Facts Behind the Right Issue of BW Plantation

In last week article about when we, as investors, should buy, hold, and sell our holdings (we call it portfolio rebalancing), I said that you can buy certain stocks if there is an extraordinary event that could occur at any time (so you would not need to wait for the end of the month, let alone the end of the year), say if there are certain stocks whose prices suddenly plummeted. Coincidentally, a few days ago there was another 'extraordinary event', where the stock of BW Plantation (BWPT) suddenly drop from 1,000 in early September to 460, or lost more than half of its market value in a matter of weeks. Even worse, the trading of the stock is now suspended!

Since the beginning, BWPT never appeared on my watchlist, so I only watched it for the first time on last September 24, when it suddenly fell 25% in just one day (a friend told me about the fallout, and at the time he was still confused as to what the cause). When I call my broker, he immediately explained that BWPT will issue 27.0 billion of new shares (right issue) at the exercise price of Rp390 – 411 per share (this is also one reason why I use my current broker, because he always know what is going on in the market, so I could go for vacation).

Because the exercise price is far below the market price, while the number of new shares issued was also very much (the number of shares of BWPT before the right issue was only 4.5 billion), it wasn’t a surprise when the stock of BWPT then dropped to 400’s, or in the range of the exercise price of its right issue. So now we have two questions. First, if I've been holding the stock since the beginning at above price, what should I do? And second, if I had not had this BWPT before, can I buy it now? How is the outlook? Well, before that let us learn the company first.

BWPT is one of many oil palm plantation companies in Indonesia. If compared with some of palm oil giants like Sinar Mas Agro (SMAR), Astra Agro (AALI), and Salim Ivomas (SIMP), BWPT is only a middle-class palm oil company with ​​70 thousand hectares of planted land as of the end of June 2014, inclusive of the plasma (SMAR, or in this case its parent, Golden Agri Resources, which is listed in Singapore, is the largest oil palm plantation company in Indonesia in terms of planted land, which reached 460 thousand hectares by the end of 2013).

Like many other oil palm plantation companie in Indonesia, BWPT had difficult times in late 2013 where its profits fell, and so its stock tumbled to Rp600 per share in August 2013. Entering 2014, BWPT had its financial performance improved, where until second quarter its net profits up 67.3% compared to the same period in previous year. Before that, the stock already climbed up since the end of 2013 until back in the range of 1,300 – 1,400.

Although most of the stocks only rise after the company has shown a better financial performance, but some stocks, like this BWPT, sometimes has already risen when the financial statements (which show the company’s better performance) released. In April 2014, when the company released its financial statements for the first quarter of 2014, BWPT already stood at Rp1,300’s per share, which reflected PBV of 2.7 times based on the value of company’s net equity at the time. So you can see why this stock had never been on my watchlist, because the price isn’t attractive.

Anyway, today the stock is priced at Rp460 per share, so it is cheap, is not it? Well, not necessarily. Because after the upcoming right issue, the number of outstanding shares and the book value would be changed, so the valuation of BWPT must be calculated from the beginning. Take a look: Assume that the right issue will be executed at highest price, ie Rp411 per share, then BWPT would receive additional paid-in capital of Rp11.1 trillion. Because the book value of BWPT prior to right issue was Rp2.3 trillion, so after the right issue it would be Rp13.4 trillion (roughly equivalent to US$ 1.2 billion). BWPT’ outstanding shares after the right issue will be 31.5 billion shares, multiplied by 460 (the stock’ current price), the market cap is Rp14.5 trillion. So the PBV = 14.5 / 13.4 = 1.1 times, or actually lower than before, but not low enough considering that BWPT have not had consistent performance in the past. In the heyday of oil palm business in 2011, BWPT had ROE of only 22.4% while most of other oil palm plantation companies had ROE of more than 30%.

In addition, you must analyze the background of Green Eagle, ie the subsidiary of Peter Sondakh’s Rajawali Group, which engaged specialty in the field of oil palm plantations. As you know, the right issue of BWPT is actually a corporate action to take the oil palm plantation companies of Green Eagle Pte. Ltd. (registered in Singapore), into the Indonesian stock market through BWPT, aka backdoor listing, because the standby buyer of the new shares was the Rajawali Group itself, in this case through PT Rajawali Capital. So it can be said that Rajawali Group will spend trillion of Rupiah to acquire Green Eagle through BWPT. But since Green Eagle was belonging to them, then in fact there is no money spent.

