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Tuesday, May 15, 2007

OSKVI - A Special Closed End Fund?

You may be aware there are 2 Closed End Funds (CEF) currently listed in Bursa – ICAP and AMANMFB. If you are new to CEF, basically, CEF works like a mutual fund, except it is closed to new investors, and so, after the IPO closing date, the pool of $$$ managed by the fund manager is fixed. At the starting date, the fund manager then carefully select securities to invest. If the stock price rise, its does well and vice versa.

ICAP (ICapital.Biz Bhd)
- Between ICAP and AMANMFB, I would regard ICAP as the more popular fund amongst investors.
- To me, its long-time popularity is due to many reasons centering on its superior past performance. It has enabled the MD to appear in the both local and international business news with greater publicity. Its stock advisory service in both print and internet form is popular as a result of it, so, not surprisingly, the fund is generally popular with investors.
- In the CEF business, success is measured by NAV (Net Asset Value) growth, or the growth in the market value of its investments. Note – not book value. Almost nobody measures CEF by book value. Doing so can be potentially hazardous to one’s financial health.
- For ICAP, it has successfully grown NAV from $1 to $1.63 in just 1.5 years. This is a truly impressive performance, if they can sustain this over the long term.
- Its popularity is reflected in its share price trading at a premium to NAV.
- However, the premium % is never a constant nor guaranteed. For CEF, the premium % varies over time, and ICAP is not immune. Historically, ICAP has more often traded at a premium than a discount, and is currently trading at a premium around 1%-3%.
- To a rational investor, the premium% is a reflection of investor’s confidence in the Fund Manager to grow its NAV in the future.

AMANMFB (Amanah Millenia Fund Bhd)
- AMANMFB is a much older fund (nearly 10 years old) than ICAP.
- Its past performance is rather poor. Latest NAV at 11 May 2007 is only $1.215 compared to $1 ten years ago. The main reason is because AMANMFB started the fund at a bad time, when KLCI was close to its peak 10 years ago.
- Still, a poor performance is a poor performance regardless of the reason. Investor’s long-term disappointment is reflected in the share price. The share is still trading at a discount to its NAV.
- However, what is interesting is that in the last 6 months, AMANMFB NAV has begun to turn-around, and grow again.
- As a result (together with speculation of higher liquidation payout & large interest from foreign investors), we have seen the discount% gradually reducing from over 20% to 13%.
- This has resulted in “double-whammy” effect on AMANMFB share price. The share price has increased faster, from the rise in NAV and the reducing discount%.
- Like all CEF, the discount% (or premium%) varies over time.

Therefore, we can see that in the CEF business, superior performance in growing NAV (or Intrinsic Value) is very rewarding. Not only does increasing NAV (underlying asset values) results in increasing share price, the increasing fund popularity with investors also result in an increasing premium % (or reducing discount %) to NAV. This creates the “double-whammy” effect on the share price.

Ok. But what does this have to do with OSKVI?

Well, as the title suggest, I believe OSKVI is really a Special Closed End Fund disguised as a company.

There is a saying that if something looks like a duck, walks like a duck, swims like a duck and quacks like a duck, calling it a chicken or a goose doesn’t change the fact that at the end of the day, it’s still a duck … Sounds logical right?

Well, having looked at OSKVI in detail, it seems to me that OSKVI looks like an Enhanced CEF, walks like an Enhanced CEF, swims like an Enhanced CEF, and quacks like an Enhanced CEF. So much so, that even if Bursa & the regulator calls it a company (and impose company type reporting without weekly NAV reporting), at the end of the day, it should still be an Enhanced CEF. Makes sense?

Logically, if they are really similar, then, the financial characteristics and financial statements should look similar right? Well, let’s compare OSKVI financial characteristics first with ICAP.

The similarities are more striking when comparing Balance Sheets:

Comparative Balance Sheet
To make the exercise a bit more interesting, I have kept the names hidden first.

