Ali Al Shihabi, AUM, EIIB, European Islamic Investment Bank, Guy Thomas, HBG Holdings, HBG Management Partners, Rasmala Holdings Limited, shareholder activism, tender offer, Zak Hydari, Zulfi Caar Hydari
Here’s a copy of a letter I’ve forwarded to EIIB’s CEO & board:
‘January 26, 2014
FAO: Zulfi Caar Hydari, CEO
CC: H.E. Abdallah Yahya Al-Mouallimi, Chairman
Mohammed Abdul Aziz Ibrahim Al Sarhan, Sr. Ind. Director
John Robertson Wright, Non-Exec. Director
Michael Willingham-Toxvaerd, Non-Exec. Director
Martin Gilbert Barrow, CBE, Non-Exec. Director
60 Chiswell Street
London EC1Y 4SA
I’m writing this letter with the full support & active input of Guy Thomas (CIO, Hazell Carr Edwards FURB) and Ali Al Shihabi (founder & former Chairman of Rasmala Holdings Limited (‘Rasmala’)). You’ve obviously spoken & emailed with each of us, jointly or separately, on numerous occasions. We currently own an aggregate stake of between 4% and 5% in EIIB. In the last annual report, you stated ‘in 2013 we will begin to focus attention on translating our success into improved share price performance’. We’re disappointed by the subsequent lack of progress, and disturbed by a number of recent developments. To summarize:
– In May, it was announced Keith McLeod was ‘to leave the Board with immediate effect’. Shareholders were only advised of a plan to hire a new CFO in last month’s general meeting circular. Also, in the same circular, shareholders first learned of KPMG’s resignation as auditor from the requisitioners’ statement.
– At the June AGM, the share buyback resolution was defeated (‘narrowly’, as you mentioned). Tactical voting was obviously a key factor here, but I believe the small scale of the buyback (GBP 5 million, a mere 3% of EIIB’s total assets) played a role also. As you acknowledged, it’s reasonable to assume a larger buyback would have attracted a far higher level of shareholder support.
– In November, Aabed Al-Zeera was ‘removed with immediate effect from the board of EIIB’. No further explanation was provided to shareholders for this abrupt removal of the Deputy Chairman.
– On Dec-3rd, EIIB published proposed resolutions (including a special share buyback resolution) for a general meeting, as requisitioned by Esterad Investment Company & Al Bassam Investment Company. Despite their prior support for a buyback, the board stated the buyback resolution ‘as drafted is not in the best interests of the Company and its shareholders’, and recommended (without further explanation) that shareholders vote against it.
– The general meeting was scheduled for 12 noon, Dec-31st. For shareholders who’d prefer to have attended, New Year’s Eve was clearly one of the worst days of the year EIIB could have chosen – as confirmed by the meeting’s actual (minimal) attendance.
– On Dec-23rd, EIIB announced it had acquired a further interest in Rasmala, increasing its stake to 76.3%. We strongly support the logic of this acquisition. However, we understand the Rasmala shareholders were only offered the option to receive their EIIB share consideration into pooled investment vehicles (rather than holding shares in EIIB directly). We would expect, as surely would the Rasmala shareholders, the management and control of these investment vehicles to be clearly & transparently structured to represent the interests of their owners as new (indirect) shareholders in EIIB. We look forward to any clarifications you may have on this matter.
– We’re also disappointed to see this share issuance implies a 4.2% dilution (of NAV per share) for existing EIIB shareholders. If you recall, Guy and I previously discussed this topic with you, and you agreed dilutive share issuance was not an attractive option. We also think it’s unfortunate that investors might well speculate – noting the timing & structure of the deal, and EIIB’s more than ample cash liquidity – this share issuance was simply a ploy by management to recruit new shareholder support via these investment vehicles.
– On Dec-24th, a requisitioners’ statement & a response from EIIB’s Chairman were finally circulated – only 1 week in advance of the general meeting. It was also announced four of the resolutions were disqualified due to non-compliance with the company’s Articles of Association. On Dec-31st itself, at the last minute, certain parties were also disqualified from voting at the general meeting.
– Surveying the past year, current & prospective EIIB investors might well question management’s commitment to prioritizing shareholder value & improving investor relations. [Shareholders may also recall HBG Management Partners (‘HBG’) sought & gained effective control of EIIB in 2011 with only a 15.6% stake, and without paying any kind of control premium]. All of which may explain why we’ve seen no (other) new shareholdings announced in the last year.
