong deal now, they can only shrug their shoulders. Sigh...

Cocoland / F&N

Win-win deal. Fun is over when investors realise that F&N bought their stake at such a deep discount. Couldn't fault Cocoland as the deal would secure a big customer and a platform to emlarge earnings. This shows Cocoland management having the vision to forgo a bit to gain a lot. Look at where their share price is now.

3A / Wilmar

Win-win deal. Same as above. If I was 3A, I would have done the deal at 50 sen even, because the platform would be so enlarged and the prospects improving by multiples with just Wilmar inside.

MFCB / Jadi

It may not make sense to many but I think MFCB is on a winner and will be able to leverage and extract more value by having Jadi into its stable. Win-win deal.

Management needs to know when to do deals and using the right way. It can be cash, convertible notes, shares issuance, even a put and call deal ~ each option is important in its own way depending on how things would flesh out following the deal. An asset may be multiplied in a different company's ownership. There has to be consideration of "opening of doors", "whether you can take the asset to the next level", etc...

In the same note, advisers and bankers should be able to advise these deals better and not just do the deals for deal making sake, just to earn some fees.

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Where Top Companies Will Be In 3 Years?

If you were to chart CIMB against Maybank or any other local banks on its progression over the last 3 or 5 years, you'd begin to understand the importance of management strategy. Too often research reports focus on just the financials to make their calls. Financials only indicate data, data can look attractive when compared to peers but it does not tell us anything about management ability. Great strategy and execution will mean that the stock commands or deserves a premium rating. Too often analyst reports do not even write a view on management 's ability in execution and strategy, and/or management's grasp of its industry, competition or soundness of its business model. To me, that is the most important consideration when going to bed with a stock in a big way. Its different when you are punting or trading, but if you are being a genuine investor for a prolonged period, rating management is the number one criteria.

If you have a look at where they are now in terms of market cap, you can do a good guesstimate on where they will be in 3 years time just based on the perceived management's ability, as that will tell us a lot on deployment of resources, ability to execute, ability to manage costs and improve margins, the ability to navigate and plan ahead of crisis and opportunities, etc. Of course another big factor will be the industry they are in as certain industries will grow faster than others.

Well, in my view, CIMB will maintain its #1 position. May I add that I still think CIMB will merge with Public Bank. Maybank will slip from its third position to maybe 6th or 7th - even with recharged management, its structure is too unwieldy to effect significant changes to culture and transformation of processes.

I predict IOI Corp will rise from #5 to #3 owing to a strong bull phase for soft commodities over the next 2-3 years. Tenaga Nasional will gradually move down the ladder as other stocks are managed for growth and profits, and TNB is managed for many other reasons than just profit and growth factors.

Genting at #8 will move out of the top 10 as I see massive consolidation in the gaming industry, too many players, too much money money being poured into the industry. AMMB may move up slightly, not aggressive enough in human resource management, top people are not empowered enough to act and raise the bar.

Maxis may make it into the top 10 but at the expense of other providers. PPB Group will no longer exist as a listed vehicle, probably shuffled to under Wilmar. Telekom Malaysia will drop a lot faster than we can say "what tf" to high teens.

KLK will be KLK, staid, slow and predictable. Even if soft commodities rally, their beta will be lower than for IOI. YTL Corp will stay there, but YTL Power should charge towards the top 10. Great long term assets that can only grow inline with replacement cost, its good yield will mushroom its market cap base towards the RM10bn mark within 3 years.

DIGI may have reached its peak in terms of branding cycle, they were in front of the curveball. Now, quality issues will see them lose out to other providers, have you used DIGI broadband??? Expect to dip from #18 to out of the top 20.

Possibly the biggest riser will be HLB, its at #21 and would be seen as the "great alternative" to Public Bank should you know what happens. Its branch base and deposit base have gone past critical mass which would see them enjoying the same stellar growth path as Public Bank did back in the 90s. I expect it to jump from #21 to #15 or higher in 3 years.

UMW, good strategy into critical O&G and China, I expect UMW to just make the top 20 from its current #23. B Sports Toto, still under valued in terms of its games potential, should move up a bit. Tanjong, same, should move up a bit. MMC will see a gradual dropping out of the top 30 for reasons I would be better off not elaborating.

RHB Capital, is in a dicey place. Uncertainty among ownership and seeming uncertainty over management's strategy and positioning makes this a strong candidate for consolidation. RHB Cap should no longer exists within 3 years (not that its very bad, but that it would have been bought out by then).

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