Global Investment Limited ("GIL") share price has surprisingly recovered back to its pre-March 2020 crash level. This means that its share price performance seems to have outshone the STI which is amazing. The Net Value Asset per share of GIL is around S$0.187 per share. Its latest share price of S$0.137 per share as at 9 July 2020 represented a discount of 26.7% given that most of its financial assets are already fair valued through profit and loss.
1. Contingent convertibles (CoCo) made up the bulk of GIL's investment portfolio
The bulk of the investment of GIL are held in the higher risk asset class of Bank Contingent Convertibles (CoCo). Coco is a fixed-income instrument that is convertible into equity if a pre-specified trigger event occurs. CoCo is actually a creature created to help under-capitalised banks and to prevent a similar global financial crisis in 2008-2009. Hence Coco is a high risk but high yield financial instrument.
As can be seen above, GIL has deployed a significant portion of its cash holdings into buying more CoCo during this period of market down-turn. The concentration of CoCo has increased from 43.4% in 31 Dec 2019 to 57.4% in 31 May 2020.
From the 2019 annual report, we can see that the weighted average coupon rate of return from CoCo is around 5.8% and the weighted average maturity is 5.09 years. 75% of GIL's CoCo are with banks in France, Switzerland, Germany and the United Kingdom. With the huge discount to Net Asset Value per share, it appeared that there is a compensatory margin of safety in event that the European banks sunk into bankruptcy should the COVID-19 2nd wave outbreak worsened the prevailing economic situation.
2. Daily share buy-back initiative still unable to unlock hidden intrinsic value
I am not entirely convinced by the effectiveness of the share buyback initiative given the significant difference to its fair value. GIL is still severely undervalued by the market. In the longer term, the share buyback is no use as a tool to prop up share price as the mandate for purchase has a limit imposed on it.
The management of GIL should seriously conduct a strategic review as soon as possible and assess options such as selling off the entire company to other industry players such as banks, fund management companies or even government institutions (Temasek Holdings). This would then unlock the huge discount in its current languid share price. The market is apparently demanding a substantial risk premium for GIL over the meltdown of GIL during the previous Global Financial Crisis in 2008 that has scarred too many souls and did not re-price in the current restructured investment assets adequately. I would prefer the option of liquidating and walking off immediately and redeploying the returns to other investments.
3. GIL and its relationship to the current scandal at Eagle Hospitality Trust ("EHT")
One important announcement by GIL caught my attention. One of its independent director, Mr Tan Wee Peng Kelvin, actually sat before on EHT's board of directors. The Authorities are conducting a joint investigation into current and former directors, and officers responsible for managing Eagle Hospitality Trust (EHT), in connection with suspected breaches of disclosure requirements under section 203 of the Securities and Futures Act (Cap. 289).
The thing about margin of safety is that this is assuming that the management's interest are aligned with shareholders and that they are discharging their duties faithfully. Else no matter how big is the magnitude of the margin of safety, the business is going to get into trouble sooner or later as apparent in the EHT case which is under investigation by the MAS and also the Singapore Police Force.
Anyway, GIL clarified that the Board is of the opinion that Mr Tan is able to discharge his duties professionally as an independent director of the company.
(Pls also see "White Knight Appears for Eagle Hospitality Trust And MAS & Singapore Police Force Commenced Joint Investigation")
Summary
For the upcoming scrip dividend scheme, I will be participating in it. Pricing is attractively set at S$0.135 which is at slight discount to its latest market trading price of S$0.137 per share and a 27% discount to its fair value per share. In addition, the current dividend yield of 7.3% (S$0.01 per share) is attractive while awaiting for an eventual unlocking of its hidden value. Saying that, GIL's heavy vesting in CoCo makes this investment extremely risky. Well, there is no such thing as a free lunch.
I hold this counter since 2008 ( formerly known as Babcock & Brown) @ $1.0 per share (now only $.0135) sad to say , but fortunately I only own 1000 shares at that time. Hope fully the management can unlock its value and benefit the investors
ReplyDeleteHi Mate, yup...it used to hold a lot of CLO subprime mortgages and this investment turned out to be a huge impairment and drag on GIL. Yes, hopefully, the new management continued their prudent management and investment of the shareholders' funds.
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