Power Root

Date: 28-Feb-2015

Quarter: 3

Fiscal Year: 2015

Net Profit Margin: 10.15%

Total Cash: 59.778 million

 Free Cash Flow: 33.136 million

Risk Arbitrage 101

Figure out the odds. Before serving as the Secretary of the Treasury under Bill Clinton, Robert Rubin worked in the risk arbitrage department at Goldman Sachs. I highly recommend his autobiography In an Uncertain World, where he writes not only about his life but about the specifics of his job at Goldman.

To engage in arbitrage, you must estimate the odds of the merger going through, and what the possible outcomes will be if it does not. Once a deal was announced, Rubin would undergo rapid, intensive research, examining all available public information. He would weigh each factor, and create an expected value table for the deal.

An expected value table works like this. Take the example of Company A and B from above. If the deal goes through, there is $1 in potential profit, and maybe we think there’s a 90% chance this will happen. In the 10% chance the merger falls apart, it will probably decline $4 to its price before the announcement. The final equation is: 90% x $1 – 10% x $4 = $0.50. So our expected return is fifty cents on a $19 investment, or 2.6%. If the deal took two months to close, the actual annualized return would be 36%. But using our expected profit, annualized return is only 17%. Rubin normally accepted deals only if expected annualized return was 20% or more.

Bob Rubin’s most important lesson was this: you should use probabilistic decision making when confronting any problem. Success comes by evaluating all the information available to judge the odds of various outcomes and the possible gains or losses for each.

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Look at incentives. Incentives aren’t given enough credit in most arbitrage situations. Yet they are very powerful motivators and can have a huge impact on the final outcome. Look for monetary incentives on both sides of the transaction. Usually there will be a “break-up” fee to discourage the buyer from walking away. What do executives in both companies get out of the deal? Will there be synergies or huge cost savings that make the merger beneficial? Do major shareholders have enough incentive to approve the deal?

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Know who’s involved. In May of last year, Rupert Murdoch made a surprise bid for Dow Jones & Co., publisher of The Wall Street Journal. The $60 per share offer was a huge 67% premium to Dow Jones’ prior closing price. In the weeks after the bid, hostility from the Bancroft family (the controlling shareholders) caused the market to price Dow at a 10% discount to the offer. It seemed reasonable, considering the amount that Dow would drop if the deal fell through (30 to 40%).

Warren Buffett knows Rupert Murdoch. Not as in “he knows him as a friend,” but as in he knows who he is, as a businessman. The market was weary, but Buffett knew there was a very good chance the deal would get done. Between the announcement and the end of June, Buffett purchased 2.8 million shares of Dow Jones—another one of his classic arbitrage investments.

Knowing the background and personalities of those involved can help immensely. The Tribune takeover was a prime example of this. No matter what happened in the final stages, Sam Zell was the kind of guy who wouldn’t have let Tribune slip past him. He had the intelligence, resources, and determination to see the deal through to the very end. This aspect isn’t always present in every arbitrage situation, but when it is, it’s often overlooked by the market.

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Look for a margin of safety. What will happen if the deal gets cancelled? You don’t want to end up holding an overvalued or distressed security. Look for any “back-doors” if the initial thesis doesn’t play out. If the Tribune deal fell through, there were multiple bidders who may have stepped in to buy the company or its assets.

Find out if it’s a good deal in the first place. When you think the takeover target is more valuable than the price being offered, it’s beneficial for a few reasons. First, if the deal falls through, you’ll still end up holding an undervalued security. Second, there’s a better chance of someone coming in with a higher bid. Either way, your possible losses are minimal.

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Wait for the no-brainers. Most funds and institutions that are dedicated to arbitrage treat it like an actuarial business. They participate in dozens of investments at a time, hoping any losses in one will be made up for with gains in the others. With the risk that merger arbitrage imposes, this isn’t a terrible way of thinking. But it ensures only mediocre performance. Warren Buffett’s strategy in his partnership and early Berkshire days was a more concentrated approach. He would be in at most a handful of situations at any one time.

The advantage Buffett had (and we have) is that he wasn’t constantly forced to make new arbitrage investments. If the buyout market cooled off, he could wait on the sidelines for better opportunities. This is in contrast to the dedicated arbitrage funds who are forced to remain active and analyze every possible deal. The best thing to do is wait for the no-brainer buyouts where (forgetting the market) the target company is obviously mispriced. That was the case with our investment in Tribune Company.

Risk Arbitrage 101

Risk arbitrage (also called merger arbitrage) is where an investor buys stock in a company that’s expecting to be taken over. The investor’s goal is to profit from the difference in current market price and eventual buyout price. Here’s a simple example: Company A announces that it will acquire Company B for $20 per share. Immediately after the announcement, the share price moves from $15 to $19 per share. The arbitrageur then purchases the stock, hoping to make a $1 profit once the deal is complete.

Why doesn’t Company B just move straight to $20 after the announcement? Why the $1 difference? There are a number of reasons. 

First, since the merger usually takes some time to complete, part of the $1 represents the “time value” of not receiving the $20 right away. 

But most of the discrepancy usually represents the market’s uncertainty about the final outcome. The deal may fall through for multiple reasons, such as financing problems, regulatory roadblocks, or the acquirer simply changing their mind. 

So the risk arbitrageur has two questions to answer: will the deal go through – and if so, how long will it take?

Merger arbitrage is like a simpler, time-constrained version of value investing. When screening for candidates, there’s no need to do valuation work because the value of the company has already been announced. Both arbitrage and value investing involve handicapping the odds and buying assets for less than they are worth. With that in mind, below are some important things to consider when making any arbitrage investment.

