Crash stock: Ipco 6 comments

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Ipco is probably one of the more colourful stocks on the SGX. However, it is also one of the greatest destroyers of shareholder value over the last ten years. A shareholder buying in at $5/share in 1993 before the start of the 1994 bull surge would be left with <$0.10/share today (assuming he had not exercised a rights issue in 1997) --- a reverse 50-bagger over 13 years excluding opportunity costs.

The evolution of Ipco since its listing in 1993 may be divided into three stages: from 1993-99, 1999-2004, and finally 2004-now. The shareholding structure of the company, and its main business operations, underwent major changes through each of these stages.

The company was founded in the 1970s and at time of listing, its major shareholders were an Australian-listed group, Leighton group, and Malaysia-based Promet, an infrastructure, maritime engineering and construction group which was a stock market darling during its time --- veteran investors would be familiar with it. Ipco was involved in infrastructure, construction and oilfield services/equipment, and given its linkages with Promet it quickly became a hot stock during the bull run in late 1993-94, hitting a peak of $10 or ~25X trailing PE. However, a normalisation of market sentiment drove the price downwards to around $2 by 1996. The company was still profitable in its core operations, deriving S$7M profit on nearly S$300M revenue in 1996, although earnings growth was patchy.

The 1997 Asian financial crisis hit the company badly, a blow from which I believe it was never able to recover since. Most construction companies were hit, given that the heavily-leveraged property developers across Southeast-Asia bore the brunt of the currency shock. Over 1997-1999 Ipco accummulated losses of over S$100M. Promet itself was troubled due to its property commitments and in 1999 pared down its Ipco stake from >70% to <10%. Ipco's share price had dived to 60-70 cents by 1999, albeit having had an 8-for-10 rights issue in late 1997 (which apparently sparked a huge short-term spike to >S$3).

The second stage began with an Indonesian businessman Purwadi taking charge, and the landmark event being an amazing share issue of 650 million new shares valued at US$0.20 a share (existing share capital had been 70 million shares) for the purchase of a toll operator Spring Sun International which owned a stake in two China toll roads. Today it would be known as a reverse takeover. However, the seller appeared not exactly keen to hold on to the Ipco shares, as there was a subsidiary agreement to sell back the shares to Purwadi in stages subsequently. It appeared to be a way for Purwadi to gradually consolidate shareholding control over Ipco, except that he couldn't: according to "regulations" he was unable to hold more than 25% at any time, which of course meant he would probably place these shares out to the market eventually. Strangely, a steady flow of market news and imminent deals cultivates the speculative instincts in traders, and Ipco's share price surged from $1 to $4 within the space of one month in April 2000 (a move contrary to the market trend, given that the dot-com bubble burst in that month), then retreated even more quickly back to $1 within the next few weeks. There is reason to believe the stock had been cornered.

The deal eventually went through but Purwadi had rescinded his offer to buy back the shares. He was lucky, for Ipco languished at ~10-20 cents, way below the original issue price of US$0.20. Anyway, the SSI seller, Hi-Way Investments, probably eventually offloaded its huge stake in mid-2002 at a loss. But it had also, in turn, probably screwed Ipco in its own way: operating losses were actually incurred on the toll roads over the next two years, and eventually Ipco sold off its SSI stake at a S$80M loss, a 40% loss on its initial investment (which admittedly cost no money, but destroyed shareholder value through massive dilution). Ipco had somehow managed to contrive a deal where all parties were made to feel that they had lost big-time.

In-between, there were so many miscellaneous deals here, there, everywhere that the minority shareholder must have been bedazzled. There were oil-and-gas deals in Thailand which ended in litigation, new share placement deals (again!) to acquire an explosives company (never went through), and attempted listing of a subsidiary Insitu (also never went through). Finally, under new management in 2004, Ipco decided enough was enough, and restructured yet again, selling off all its core infrastructure and construction assets and acquiring yet another set of assets, comprising stakes in companies doing electronics , property, oil and gas, gas supply, located in Malaysia, China, USA, Singapore (confusing, but in alignment with the company's "culture"). This is the third stage. It is still evolving, and I shall not go into it further because I have already covered it in a Hotstocksnot article on Ipco recently.

One thing cannot be denied, and that is the speculative nature of the stock, which has made it a traders' favourite. It is interesting to note that starting 1994 when Ipco had its first price spike, it had had one every 3 years, in 1997, then in 2000. Since then, it has not had any real price surges of note. Traders, however, still believe in it.

But for what? It is a prime example of a management being distracted by too much dealflow and attempting to capitalise opportunistically on the stock market to grow the firm (through new share placements to finance acquisitions), but instead losing focus and missing the forest for the trees. Most importantly, it continually compromised the minority shareholders. This was especially apparent in the SSI deal. Those who believe they can still ride on the stock when it recovers might end up being trampled by the vagaries of its management.

References:
(1) Various issues of "Shares Investment"

The 1980 silver corner 2 comments

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A corner is a situation where an investor/group of investors secures a large proportion of the outstanding amount of assets on which he forces, or squeezes, those short on the asset to pay a disproportionately high price. Coined in the days of the 19th-century robber barons, it is a vivid description of the quandary faced by shortists who panic to cover: "he that sells what isn't his, must buy it back or go to prison" (courtesy Daniel Drew). The silver corner of the late 1970s-1980 was probably one of the last attemmpted corners.