– The EIIB share price is an appropriate report card: It increased by only +6.6% last year, and is down 3.1% since year-end. Noting EIIB’s operational progress, and spectacular equity market returns, that’s a damning level of under-performance – versus, for example, the FTSE AIM All-Share Index (up +20.3% in 2013), the Bloomberg GCC 200 Index (+26.7%), or the Dubai Financial Market General Index (+107.7%).
Despite our reservations about these developments, we remain strongly supportive of the current stated operating strategy. The focus of the previous board & management team on leveraging up the balance sheet, and making private equity investments, were risky & ultimately unsuccessful strategies for EIIB. Current management’s decision to reduce costs, and focus on asset management (& corporate finance) is clearly the right strategy – it requires little capital, offers recurring fee income, and can deliver high margins & attractive economies of scale. The successful acquisition & integration of a controlling stake in Rasmala has been a solid foundation for this strategy. In fact, the recent increase in EIIB’s Rasmala stake makes perfect sense – if it wasn’t for the deal’s timing & structure raising questions.
With continued improvement in GCC markets & sentiment, we hope to see Rasmala report significant organic growth in Assets under Management (‘AUM’). We also support further asset management acquisitions – provided there’s a good ‘culture fit’, they’re fairly priced & non-dilutive, and they offer attractive cost (and ideally, revenue) synergies. However, we are strongly opposed to any form of merger, acquisition or joint venture with HBG (or other related party entities).
Unfortunately, EIIB’s recent operational success has proved irrelevant to the share price. It now trades at a colossal 52% NAV discount – unfortunately, as long as shareholder value & investor relations continue to be neglected, we don’t expect this value gap to disappear. But we also believe there are some simple but effective remedies available – I’ll use the rest of this letter to lay out some specific proposals. Please treat them as a road-map for you (as CEO & a fellow shareholder), the board, and other significant shareholders to consider:
i) Tender Offer:
We consider EIIB’s current net equity a good approximation of intrinsic value. [It’s worth highlighting this net equity’s now predominately invested in liquid & low-risk assets, with little leverage employed]. We also believe an improved Return on Equity (‘RoE’) is the key to eliminating EIIB’s current value gap. Judging by current sector valuations, a RoE of at least 6-8% plus is probably required for EIIB to trade at a price/book ratio of 1.0 (or better). As things stand, this will not happen.
Let’s assume: a) the rest of the group can pay for itself, and b) asset management reaches its 2016 target, and is earning a 100 basis point (bp) fee & a 25% operating margin on $3 billion of AUM. That’s a reasonably generous assumption, but it still only implies a 3.6% RoE. But this ignores the fact that a wholesale strategy is being employed, so (net) revenues will be far lower than 100 bp. It also ignores minority interests – for example, only 76% of Rasmala’s profits will accrue to EIIB’s shareholders. Finally, it ignores any (future) taxation of those profits. The real problem here is equity, not return – the asset management business requires little capital, while EIIB’s surplus capital cannot earn a decent return in the current environment (unless undue risk or leverage is employed).
Returning capital to shareholders (via a tender offer at, say, a 20% discount to NAV) would improve RoE, enhance NAV per share, and (ideally) increase EIIB’s market valuation. The prior GBP 20 million reduction in share premium was mostly absorbed by losses & write-downs, so we suggest a further GBP 40 million reduction in share premium (to create new distributable reserves) – followed by a GBP 20 million tender offer. This would return 33% of EIIB’s current market capitalization to shareholders. [And if we assume a tender price at a 20% NAV discount (representing a 67% premium to the current share price), and the post-tender share price discount (to NAV) halves, shareholders would enjoy a 63% uplift in the value of their investment]. Of course, if EIIB shares end up consistently trading close to/in excess of NAV, the tender will be judged a complete success. Otherwise, the company retains the fire-power to repeat the exercise (with another tender offer, and/or open market buybacks), and create/return even more value to shareholders.
Proposal A: Create a new GBP 40 million reduction in share premium, execute a GBP 20 million tender offer (at a 20% discount to NAV), and review & repeat if necessary.
We appreciate the entire tender offer process takes a number of months to complete. Meanwhile, as of Jun-2013, EIIB has distributable reserves of GBP 3.4 million (and possibly up to GBP 5.5 million), but no share buyback authority. But it can still declare a final dividend. This obviously isn’t as tax-efficient as a tender offer, nor will it enhance NAV per share, but it’s an attractive & more immediate reward for long-suffering shareholders. Also, it would hopefully improve EIIB’s market valuation & attract new investors.