See the similarities between the 2? Almost identical in proportions and relationships between Assets and Liabilities. Try to guess which column is ICAP and which is OSKVI. Look at each line carefully:

1. Investments and Cash forms at least 99% of Total Assets for both.
2. Current Liability less than 1% of Net Assets for both.
3. Borrowings nil for both.
4. Net Asset reported in the Balance Sheet is at cost. Not representative of market values of listed securities for both.
5. NAV (market value) is larger than Book Value (at cost), due to Unrealized Gains for both.
6. Unrealized Gains are significant. In fact, one of them is much larger than the other

So, how?

Which one is ICAP? Which one is OSKVI? Can you tell the difference?

Actually, if you had studied my previous article, you should be able to identify the correct answer instantly from the size of the numbers. If you had picked the RHS column for ICAP (since it has a bigger Unrealized Gain), then, your pick would be wrong.

Yes, OSKVI has a much, much larger unrealized gain than ICAP, even though it is not a CEF. Actually, it is not surprising due to the highly successful listing of its Mesdaq “associates” like GPACKET, etc. OSKVI is worth a lot more than what Book Value would indicate, and a large amount of this extra net worth does not depend on distant future events, but are quite real today.

Ok, here’s the full table, with labels, as well as additional section below to compare NAV vs Share Price to show the premium % (or discount %) size.

Quick observations:
1. ICAP share price is closer to NAV than BV.
- At 31 May 2006, ICAP share price = $1.25. NAV = $1.13 (12 sen lower). Book Value = $0.99 (or 26 sen lower).
- At 9 May 2007 (NAV date), ICAP share price = $1.65, just 1% premium over NAV.

2. As expected, OSKVI share price doesn’t reflect its NAV at all.
- At 31 Dec 2006, share price = $2.80. NAV = $4 ($1.20 higher). BV = $2.2 (60 sen lower).
- At 11 May 2007, OSKVI share price = $2.4 , which is a large 35% discount to NAV.
- Therefore, at current prices of $2.38 which implies 35% discount, it appears Mr Market is penalizing OSKVI much worse than when AMANMFB didn’t perform for the last 9.5 years and provided negative returns.

Measuring OSKVI’s Past NAV Growth
Ok, if OSKVI is a special type of CEF, how has its NAV grown in the past?

According to the company website, OSKVI IPO raised $175.5M from shareholders on August 2004. The stock was listed in Sep 2004, or nearly 2.75 years ago. During this period, that $175.5M shareholder equity (or initial NAV) has grown to nearly $600M in 2.75 year period. Standardizing, for the same base line as ICAP, that would be equivalent to ICAP growing from $1 to $3.42 over 2.75 year period. That’s mighty impressive for a CEF isn’t it?

And the best part is that OSKVI’s future growth is not over yet. In Apr 2007, the company reported to the press that it intends to grow its funds to $1B. To me, this has a high level of believability, if one factors in the China listing venture together with the Singapore listing venture, as well as allowing for Mesdaq and stock market general growth over the next 2 years, not to mention growth in venture capital industry domestically and within the region, it's plans to expand into rapid growth market like Vietnam, etc. etc.. At $1B NAV, it would be equivalent to ICAP growing to $5.70! (from $1 originally).

Or put another way, can AMANMFB or ICAP really generate the same NAV growth performance like OSKVI?

So, I submit to you - is this rational market pricing, to price OSKVI ignoring its NAV and ignoring its future prospects?

Some Concluding Comments For Consideration

To me, it is clear that OSKVI has been mis-priced in a large manner. Why?

1. OSKVI is really an enhanced closed end fund in disguise. If I were a private buyer, NAV matters, and hell, its current projects and future prospects matters too (after due diligence of course). In fact, its proven ability to identify good and promising businesses to list, and its ancillary services that it provides are real enhancements to normal CEF, that makes it a fairly unique CEF.

2. Bursa reporting doesn’t report the weekly NAV for OSKVI, which clearly has resulted in the market mis-pricing OSKVI.

3. However, just because of a long-term reporting deficiency in 2. is it rational to assume that OSKVI doesn't have unrealized gains? Is it rational to let weekly NAV reporting to decide whether OSKVI have or don’t have unrealized gains in its books?

4. Is OSKVI’s past performance so bad that it deserves to be priced at a much bigger discount to NAV than AMANMFB?

5. Is OSKVI’s future prospects so bleak that they deserve to trade at huge discounts to its NAV?

6. Is OSKVI’s future NAV outlook worse than both AMANMFB and ICAP?

7. IF OSKVI were to suddenly report NAV on a weekly basis, would you suddenly decide that instead of $2.4, the stock is now worth a lot more? Is that rational?

