Friday, October 28, 2011

Making Investment Decisions – Hibiscus Petroleum Berhad

Hibiscus Petroleum made the news these past few days following the purchase of a stake in an Oil & Gas company in the Middle East. Following the news, I received some interest from friends who started asking me about it.

Now, Hibiscus is not your regular company. It is a Special Purpose Vehicle, otherwise known as a blank-cheque company which goes public to raise funds with the intention of acquiring targeted assets and businesses. When it was listed, it owned nothing at all. It’s ‘mission’ was to use the money raised from the IPO to buy assets and businesses in the oil and gas industry. (I generally do not like this idea, that Special Purpose Vehicles can be listed on the stock market without any track record and existing business operations. Expected returns are solely based on hopes that their plans will come to fruition. More must be done to protect investors; ‘Caveat Emptor’ is NOT ENOUGH!)

With a blank-cheque company like this, it is hard to do a regular analysis using traditional approaches. Much of the valuation methods we are familiar with will not make sense here. How can we perform a five-year financial statement analysis when they have no track record to start with?

Investment Analysis shouldn’t be done in a vacuum where we analyze the investment on its own and in itself. It must always be done in relation to other available investments so we can compare the alternatives and understand our opportunity costs. With traditional stocks of normal companies, we can focus an article on the analysis of a single company because the results in terms of earnings yields, dividend yields and price/book ratio can easily be taken away and compared with other firms.

But for a ‘special’ entity like Hibiscus, a better perspective can be gained by comparing its qualities side-by-side with a traditional company. I noticed that the current price of Hibiscus is 67.5 sen, which is quite close to the price of Lonbisc (76.5 sen) which we analyzed (using traditional methods) last week. So let’s compare these two companies; hopefully the differences will help investors better understand what Hibiscus is about.

Track Record
London Biscuits has been around for years. Hibiscus is a new kid on the block. It began with a clean slate and recently purchased a stake in a business in the middle-east. The lack of a track record means we do not know what to expect. When we invest in a company like Lonbisc which has been around for some time, at least we have a good idea of how management will act in the future based on how they acted in the past. When they tell you they have an expansion plan, you can predict how it will turn out based on how previous plans turned out. Sales trends can tell you whether the company is good at capturing market share. Earnings trends can tell you about whether the company is good at giving stable returns. Dividend trends tell us about whether the company is a good custodian of cash and responsible to shareholders. But if there is no track record at all, then what do we have? Nothing. We have nothing. We know nothing about the style of the CEO. We know nothing about what earnings yield to expect. We know nothing about the ability of management to deliver. Yes, you may say that investing involves risk and luck and sometimes we have to take a bit of a gamble. But this is like going on a date with a man you’ve never met. Of course he may turn out to be a great guy. But are you really so desperate?

Management

Our discussion about track record above touched a lot on the insights provided by prior year financial results relating to the performance of management. Now, let’s look at the management teams at Lonbisc and Hibiscus.

Lonbisc is managed mainly by the Liew family, who have been in business for a long time and have entrepreneurial roots. The chairman, Dato’ Sri Liew Kuek Hin, has been in the family business since he started his career and is already 71 years old now, gaining experience and networks over the years.

Hibiscus on the other hand, is managed by a group which has mainly corporate roots as opposed to entrepreneurial ones. Can they weather the storms when they come? Maybe, but we don’t know.

Product

Lonbisc makes cakes. We can see their cakes at Giant and Tesco. We can eat their cakes and compare them to some other cake and make a judgment on the quality and value for money. The location of their real estate is mostly in Malaysia. Just by looking at the addresses, we can have an idea of the market value of those properties.

What about Hibiscus? The asset they just bought is in the Middle East. And it is in the O&G sector. It is too far for us to see, and some of us can’t even conceive of what it looks like over there. Quite a high level of proficiency in the O&G sector is required before you can make a call on this one. You need to know all sorts of things on the technicalities of oil drilling. For many of us, we have nothing to rely on other than analyst reports and stuff we Google from the Internet.

Now, please don’t get me wrong. I am not saying that Hibiscus is doomed to failure. I’m not even saying that it is not a good investment. I am just saying that if you are like me and are not well-versed in the subject of oil reserves in the Middle East, it may be better to go to Tesco and try out different cakes to find out which one tastes better.

If I am going to issue a blank-cheque to someone to make investments; it has gotta be someone I can trust, someone who’s been around a while, and doing something I can understand.

When making investment decisions, don’t get too tied up in the financial analysis of a single company. This is not an exam. It is okay if you do not have certain answers. Look at the big picture of your investment goals, and let go of whatever does not fit in nicely.

As Steve Jobs says, “To be successful, we have to say NO to 1,000 things”, even if some of those seem seductive at first.

By the way, I am also not asking you to buy Lonbisc. I do not endorse any investments. I only lay down the facts. Some facts about Lonbisc can be found in last week’s article.


Andrew Chua
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(The above is an academic exercise which applies well-established securities-analysis methods and benchmarks on currently available investments. It does not constitute a recommendation to buy or sell any security. The writer does not own any shares of the above-stated company at the time of writing, and does not receive payment for the sale or research of any security. ~I lay down the facts; you make your own conclusion...)

1 comment:

  1. Those cakes do look tasty though. I'd definitely have to spend some time on the ab machines after indulging though.

    ReplyDelete