Through Green Eagle, Rajawali Group owns oil palm plantations at thirteen different locations throughout Indonesia. All the plantations will be merged (becoming subsidiaries of a single parent company) with the plantations of BWPT, so the combination of Green Eagle and BWPT would have a total planted area of 147 thousand hectares, including plasma. Thus, BWPT will be one of the largest oil palm plantation companies in Indonesia, though the name of ‘BW Plantation’ is likely to change, probably become ‘BW Eagle Plantation’ or such.

Here are few things I’ve learned about the backdoor listing.

First, the acquisition made by BWPT (or, the acquisition made by PT Rajawali Capital through BWPT) against the Green Eagle, executed at a quite expensive price. BWPT will acquire 100% stake in Green Eagle at a price of Rp10.5 trillion. According to opinion of independent assessor appointed by the company, the net value of Green Eagle, as a whole, is only Rp8.5 trillion. And based on the compnay’s latest financial statements dated June 30, 2014, the book value of Green Eagle was only Rp2.2 trillion. So it is clear that BWPT would acquire Green Eagle at premium price (actually, even if the acquisition was done at a price that is higher than Rp10.5 trillion, it does not matter, does it? Because, like I said before, there is no money spent at all). Although the transaction was considered fair by some reasons, but this shows that the valuation of BWPT afte the right issue, which the PBV was only 1.1 times, it probably not as low as it looks.

Another thing, Green Eagle have not had good track records of financial performance. Green Eagle was established in 2010 (by Rajawali Group) as a vehicle to acquire oil palm plantation companies, where Rajawali Group through Green Eagle acquired fourteen different companies. As a start-up company with limited capital (but unlimited ambitions), most of the acquisitions were financed by bank loans, so the balance sheet of Green Eagle was full of debts. Thus, in its first years, the company suffered considerable losses, including comprehensive net loss of Rp162 billion in 2013, because of costs of finance, while the revenue had not been big enough. Only in 2014, Green Eagle have positive income, with comprehensive net profit of Rp217 billion in first half of 2014. But still, with bad performance in the past, not including a mountain of debt (current DER of Green Eagle is 2.9 times), there is no guarantee that in the coming years, Green Eagle will not make any other losses.

Seeing the above facts, it is clear that the shares of BWPT is not worth for serious investment, because in addition that the price has been ‘marked-up’, the company itself is not good enough. BWPT may still a profitable company, but Green Eagle may not.

That’s first. Second, this corporate action of Rajawali Group (through BWPT) reminds me of a previous action performed by the very same group. One or two years ago, Rajawali acquired PT Eatertainment International (SMMT), a small and dying company that owns the restaurant chains of Paparons Pizza. After have it under control, Rajawali sold the Paparons, and change the company into a coal company under the name PT Golden Eagle Energy (the ticker is still the same, SMMT). Through SMMT, Rajawali issued 820 million of new shares at a price of Rp500 per share, to acquire Rp410 billion, where the funds would be used to acquire and to place a capital in two coal companies, PT Naga Mas Makmur Jaya and PT Rajawali Resources. Once again, since the companies already owned by Rajawali Group, there was no money that changes hands.

Because the right issue’s value was relatively small, and because SMMT was a junk stock that not liquid at all, the backdoor listing had not received any attention from the market. All of the issued shares were bought by Rajawali Group through its affiliated companies, so the public ownerships of SMMT are very small, or even zero. But interestingly, after the right issue, the stock of SMMT, which was ‘dead’ before, continues to move up from its right issue price of 500, up to 1,800, and the trend continues to move up. If you look at its unnatural pattern of movement (the price was stagnant in the range of Rp1,600 to 1,700 per share over the year, with almost no fluctuations at all even though Jakarta Composite Index was go ups and downs during the period), and the zero fundamentals of the company (until the second quarter of 2014, SMMT only made a net profit of Rp6 billion, too small), then it is quite clear that the increase of the stock price during this time is because of some ‘stock maker’, ie the owner itself.

