As of 2nd November 2012, funds managed by Laxey Partners Ltd ("Laxey") owned 9,645,191 shares in Icapital.biz Bhd ("ICAP"), being 6.89% of the shares in issue. Laxey have been a Shareholder since 2010 in ICAP.
The purpose of this letter is to provide Shareholders with information relating to the Resolutions to be tabled at the forthcoming AGM. We would urge you to:
Vote Against Resolution 3: To re‐elect Datuk Ng Peng Hong @ Ng Peng Hay
Vote Against Resolution 4: To re‐elect Dato’ Dr. Norraesah Binti Mohamad
Vote Against Resolution 6: To re‐appoint Tunku Tan Sri Dato Seri Ahmad
Vote Against Resolution 7: To re‐appoint Tunku Abdul Aziz bin Tunku Ibrahim
Vote FOR Resolution 10: To elect Mr. Andrew Pegge as Director
Vote FOR Resolution 11: To elect Mr. Lo Kok Kee as Director
Vote FOR Resolution 12: To elect Mr. Low Nyap Heng as Director
Vote Against Resolution 13: To elect to elect Dato’ Tan Ang Meng as Director
Vote Against Resolution 14: To elect Dr. Yin Thing Phee @ Yin Thing Phi as Director
The Rationale:
Massive Persistent Discount:
While the manager has done a good job by delivering a NAV growth which has outperformed the FTSE Bursa Malaysia KLCI Index since inception, we are concerned about the substantial discount to Net Asset Value (“NAV”) that the fund has traded at and indeed continues to trade at. For the record we attach two charts from the Company 2012 Annual Report:
In page 4 of the Annual Report, a gain of 3% in NAV for the financial year, vs. a 1% gain for the FBMKLCI has been reported. However, the Index is not adjusted for dividend yield, which is in excess of 4% p.a., so the actual total return of the Index was in excess of 5.6%. Because the discount on which the Ordinary shares trade widened from 19.5% to 25.5%, the comparative total return to Shareholders was negative 4.5% – a total return underperformance of the index of 10.1%. So whilst the Fund Manager received a 13% increase in management fee, the “share owners” to use a term in the annual report, actually lost 4.5%.
This is where the Fund Manager’s and Shareholders’ interests diverge. The Fund Manager’s key performance measurement is the NAV, upon which its management fee is based, whereas for Shareholders, it is the share price ‐ which has suffered a widening discount.
Shareholders rely on the Board of their Company to address the issues facing them, which in the case of ICAP are, in our view, predominantly corporate governance related. Laxey has spoken to the Company to take action on the discount to no apparent effect. Laxey has earlier proposed a Resolution to be tabled at this AGM requesting the Board to address the persistent discount problem, but this was rejected by them.
In our view, one of the main reasons for the discount in ICAP to exist at such an unreasonable level is the lack of a defined policy to deal with the persistent and widening discount. The global closed end fund industry has over the last decade realised that a substantial discount is not in the interest of its owners – the shareholders. Incumbent boards globally have addressed the issue by instigating a series of measures which have collectively reduced both the absolute discount and discount volatility.
Share buybacks are one of the methods employed globally. In buying back shares cheaply, the Company can enhance its NAV per share for the benefit of all Shareholders. In addition, it should give investors confidence in the NAV, boost the demand for the shares of the Company and ultimately help to close the discount. The Company has cash backing of 99 sen/share as at 31st August 2012. Assuming this is unchanged, on 31st October 2012, with a market price of RM2.3/share and a NAV of RM2.96/share, the net NAV of the non‐cash portfolio is RM1.97/share against a market valuation net of cash of RM1.31/share, a discount of 33.5%. As a value investor like ICAP, what could be a better investment than buying your own portfolio at such a deep discount? We believe the Board should use an already available method to make a start on tackling the persistent and large discount. Even Warren Buffett, the value investor role model quoted by the Fund Manager, advocates buying back Berkshire Hathaway’s own shares if they are cheap enough. To quote from Warren Buffett 2011 Shareholder letter “At our limit price of 110% of book value, repurchases clearly increase Berkshire’s per‐share intrinsic value. And the more and the cheaper we buy, the greater the gain for continuing shareholders…” Are we not cheap enough yet?
Independence of the Board & Corporate Governance Issues:
The Chairman, Tunku Tan Sri Dato Sri Ahmad bin Tunku Yahya, is non‐independent because of his indirect shareholding in Capital Dynamics Asset Management S/B, the Fund Manager of the Company. From 1982 to 1993, he was Group CEO of the Sime Darby Bhd Group and until 2007, was its Deputy Chairman. An Independent Director, Mr. David Loo Kean Beng, started his career with Sime Darby Berhad in 1987 and left in 1997 as Senior Legal Adviser. Another INED, Tunku Abdul Aziz bin Tunku Ibrahim, was at one time, group director of Sime Darby Ltd, the exact period for which has not been specified.The present composition of Directors would meet the requirements of the Bursa listing rules, but in terms of corporate governance, is it ideal? Should our Board be filled by a group of Directors with past ties to each other?
On 1st November, the Company announced the 5 additional nominees for election as Directors of the
Company at the forthcoming AGM.
• Dr. Yin Thing Phee works at Sime Darby Medical Centre Subang Jaya.