8. Will the mis-pricing lasts forever?

9. Will it take a long time before mis-pricing is corrected?

. When OSKVI is successful in growing its NAV, and the market decides that instead of applying a discount%, it should apply a premium%, what effect would it have on OSKVI's share price? Is a double-whammy effect (both NAV growth and reducing discount% effect) worth nothing?

11. If it takes a long time (e.g. 2-3 years) for a huge catalyst to appear (I expect the usual news effect to occur from time to time), is the current dividend yield of 8% gross and 6% net attractive compared to current fixed deposit rates?

12. If you don’t intend to sell over the next 2 years, what is the downside and what could be the potential upside?

13. Even if one's conservative Target Price is say $3.2 (= 80% of its NAV of $4), and with current market price at $2.40, that is equivalent to 33% expected return … Is OSKVI a sell with this sort of potential returns? A hold? Or a Buy?

What do you think?

As usual, use your own judgement, and invest (buy, hold, sell) at your own risk.


grahamsmun said...

I think the association of OSKVI to NAV of a closed end fund is the right approach.
There is a huge discount when u take in the mkt value of the stockholding agst the book value this give a hidden reserve.

The risk reward will favour investors bcos of this large discount, however there is 1 caveat on this approach is that the group is holding large position of Mesdaq counters which accorded high valuation by the mkt agst its real intrinsic value.

If u adopt flow through earnings and intrinsic assets holding of Warren Buffet and accord reasonable P/E of say 13 times as a benchmark in valuation the huge discount will drop drastically.

Valuation of OSKVI is unique in the sense ,that MR Mkt overvalue the Group portfolio, but yet the Mr Mkt did not overvalue the Group itself.

Although there appear to be large margin of safety but based on intrinsic value the m.safety will reduce tremendously.

In view of that above i still think that investment in OSKVI is still positive, but not on the point of undervaluation ,but more towards the mkt for the over-valuation portfolio will perform based on current mkt condition and the group is able to cash out.

Seng said...

Dear Grahamsmun,

Thanks for your comments.

It seems to me that your reasoning centres on the principle that OSKVI's stock holdings (e.g. GPACKET, etc.) should be valued using a "safe" P/E of 13 (or another smaller number) instead of Market P/E (i.e. the P/E implied by current GPACKET price).

Actually, this is not the first time I've heard this line of reasoning. Let's call this the "safe P/E approach". However, I must say that I have a few fundamental issues with that for the following reasons.

1. On 19/4, OSKVI disposed 3.5M shares of GPACKET via an off-market transaction. The stock price on that day ranged from $4.96 to $5.05. My expectation is that OSKVI should receive close to the market price (say 95%) for the disposal. That is already inconsistent with the "safe P/E" approach, as sales fetch market prices, not "safe price".

2. "Over-valued" (and "under-valued") stocks occurs not just in Mesdaq but also in Main Board and 2nd Board. When investors buy ICAP or AMANMFB, they don't necessarily apply the "safe P/E" approach to ICAP and AMANMFB. So, why OSKVI? Globally, closed end funds are valued at NAV, not "safe prices". So, why OSKVI?

3. Actually, the NAV of ICAP and AMANMFB fluctuates too. If OSKVI holdings are volatile, then, this should be reflected in its NAV. At 31/12/06, NAV = $4. At end of last week, NAV = $3.7 - it doesn't look that volatile. Actually, this is not too surprising to me, because OSKVI has other holdings which provides diversification benefits. For example, whilst GPACKET and MTOUCHE has been falling, EBWORX has gone up from $0.33 (at 31/12) to $0.80.

4. I also have a problem in applying a P/E of 13 for a rapidly growing stock. Take GPACKET as an example. Its 2006 earnings grew over 70%. For Q1/07, it grew 26% over Q1/06. The market frequently changes its mind about GPACKET's future growth rates, but valuing GPACKET at $1.25 (or a quarter of $5) does not make sense to me, if one wants to try to justify OSKVI's current price. The gap is simply too large. Maybe $3.50 or $3 is about as low as any reasonable GPACKET buyer would consider (I suspect over 90% of the market participants would consider GPACKET a steal at $3-$3.50).