So what was the goal of these ‘stock making’ activities? Well, ask them! But from here we can see that, in the case of BWPT, how could the right issue price set at a level far below the market price? And maybe the answer, in that way the stock price would plunged by itself, so that the public shareholders should sell it off, especially if they used the margin money to buy the stock, aka forced to sell! (BWPT was one of stocks that can be bought using margin money). That’s why BWPT experienced left auto reject for two days in row, because the brokers have to sell the stocks while nobody willing to buy, because people had already know about the rights issue.

If this scenario of 'kicking everybody out' is true (please note that this is only a theory, the Rajawali Group is not necessarily going to do it), then later the entire stock of BWPT will be held by Rajawali Group, so that they would be in full control of the stock price in the market, doesn’t care if the Jakarta Composite Index (JCI) will go up or down, doesn’t care if the financial statements of BWPT will record profits or losses, just as they did against SMMT. In the case of SMMT, the execution of right issue did not need to be done at a price far below the market price, because since the beginning, there weren’t public investors in the company’s structure of shareholders, except a very little.

Conclusion

Okay, now we are back to the two questions above: I was already holding this BWPT at the above price, what should I do? Well, if we look at the analysis that the fundamental of the combined company of BW Plantation and Green Eagle would be a 'mess' (BWPT, once again, its historical financial performance was pretty good, but Green Eagle was not), then the decision to keep holding the stock will be a risky decision, especially if the Rajawali Group actually attempted to kick everyone out of BWPT (the share price will be lowered). Because if they want to raise the stock price, then they have to hold all of the shares first.

But, are you suggesting me to realize my losses? And that was a great value of loss! Well.. yes it was, but it's better than if you lose all of your funds, right? Currently, there are efforts made ​​by certain parties to report BWPT to the Financial Services Authority (FSA) or other authorities, but I’m not sure that it will succeed, because the investor protection programs in here are not as good as in America or in other developed countries. Frankly, if I was one of the BWPT shareholders, I also do not know where to complain. The Indonesia Stock Exchange (IDX) as the organizer of the Indonesia capital market always hold annual investor summit regularly to attract people to invest in the stock market, but it looks like they forgot to socialize a phone number for complaint something (if there was one), so that investors can complain if they suffer unusual losses, such as the case of BWPT. Well, maybe Mr. Ito Warsito can imitate the action of Mr. Ahok who deliberately spread his personal telephone numbers, so that the residents of Jakarta can directly report to him if there was anything disturbing.

But well, everything has just happened. The only effort that can be done in the future to minimize the possibility of a loss like this case of BWPT, is by diversifying your investment. As has been frequently discussed on this website, no matter how much your funds, do not ever put it entirely in just one or two stocks, but spread it into ten to fifteen different stocks. The case like what happened to BWPT can happen to any stock you hold, no matter how good the fundamentals, and it is a part of the risks of investing in the stock market. But if you are holding ten different stocks, it is almost impossible that the ten companies simultaneously hold the rights issue, is not it?

Okay, so what if I am not yet holding the stock? At the current price, is BWPT worth to buy? Well, if you look at the possibility that BWPT could be like SMMT, then in terms of speculation, the stock price may be increased in the long term. Moreover, the company has ESOP (employee stock option program) which BWPT employee has the option to buy shares at a price of Rp790 per share, and the option will be expired in October 2015 (one year from now on). So if the company wants the employees to execute the options, then the price of the stock must first be raised to above 790, no later than the month of October 2015. Because, how can the employees willing to buy BWPT at the price of 790, if in next October 2015, BWPT market price is still at the level of 460 as it is now?

However, as already mentioned above, the company probably will not immediately raise the stock price, but 'kick everybody out' first, so the ones who will enjoy the rise is theyself (and employees). But it is clear that from the point of view of fundamentals and value investing, this BWPT (after later merged with the Green Eagle) is not a good company, and the valuation was not that low, so the decision to buy it is closer to speculation than investment. The choice is yours.

Any inquiries about investment in Indonesia Stock Market? Please send an email to teguh@averepartners.com.