• Dato’ Tan Ang Meng is the ex‐CEO of the Fraser and Neave Holdings Berhad (F&N). As of 12th September 2012, ICAP holds RM41m worth of F&N, making it the 4th largest position in its portfolio.
• Low Nyap Heng is 100% independent of the Company and the Sime Darby network.
• Lo Kok Kee is 100% independent of the Company and the Sime Darby network.
• Mr. Pegge is 100% independent of the Company and the Sime Darby network. He is the co‐
founder and a Director of Laxey.
• Their profiles are at the end of the letter.
Moving Forward:
We believe that a Board of Directors should bring forward proposals to eliminate or substantially narrow the discount that the shares of the Company trade at relative to their NAV. This is a growing problem for our Company.The Company could, as a minimum, consider implementing a share buy‐back scheme in accordance with the provisions of Section 67A of the Companies Act, 1965 of Malaysia, in order to give investors confidence and to boost the demand for the shares of the Company. We believe that the Board should concurrently engage advisors to research other methods to permanently remove the substantial discount at which the shares trade.
We have lost our confidence in the ability and commitment of the Board to address such an important issue.
Conclusion:
• We are long term investors seeking to restore shareholder value and have been investing in the local market since 2002.
• We are a strong believer in the importance of high and proper standards of corporate governance.
• We believe the changes in the Board would be in the best interests of all shareholders.
• The discount that the shares of the Company trade at relative to their NAV simply reflects the weak investor sentiment in the Company.
• Our Board should research the means to permanently remove the discount to NAV which our shares trade at, and bring forward proposals to enact those recommendation forthwith.
• We believe that by introducing new Directors, the disparity between the current share price and NAV will be addressed to the benefit of all.
Profile of Andrew Pegge:
Andrew Pegge, a British citizen, is 100% independent of the ICAP.Andrew Pegge started his investment career with Laurentian Fund Management in 1987. In 1990 he joined Buchanan Partners Limited where he was initially responsible for systems planning and integration, later developing a process of systematic analysis and management of investment situations in both mainstream and emerging equity markets. In 1995, Andrew, with Colin Kingsnorth, set up Kingpin, where as Chairman he had responsibility for managing the group's global emerging markets; Following the decision to relocate to the Isle of Man, Andrew spent six months with the Isle of Man Financial Supervision Commission as Supervisor of Collective Investment Schemes. After 8 months in this role he left, in late 1999 to found Laxey Partners Limited again with Mr Kingsnorth. He holds an Honours degree in Psychology and Cognitive Studies, an MBA and is a CFA charter holder.
Mr Pegge currently sit on the boards of a number of public listed companies as Independent Non‐ executive director, including ASA Limited – a Bermudan domiciled New York Stock Exchange listed fund that comes under the supervision of the United States SEC; Sefalana Holding Company a company both domiciled and listed in Botswana; and the Value Catalyst Fund Limited – a fund managed by Laxey Partners that recently delisted having offered shareholders the opportunity of electing for realisation shares at NAV. He contributes significantly in his roles as Member of various board committees.
Profile of Low Nyap Heng:
Mr. Low Nyap Heng is a Malaysian, aged 61 and a Fellow member of the Institute of Chartered Secretaries and Administrators, United Kingdom. He was the Chief Executive Officer of Ayer Hitam Tin Dredging (Malaysia) Berhad from 1991 to 1993. He had also served as Executive Director of Kampung Lanjut Tin Dredging Berhad and Director of Roxy Industries Malaysia Berhad and Projects for Asia Management Sdn Bhd. He was also the Executive Director of Jackin International Holdings Limited from 2003 to 2007, the shares of which are listed on the main board of The Stock Exchange of Hong Kong Limited. Currently he is the Vice President of Cen‐1 Partners, a corporate advisory and consultancy firm in Hong Kong.Profile of Lo Kok Kee:
Mr. Lo was director and shareholder of Jupiter Securities Sdn Bhd, participating organization of Bursa Malaysia Securities Bhd. Prior to that, he was director and shareholder of OSK & Partners Sdn Bhd, the forerunner of the present OSK Investment Bank.Mr. Lo has long been involved in shareholder activism, before it became fashionable. In 1990, he unsuccessfully proposed the open‐ending of Overseas Union Securities Ltd.(OUS), a closed‐end fund listed on the Singapore Stock Exchange, which was trading at persistent deep discount to net asset. OUS has since merged with United International Securities Ltd. while the other two closed‐end funds, Harimau Investments Ltd and General Securities Investment Ltd, had gone into members’ voluntary liquidation, after failing to narrow the persistent discount to NAV.
More recently, in 2009, he initiated and successfully moved the members’ voluntary liquidation of Amanah Harta Tanah PNB2 (AHP2), an underperforming real estate investment trust managed by PNB, the first such liquidation in the history of the Bursa. Members were able to realise a distribution of RM 1 compared to the prior market price of around 50 sen/unit.
Mr. Lo holds bachelor degrees in Agriculture and Economics from the University of Saskatchewan, Canada as a Colombo Plan scholar. He also holds an MBA, majoring in Finance and Accounting, from the Chicago Booth Business School, University of Chicago, where he studied under Nobel laureates Professors Merton Miller and Myron Scholes.
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