The only reason why I think someone would adopt a "safe price" approach is because they don't have an underlying belief that OSKVI is a Closed End Fund. If the underlying belief is strong, then, they will put a lot of weight on NAV. The reason why the belief is weak is because OSKVI and Bursa don't report weekly NAV figures now or in the past ...

However, with computers readily available, it is actually a relatively simple exercise to do a rough estimation of OSKVI NAV. I think most fundamental investors can set up the spreadsheet in less than 15-30 minutes, and it would only require 1-2 minutes to update the price each day. Anyone who did this would be able to see that OSKVI NAV is much higher than its current price.

grahamsmun said...

Dear Seng,
Your point mentioned are valid and acceptable in fact i m also a shareholder of oskvi but my key concern is also a valid point.
Green Packet the single largest investment of the Co & it is trading at a very high PE although there is an element of growth it is difficult to ascertain the true growth position.
Perhaps i may be to conservative using Pe 13, lets take a more aggressive stand says we accord PE of 25 times this means the share price of GP will be Rm 2.50 based on eps of Rm 0.10.
Since majority investment of the co is Mesdaq u can find quite similiar type of investment like GPacket.In addition the co is in a difficult position to dispose the share bcos of large holding in terms of %, a slightly diff position compare with Amancap.
In view of that,the exit strategy, largely depend on placement of blocks which depend on a favourable mkt condition and promotion.
Thus i will say that Oskvi has a large speculative element in it, if u mark it to the mkt however having said that i m quite comfortable with my investment although the margin of safety has dropped after we perform the exercise, as i m relying on the good management and continous good stk mkt condition.
As a value investor based on graham principle what i m driving at the expectation of undervalue should be slightly downgraded from extremely undervalue.
On the whole this is still a reasonable good investment & i feel the management in stockbroking line should be handle the tricky part.

Seng said...

Dear Grahamsmun,

Thanks for your comments, but I'm not entirely sure what you mean by "slightly downgraded from extremely undervalue." in your 2nd last paragraph ...

To me, OSKVI is worth more than its yesterday's updated NAV of $3.77 (see my new posting this morning on NAV). Yesterdays' closing price = $2.40. That's 57% potential upside, which is large.

I noticed you are still focused on "owner's earnings" approach in your GPACKET example. In general, Buffett is right because he intends to hold his businesses "forever", and present US accounting rules do not allow Berkshire to fully report earnings. So, he has no choice but to present an alternative set of "owner earnings" figures, so that his shareholder can make a reasonably intelligent assessment of Berkshire's Intrinsic Value.

However, I find this not strictly comparable to OSKVI which I view it as a closed end fund. Also, US markets tend to value Berkshire at a premium (not discount) over its NAV, because Berkshire with the "Buffet factor" is worth more than just current NAV.

I am less concerned about OSKVI's large holding of GPACKET since it is only 17% of total GPACKET shares outstanding. In the last 12 months, GPACKET total volume traded in the open market (excluding off-market transactions) is 139M shares. OSKVI owns about 74M shares in total. It should not be difficult for a professional like OSKVI to dispose its entire holdings over say 5 year period (or say 14-15M shares p.a.), at close to market values. Your conservative valuation of $2.50 assumes that over the 5 year period, GPACKET price will fall from $5 to close to nil, to have an average of $2.50. I personally don't think GPACKET will fall to nil in 5 years time.

Nevertheless, you can of course choose to be conservative in your own personal valuation.

I have just posted a more detailed comparison of OSKVI NAV vs Share Price. Do take a look at there first, and then let me know your own assessment of OSKVI's Intrinsic Value.

Thanks for sharing your thoughts, as your concerns are actually not uncommon.

Kind regards,

PS. Re your 3rd last paragraph "Thus i will say that Oskvi has a large speculative element " - perhaps you should take a look first at my new posting on OSKVI NAV, as I'm not convinced there is a large speculative element. Instead, the margin of safety seems quite fat and nice, and I can certainly sleep very, very soundly with 5% of my stock portfolio in OSKVI.