Of course, this presumes distributable reserves don’t end up wiped out by H2-2013 losses – but on the other hand, net profits would actually increase these reserves. Paying the maximum permissible dividend clearly poses no financial burden – for example, GBP 5.5 million is only 3% of EIIB’s total assets, and even GBP 2 million of reserves would provide shareholders with a 3.3% yield.
Proposal B: Declare the maximum permissible dividend when announcing EIIB’s final results.
iii) Monetization (or Relinquishment) of EIIB’s UK Banking Licence:
As you’ve highlighted before, we appreciate EIIB’s UK banking licence may provide some prestige & reputational benefits when marketing to new & existing clients. But the company’s now focused on Rasmala’s wholesale asset management strategy throughout the Middle East. In that context, we consider any direct/incremental value a UK banking licence may add is more than offset by the required regulatory costs & burden. We also believe EIIB’s London listing already offers the same benefits.
Relinquishing the UK banking licence would eliminate incremental employee cost & other expenses associated with this unnecessary regulatory burden. More importantly, it would add balance sheet flexibility & reduce the regulatory capital that’s required. However, a UK banking licence is potentially a valuable intangible asset. [For example, the strategy of Tungsten Corporation plc (a recent IPO) highlights this potential value]. Selling (or otherwise monetizing the value of) the licence to a third party could prove far more rewarding. It also suggests another attractive strategy – potentially carving out a significant percentage of the current balance sheet, to include in the licence sale. This might offer shareholders an opportunity, for example, to realize a major portion of EIIB’s current NAV at book value – rather than the 52% discount implied by the current share price.
Proposal C: Initiate a formal process to sell/monetize the UK banking licence, ideally to include a major portion of the current balance sheet. Failing that, relinquish the licence.
iv) Other Investor Relations/Governance Measures:
This final proposal aggregates a number of other measures. Most speak for themselves, so I’ll only comment on two of them. a) Name Change: Noting EIIB’s newly-increased stake, and the focus on Rasmala, its reputation, and its asset management strategy, a name change is now appropriate. And b) Independent Directors: It’s unclear if a majority of directors are now UK based. We also note the board’s recent commitment to ‘seek to increase independence’. Most importantly, we’re concerned 50% of the board’s now connected with HBG, even though HBG’s last reported shareholding is just 16.1%. The appointment of new independent (UK based) non-executive directors would ensure a more representative board – candidates should have a history of delivering shareholder value & managing potential conflicts of interest.
– Re-affirm the board’s (prior) commitment to share buybacks as soon as possible.
– Appoint a new (primarily London-based) CFO asap.
– Confirm the new audit appointment to shareholders asap.
– Appoint new independent (UK based) non-executive directors asap.
– Consider a potential name change – for example, to ‘EIIB-Rasmala Group’.
– Actively present EIIB as a MENA/GCC & emerging/frontier markets investment opportunity to fund managers.
– Comprehensively update EIIB’s website, and post all recent/future IR presentations.
We assign the highest value/priority to Proposal A (Tender Offer), but believe the vast majority of these proposals can be implemented (on a concurrent basis) within six to twelve months. Executed in their entirety, we’re confident these proposals will produce a substantial & sustained improvement in EIIB’s intrinsic value, share price, and investor sentiment.
We’d be delighted to discuss them in greater detail with you, the board, or other significant EIIB shareholders. And we’d welcome all public comment about these proposals. In fact, we’re sure all shareholders would welcome such comment…in the end, we are all owners of the company. HBG may be comfortable with the current share price range (noting its further purchase of 35 million shares at 3.175p last May), but we expect the over-whelming majority of shareholders are frustrated with the poor share price performance (down 14% since your appointment as CEO, versus +24% for the FTSE AIM All-Share Index), and the lack of progress realizing & enhancing EIIB’s obvious intrinsic value.
Please note I’m also publishing this letter on the Wexboy investment blog, and will be actively seeking the support of other like-minded EIIB shareholders.
CC: Guy Thomas
Ali Al Shihabi’
Now, as a reminder for readers – here’s what the EIIB 5 year chart actually looks like:
Of course, some EIIB shareholders may actually prefer this status quo…
But I expect most will take another look at the current value gap, re-examine their own operating target & scenario analyses, and a majority of shareholders will quickly recognize our proposals present a more certain & immediate road-map to realizing EIIB’s quite obvious intrinsic value.
If you currently have a direct/indirect shareholding in European Islamic Investment Bank (large, or small), and support this letter & its proposals (as presented to EIIB’s CEO & board), I’d like to hear from you.
Please email me at: firstname.lastname@example.org