Global Investments

[sykn]

Great analysis! I am vested, but I don't have very good vibes about this counter as I don't quite understand the business, partly because they don't disclose a lot of things. Thanks much.

[sgd]

I see ST Asset Management is owned by Temasek, if temasek don't have full disclosure how to expect this to be disclosed? haha

Anyway my thoughts on this, most companies on sgx generally make 10-20% net profit of revenue a year but GIL made 80% net profit which is exceptionally high I wonder if anybody else has noticed this.

26% aft tax net profit of revenue in 2010
59% aft tax net profit of revenue in 2011
103% aft tax net profit of revenue in 2012
80% aft tax net profit of revenue in 2013

There are companies listed on sgx make close to this level of profit but when you look at their balance sheet it usually has a mountain of debt.

For GIL I see

current assets to total debt is over 10x
total assets to total debt is over 24x

This is a very low debt high profit company.

Another thing I noticed is this company pays very low income taxes, many other companies have good earnings but after income taxes the net profit level goes down.

The question of rights issues, I guess the company could increase borrowings, but borrowing have to pay interest and that will impact your profit and also maybe dividend.

rights issues on other hand leads to share dilution and lower earnings per share and affect dividend but it does not impact the net profit.

It will be nice to if company don't have either borrowings or rights yet is a cash cow but is that possible or not? if you follow the quote you need money to make money.

Instead of growing progressively, the management could also not do any rights issues just borrow to the max and increase assets under management to reach their targets and goals then start collecting fees and performance bonuses. I don't really know how mutual fund works but is that possible?

[Nick]

1) I don't think it makes sense to make a blanket comparison on GIL viability as an investment by simply using its net margins for 2 reasons - 1) The net profit figures are inflated by numerous one-off items and 2) An investment fund should be a high margin business since its main expenses is primarily management fees and administrative expenses as a listed entity. The revenues are interest and dividend income - there is no COGS for such a revenue stream.

2) It isn't abnormal for a mutual fund to be unleveraged. The bulk of the assets are in listed equities, bonds and CDOs. It will be very risky to borrow substantially to buy minority stakes in such liquid investments with volatile valuation. Its predecessor had to suspend distributions to repay debt during the GFC.

3) I am not too certain if borrowing money will be a fast way to grow AUM. I would agree with you here that equity fund raising is the fastest (and safest) way to raise AUM.

4) Personally, I was not impressed with their investments in listed bonds and equities. I felt this was an asset class which I already had access to so it didn't warrant investing in such a mutual fund. If they were purchasing operating assets or had built up a track record in CDO / distressed assets investments, it will be a different story. But that's just me.

5) Moreover, I felt the Management could have given more details on their investments ie Top 10 holdings in their listed investments.

6) Nonetheless, it trades at a substantial discount to its NAV and if it deploys its investments from lower yielding assets to riskier assets, the dividends may be raised. That's how I saw it then and now.

(Not Vested)

[Boon]

In addition to lack of disclosure in what they have invested in (Listed equity + bonds), another concern of mine is the high activities of “trading” as evidenced by high turnover of its financial assets as % of total net asset – this is high at least by my standard.

As at 31-December-2013

Total Net Asset= SGD 270 million

Purchase of financial assets = SGD 232.9 million (86% of total net asset)

Proceeds from disposal of financial assets = SGD 146.4 million (54% of total net asset )

(not vested)

[Nick]

In addition to lack of disclosure in what they have invested in (Listed equity + bonds), another concern of mine is the high activities of “trading” as evidenced by high turnover of its financial assets as % of total net asset – this is high at least by my standard.

As at 31-December-2013

Total Net Asset= SGD 270 million

Purchase of financial assets = SGD 232.9 million (86% of total net asset)

Proceeds from disposal of financial assets = SGD 146.4 million (54% of total net asset )

(not vested)

Do they earn acquisition and divestment fee for each trade ?

[valuebuddies]

STAM do charge acquisition and divestment fee but it was not known that whether on each and every trade, overall the fees paid to STAM is about 2.2% based on the average AUM (opening + closing / 2) and I think it is still fair. I have also been trying to locate the management mandate as well as more information on its portfolios but fail, I guess the fund manager won't release the portfolio easily to public especially if they are appointed under the discretionary mandate.

[Boon]

Fee structure could be found on page 10 of AR2009

Acquisition Fee
1.0% of:
- Total risk capital invested by the Company in the investment; and
- Percentage interest in the investment acquired by the Company multiplied by the quantum of debt facilities of the investment arranged by STAM in relation to the acquisition (but excluding debt provided by the Company).

Divestment Fee
Existing Asset Portfolio: Nil
• New assets: 3.0% on net disposal proceeds, subject to profit after divestment being greater than zero.

If the Divestment Fee payable is greater than
the Company’s profit after divestment, the
Divestment Fee shall equal the Company’s profit
after divestment.

(not vested)

[EnSabahNur]

The lack of transparency of GIL is a negative point for me. I understand that the manager would like to keep their cards close to their chest, but it doesn't help unitholders or the market who have lesser and lesser information to make an informed judgement about its worth.

The fee structure is another problem. The Acquisition and Divestment fees seem to be more appropriate for a REIT than a fund of listed and unlisted securities. Moreover, as it purchases more liquid securities, it does not make sense for the fee structure to remain as it is. It might be better to change it to resemble a normal unit trust, or at least a hedge fund.

[Boon]

No kidding !
________________________________________________________________________________________________________________________________________________
The Governance and Transparency Index 2013 (“GTI 2013”) was released in The Business Times on 2 August 2013. GIL’s ranking improved from 82 in 2012 to 25 in 2013. The Company’s base GTI score was 68 points and was given a further 10 bonus points, totalling up to a final score of 78 points in comparison to last year’s final score of 47 points. GTI is jointly launched by The Business Times and the National University of Singapore’s Centre for Governance, Institutions and Organisations. Sponsored by CPA Australia and supported by the Investment Management Association of Singapore, it assesses the financial transparency of companies based on their annual announcements.

From page 12 of the FY2013 Result Presentation
http://www.globalinvestmentslimited.com/...tation.pdf

[D123]

3) On 8 January 2014, the Company announced that the Manager is entitled to the Manager Incentive Fee of SGD 1.215 million (on top of base management fee for FY2013 = SGD 1.573 million). This is the first time the Manager will be receiving the Manager Incentive Fee since its appointment on 25 November 2009. Interestingly, this was a “share price based incentive scheme” which I do not like.

To add, the incentive fee is first derived from the excess of share value over the threshold value, and subsequently, after a benchmark return of 8% is factored in. Share value refers to an estimate of the market cap of the company, assuming that any dividends paid are reinvested at the closing price of shares on the payment date of such dividends.

The threshold amount on the other hand, is estimated using the benchmark they set when they first took over (S$0.36) and adjusting it downward with each subsequent rights or scrip issue. The issues in the past were all made at discounts to prevailing market prices.

Given the above, it seems that if you want to be aligned with management's interests, then you should be taking up all rights and scrip issues offered.

Detailed explanation of the fees payable to STAM can be found in the following SGX announcement dated 6 Nov 2009, under Appendix B:
http://infopub.sgx.com/FileOpen/41b.GILS...eID=111695