Wednesday, October 12, 2011

EPF buying Laugfs: No smoke without fire!

The adage ‘there is no smoke without fire’ appears to be a perfect fit to Monday’s mega deal of EPF buying an 8% stake in Laugfs Holdings Plc for Rs. 1.6 billion, given its timing and the price paid.

The Employees Provident Fund (EPF), which is heading towards a fund base of Rs. 1 trillion, on Monday bought 33 million shares or an 8% stake in Laugfs for Rs. 1.6 billion or Rs. 48 per share. In total 36.88 million shares of Laugfs transacted via 1,501 trades for Rs. 1.76 billion.

Laugfs Holdings said it was the seller reducing its stake to 59% (227 million shares) from 67% previously.

Whilst Laugfs is yet to release its FY2012 first (June) or second (September) quarter results, it appears EPF’s stake in Laugfs is now nearly 14%. As at end March 2011, it held a 5.6% stake (via voting shares).

 Its non-voting holding is a high 35%. The latter is substantial as in December 2010 the holding was only 5% whilst voting stake amounted to only 1.56%.

The purchase was the talk of the market on Monday given the timing and the price. For starters, EPF bought the big stake whilst Laugfs’ share was on the up in a relative sense. The other is that it bought the stake not from the market but from the controlling shareholder via a crossing, giving credence that it was a pre-arranged deal.

Perhaps as a precursor to the impending deal, Laugfs on Friday shot up out of the blues.

After being depressed for a long time, Laugfs voting share topped the list of percentagewise gainers on Friday with price increase of 18% or Rs. 7.30 to close at Rs. 50.50. Around 20.7 million shares transacted via 2,916 trades for Rs. 987 million. The amount of trades confirms retailers buying on speculation.

Some sensed the impending deal whilst a rumour that State-run Litro gas management would be handed over to Laugfs was doing the rounds. A Laugfs spokesman had denied both. In the two preceding days, Laugfs rose by one rupee and 70 cents.

Talk of a major stake being traded was nothing new. In fact the market was buzzing with the speculation in July-August and many retailers had bought in to hoping to cash in. However, the share price remained depressed.

The question being asked is why EPF didn’t buy when Laugfs share was at much low levels. If it was keen to up its stake, EPF could have collected quantities from the market certainly at lower prices than Rs. 48 paid on Monday.

Laugfs’ net asset value per share as at 31 March 2011 was Rs. 14.31 at Company level and Rs. 15.66 at Group level, though there were higher by over 40% in comparison to FY2010.

Market talk has been that the strike price was Rs. 55 or thereabouts, and whether Laugfs and EPF deferred the deal until prices were closer to Rs. 50 levels to strike it was another question.

The investment in Laugfs also comes a week after the Central Bank issued a statement about the EPF’s fund base nearing Rs. 1 trillion in 2011.

In a critical analysis, the announcement wasn’t anything new because when Central Bank released EPF’s 2010 performance (11 March), it revealed that the base would top Rs. 1 trillion. Why Central Bank felt a reemphasis of the matter again is unclear.

Given the fact that the Rs. 1 trillion reference was made in 2010, performance release analysts noted a fresh statement following the actual reaching of that milestone would have been a more professional move.

Whilst EPF is an important investor in the Colombo bourse as part of its strategy to maximise returns to its members, of late it had been criticised over the selection of stocks or the timing of its investments. In general State funds are under flack for being the dumping ground for stocks at highly-inflated prices either by high net worth or select institutional investors.

Be that as it may, in a highly-depressed Colombo bourse, some analysts were of the view that there was nothing to suddenly fuel Laugfs’ price on fundamentals.

Whilst newly-listed Laugfs has done well in the financial year ended on 31 March 2011 to top the Rs. 1 billion mark in Group pre-tax profit (up 79%) and after tax profit of Rs. 853 million (up 61%), analysts had expressed doubts over sustainability. When interim accounts are released this view can be confirmed or dismissed. In FY2011 return on equity at Laugfs was down by 24% at Group level and 43% at Company level.

Another concern is Laugfs’ rapid diversification to a multitude of sectors such as tourism from its core business of energy, though some opined that minimising the risk of being too reliant in one sector was a good move.

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