The protagonists were the Hunt brothers, specifically Nelson Bunker and William Herbert Hunt, two of the fourteen children of the Texas oil magnate H. L. Hunt, who was the richest man in the United States when he died in 1974. Of the two, Nelson Bunker Hunt was the main driving force.

In 1970 Nelson Bunker Hunt decided to invest in silver to hedge against inflation, which was clearly rearing its head. At the same time, silver provided a safe haven to individual investors, in the face of a risky international situation in the forms of Vietnam and the Middle East. The price of silver was then $1.50/oz(ounce). The form of accummulation was via silver contracts which the Hunts had every intention of accepting delivery: by 1974 they had accummulated silver contracts totaling 55 million oz or about 8% of the world's silver supply at that time; they took delivery of all the silver. By the spring of 1974 silver had risen to over $6/oz amid talk of the attempted silver corner.

At this point it is useful to understand the silver market. There are three primary markets for silver: the ornamental market which serves jewelry and silverware; the investor segment which concerns silver bars and coins; and the industrial part which includes photographic film and paper (the main), computer components, brazing alloys, pharmaceuticals and alternative energy applications. The industrial sector generates the biggest demand for silver, while the investor segment, the smallest. Although the world was churning out new silver from the mines all the time, world demand was about double that (new annual production of 245 million oz vs annual demand of 450 million oz in 1974). In that year, of the estimated 700 million ounces of silver in supply, only about 200 million ounces was available for delivery against futures contracts. Supply was tight, and the Hunt brothers realised that if they could take on a partner to resume purchases of silver, the price would rocket upwards, as those short on silver (ie. the sellers of the silver contracts) would have to scramble to find new silver for delivery.

The partner was needed because the Hunts, despite their wealth, were now a little short on cash by then. It also takes a lot of courage to attempt a corner on one's own; better to spread the risk. In 1978 they found their partners in two Saudi sheiks, formed an investment group called International Metal Investment, and resumed their silver contract purchases in 1979 on the CBOT (Chicago Board of Trade) and the COMEX (Commodities Exchange of New York). In the fall of 1979 the silver price doubled from $8 to $16/oz in only two months. Other syndicates with big money behind them started buying silver, as momentum took on a life of its own. The COMEX and the CBOT started to panic; in late 1979 the warehouses of the two exchanges only held 120 million oz of silver. By then, the Hunt brothers held 40 million oz of physical silver in Switzerland and 90 million oz of bullion they jointly owned through International Metals. International Metals had contracts on another 90 million oz due for delivery that March from the COMEX. The Hunts were looking ready to suck all the available deliverable silver out of the US exchanges.

Then the exchanges started to modify the rules of the game. CBOT changed the rules and stated that no investor could hold over 3 million oz of silver contracts and the margin requirement were raised; those holding above 3 million oz. had to liquidate the excess. The market interpreted this move as a sign that a silver shortage was imminent, and pushed up prices to an astronomical $34 by end-1979. Then in January 1980 the other exchange, the COMEX, changed their rules to only allow 10 million oz. of contracts per trader; excess to be liquidated. The Federal Reserve supported the rules modification of the two exchanges. It was analogous to a casino telling the professional gambler that only a certain portion of his chips were now exchangeable for cash. And such an abrupt rules change against a speculator might have inspired Dr Mahathir's moves during the Asian financial crisis to impose capital controls to halt the tide; it makes one wonder what moral authority the West had in criticising the Malaysian PM for his "draconian" measures, when they had set a precedent in 1980.

When the market realised that the financial authorities would resort to drastic measures to stop any silver cornering attempts, the price began to slide. As the Fed kept on raising interest rates (a move to curb overall inflation: see "1970s Bear Market"), it had two effects: it made the US dollar strong and hence silver cheaper (in US$ denomination), and it made credit expensive. The combined effect was to make it difficult to borrow more money against the Hunts' silver holdings (rapidly depreciating in collateral value) to buy even more silver to hold up the price.

By mid-March 1980 silver was down to $21/oz. By end-March the Hunt brothers ran out of cash to top up their margin calls. On March 27th, a day known as Silver Thursday, the price of silver collapsed by 50% from $21 to $11 in one day, as the market realised the Hunts were now being forced to sell their silver. And so started a downward spiral.

The collapse of the silver market meant countless losses for speculators. The Fed eventually came in and got a group of banks to provide a billion-dollar loan to the Hunts, with their oil assets as collateral. Nevertheless, in 1988 Bunker Hunt declared personal bankruptcy, as the family's fortunes declined following the debacle. In 1988 the Hunts were convicted of conspiring to manipulate the market.

The most interesting thing about this episode that emerged in its wake was that members of the two commodities exchanges had just as much at stake as the Hunts, because they were short the futures contracts. If the corner had succeeded, these were the guys that would have been financially killed. Was there a conflict of interest when they formulated the rules changes that eventually killed the Hunts' silver corner? The answer is very clear. Often people take the moral high ground with a secret agenda.

After the Hunt debacle, silver fell into a deep swoon -- falling to about $3.50 in the 1990s. It is interesting that some investors such as Warren Buffett, George Soros and Bill Gates have taken on significant silver positions. They might have seen some undervaluation given the strong utility provided by this precious metal, as described above.

References:
(1) H.L. Hunt's Boys and the Circle K Cowboys
(2) The Hunt Brothers: by Kevin Kerr
(3) The Hunt Brothers and the Silver Bubble: from StockandNews.com