I hope readers were just as pleased (as I was) to note the recent tender offer announcement by European Islamic Investment Bank (EIIB:LN). Even if you’re not an EIIB shareholder, it’s an excellent reminder activism isn’t simply a bloodsport practiced by US hedge funds. All investors, large & small, have rights & responsibilities as the owners of the companies they invest in – and sometimes they need to insist their voice is heard by management…
I proposed such a tender offer to EIIB management in my Jan-2014 letter (with the support of Guy Thomas, Ali Al Shihabi & a number of other shareholders). Of course, this letter was a follow-up to my previous 2013 letter. Some might argue I’ve been far too sedate/polite in my activism – that’s understandable – I could definitely have taken a far more aggressive activist stance, but in this instance my approach reflected my underlying (positive) perspective on the business. As I’ve detailed before, I believe EIIB offers investors a compelling triple play on frontier markets, Islamic finance, and Middle Eastern oil wealth & resources. Unfortunately, in its previous incarnation, that potential was wasted…
However, the arrival of HBG & the appointment of Zak Hydari as CEO stabilized the business, led to the acquisition of Rasmala & re-focused operating strategy on becoming a leading GCC asset manager. Which has, to date, been a great success – not that you’d notice from the share price – Assets under Management (AUM) have doubled in just 2 years (to USD 1,176 million at year-end 2013, from USD 600 million in Jan-2012). This is clearly a high margin business, with attractive economies of scale, but that’s not yet apparent due to the restructuring of Rasmala/EIIB & the rapid expansion in AUM. Unfortunately, as things stand, it’s unlikely this operating progress/potential can deliver a decent return on equity for shareholders in the foreseeable future – because any likely return will end up swamped in a sea of equity! [EIIB currently has GBP 123 million of equity, mostly in cash & liquid securities].
But asset management is inherently asset light – that’s always been the beauty of the business for companies, entrepreneurs & investors alike. Having surplus cash & investments on hand may be comforting to management, but it’s an expensive luxury to have & no different really than (other) fixed assets – it weighs the business down, and there’s always the risk & temptation of spending the money on a foolhardy investment or acquisition. Most of the listed asset managers figured this out long ago…so balance sheets have slimmed down, returns have increased & investors have rewarded them accordingly. [See this Argo Group (ARGO:LN) post & letter – the peer analysis makes for interesting reading: Median net cash/investments totalled just 0.8% of AUM for UK-listed asset managers]. Of course, EIIB is still (technically) a bank, subject to regulatory capital requirements, but that’s basically irrelevant: a) Building a leveraged portfolio of long-term loans is (thankfully) not part of the operating strategy, and b) the current balance sheet can be easily reduced/liquidated to facilitate reduction(s) in regulatory capital. [Whether EIIB’s operating strategy even requires a banking licence remains a subject for debate].
A tender offer by EIIB is a great first step in addressing this issue – it returns surplus capital to shareholders, it enhances NAV per share, it will improve return on equity, and it will (ideally) improve market/investor sentiment in the medium-term. In my most recent letter, I proposed a GBP 40 million reduction in share premium – in the 2014 AGM Notice, I’m delighted to see Resolution 9: ‘That the share premium account of the Company be reduced by £40,000,000.’ Approval of this resolution will, in turn, permit:
– My proposed GBP 20 million tender offer – see Resolution 11: ‘the maximum number of Ordinary Shares hereby authorised to be purchased is limited to an aggregate number of 400,000,000…the price to be paid for each Ordinary Share shall be 5 pence’. [I proposed a 20% NAV discount (i.e. GBP 5.1p) – sensibly, the resolution rounds this to 5p per share, a 22% discount to EIIB’s latest 6.4p NAV]. I obviously expect management should purchase the maximum 400 million shares (i.e. GBP 20 million) in the tender offer.
– Share buy backs – see Resolution 10. A buy back programme is the ideal follow-up strategy to the tender offer, and can be executed on a regular and/or opportunistic basis by management (subject to certain prescribed limits & a maximum of 197 million shares).
The tender offer alone is 25% of the current market cap & it will enhance NAV by almost 6% to 6.8p per share. Noting these facts, plus the 5p tender offer price itself, I’m disappointed to see the share price now trading at just 4.1p per share. That seems a pretty miserly & short-sighted investor reaction – in fact, it’s only a 14% premium to the pre-tender announcement share price, and still a colossal 39% discount to the post-tender NAV. But in my experience, investors are often slow to respond to & renew their faith in a stock trailing this kind of long-term chart – regardless of its progress, or news flow:
But money talks… Let’s see the reaction of current/potential investors once the tender offer actually goes ahead. And don’t forget, at that point, management should have a marvelous one-two combo at its disposal – tender offer, then share buy backs! [Not to mention the other investor-friendly proposals that remain on the agenda – again, see my most recent letter].
Of course, none of this is possible ’til the resolutions are actually approved at the upcoming (June-25th) AGM. Every vote’s important here, especially since special resolutions require 75% of the votes to be passed – and I’m sure no shareholder wants to see a repeat of last year’s AGM, where the share buy back resolution failed to receive the necessary votes. If you’re voting via your broker, you’ll probably need to contact them immediately. [And don’t accept any run-around, or ridiculously early deadlines – some brokers now seem to think voting’s simply a quaint & annoying practice!?]. If you plan to submit a proxy form, it must reach the registrar’s office by noon, June-23rd. And if you’re planning to attend the AGM itself, I’m sure you already know the drill…
Here’s another copy of the AGM Notice. There’s a total of 11 resolutions – some are simple housekeeping, others deserve more detailed consideration – I’ll limit my personal recommendation to:
VOTE FOR RESOLUTIONS 9, 10 & 11!