Arbitrage

Arbitrage situations can be evaluated by answering four questions:

(1) How likely is it that the promised event will indeed occur?

(2) How long will your money be tied up?

(3) What chance is there that something still better will transpire — a competing takeover bid, for example?

(4) What will happen if the event does not take place because of anti-trust action, financing glitches, etc.?

Arbitrage

Source: http://www.investopedia.com/terms/a/arbitrage.asp

DEFINITION of 'Arbitrage'

The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time. 

INVESTOPEDIA EXPLAINS 'Arbitrage'

Given the advancement in technology it has become extremely difficult to profit from mispricing in the market. Many traders have computerized trading systems set to monitor fluctuations in similar financial instruments. Any inefficient pricing setups are usually acted upon quickly and the opportunity is often eliminated in a matter of seconds.

Trump International Hotel & Tower Vancouver

A collaboration between the Trump Brand and TA Global

Souce:http://forum.skyscraperpage.com/showthread.php?t=138004&page=167

Dear Vanelevatorman,

Firstly we would like to wish you a very joyous and prosperous 2015! Secondly, we would like to take this opportunity to give you an important update with regards to the Trump International Hotel & Tower® Vancouver. Construction is now on level 66, while residential condominiums are over 70% sold. We remain excited to welcome you in the summer of 2016.

As you may already know, Magnum Projects Ltd. has been acting as our local listing agent in connection with the marketing and sales for this esteemed project. However moving forward, we have decided to take on this role internally, hence effective January 23, 2015, please contact our office directly using the following contact information:

For general inquiries on Trump International Hotel & Tower ® Vancouver:
West Georgia Development Limited Partnership
10-698 Seymour ST, Vancouver, BC V6B 3K6
604-688-8387
info@holborn.ca
For sales related inquiries on Trump International Hotel & Tower® Vancouver:
Rachel Pai
Sales Manager
rachel@trumpvancouver.com
Trump Sales Center: 604-568-7888

We look forward to sharing further updates with you regarding this exciting project, and thank you for your continued success and friendship.

Best regards,
Joo Kim Tiah
President and CEO, Holborn Group

Safe & Sound

Nestle
Dutch Lady
GAB
Carlsberg
Digi
Astro
Public Bank
Maybank
Hong Leong Bank
F&N
LPI
Petronas Dagangan
UMW
AEON
BAT 

Petronas Dagangan Berhad

Financial Financial Revenue PBT Net Profit EPS Dividend NTA Year Quarter (RM,000) (RM,000) (RM,000) (Cent) (Cent) (RM) 2014 3 8,226,648 223,629 160,399 16.1 12 4.89 2014 2 8,367,968 250,787 185,649 18.7 14 4.86 2014 1 8,293,564 223,137 155,079 15.6 12 4.8 2013 4 8,385,988 193,784 151,321 15.2 17.5 4.82 2013 3 8,412,061 315,647 226,209 22.8 17.5 4.85 2013 2 7,924,901 273,041 197,127 19.8 17.5 4.88 2013 1 7,618,972 326,969 237,097 23.9 17.5 5.08
How do you value Petronas Dagangan? 2014 EPS: 15.6(Q1) + 18.7(Q2) +16.1(Q3) + 16.1(Q4, Forecast) = 66.5 cents IF one wish for a 10% earning yield, the price = 0.665/0.1 = RM6.65 IF one wish for a 5% earning yield, the price = 0.665/0.05 = RM13.30 2014 DPS: 12(Q1) + 14(Q2) + 12(Q3) + 12(Q4, Forecast) = 50 cents IF one wish for a 6% dividend yield, the price = 0.50/0.06 = RM8.33 IF one wish for a 3% dividend yield, the price = 0.50/0.03 = RM16.67
Long term 10 year outlook, MR. Optimistic (10% growth) hunting for 15% CAGR:
EPS Growth DPO DPS (Cent) (%) (%) (Cent) 0 66.5 10.00% 0.75 50 1 73.2 10.00% 0.75 55 2 80.5 10.00% 0.75 60 3 88.5 10.00% 0.75 66 4 97.4 10.00% 0.75 73 5 107.1 10.00% 0.75 80 6 117.8 10.00% 0.75 88 7 129.6 10.00% 0.75 97 8 142.5 10.00% 0.75 107 9 156.8 10.00% 0.75 118 10 172.5 10.00% 0.75 129 Total 924 Dividend yield= 3% Price= RM 43.12 Total Dividend= RM 9.24 Total= RM 52.36 Today's Buy Price= RM 12.94 MR. Pessimistic (5% growth) hunting for 15% CAGR:

	EPS	Growth	DPO	DPS
	(Cent)	(%)	(%)	(Cent)
0	66.5	5.00%	0.75	50
1	69.8	5.00%	0.75	52
2	73.3	5.00%	0.75	55
3	77.0	5.00%	0.75	58
4	80.8	5.00%	0.75	61
5	84.9	5.00%	0.75	64
6	89.1	5.00%	0.75	67
7	93.6	5.00%	0.75	70
8	98.3	5.00%	0.75	74
9	103.2	5.00%	0.75	77
10	108.3	5.00%	0.75	81
Total				709
Dividend yield=				3%
Price=			RM	27.08
Total Dividend=			RM	7.09
Total=			RM	34.17
Today's Buy Price=			RM	8.45

Current Price (27-Jan 2015): RM 17.20


So, how do you value Petronas Dagangan?

Digi Berhad's ROE

Fiscal Year	ROE (%)
2013	244
2012	517
2011	90
2010	88
2009	66
2008	61
2007	67
2006	46
2005	21
2004	18
2003	10
2002	8