The Bad Investor

Stock Writeups

KLSE:Mulpha - Mulpha International Bhd

3 July 2019

Market Cap: MYR $700Mill (AUD $240Mill)

Share Price: MYR $2.19 (AUD $0.75) @ 3 July 2019

*Edit: Update 17/07/19 - Sold Cairns Esplanade for AUD65M, was held on books for AUD36M

Elevator Pitch - Mulpha is the permanent capital vehicle for the chairman Lee Send Huang. It is an Investment holding company and property developer listed on the Malaysia (Burhad Main Market). However, all but 2 of its blue chip commercial portfolio and strategic development portfolio are in Australia (others in Malaysia and New Zealand). This misunderstanding is the primary source of mis-pricing causing the business to sell at 25% of reported NTA. Of the NTA, Mulpha's investment in Australian listed company, Aveo Group, is worth the value of Mulpha's market cap. The quality of the portfolio at substantial discount is compelling enough, however there is also catalyst on the way. Even if this catalyst doesn't execute, there is the environment for many other catalysts.

Aveo is currently in talks with Brookfield about a whole of company sale with expiry date for negotiations on the 22nd July 2019. If the sale goes through, this discount to asset value stock will turn into a net-net!

Areas of Businesses

Property Development: Active both in Sydney and in Malaysia. The most notable development sites are in Norwest, Sydney, a suburb in the North West of Sydney which recently opened it's metro station (Norwest). Mulpha owns significant land parcels in the most prominent locations including the suburbs primary shopping centre. Projects owned by Mulpha include Marketown (4.4 ha), The Greens/Haven/Neo (4.4 ha), Essentia (6.1 Ha). Both Market town and The Greens have enormous uplift potential subject to the approval of 2000 apartments.

The other substantial development site is Leisure Farm Malaysia (370 Ha) which is located 40 minutes from Singapore. A high speed rail linking Kuala Lumpar and Singapore has been announced for anticipated for completion in 2026, with a station at the project. This project is recorded on the books for significantly less than its actual value.

Hotels, Resorts and Commercial Buildings: These include the trophy 509 room Intercontinental Sydney, Sanctuary Cove resort Gold Coast (64 ha inc hotel/office/residential/golf course), trophy 166 room Hayman Islands Great Barrier Reef (290 ha with 17 house land lots for sale), Waldorf Stadium Apartment 4-star Hotel Auckland, Rydges Esplanade 4-star Hotel Cairns, Transport House Sydney (strategically located adjacent to the Intercontinental site and could have development uplift in the future).

Aveo Group Equity: Mulpha owns 22.6% of Australian listed Aveo Group (ASX:AOG, AUD $581mill) which is a developer, owner and operator of aged care providers. Aveo is a defensive business that services the aging Australian population and is the second largest aged care provider in Australia after Lendlease and before Stockland. The homes are sold and the lump sum for the property is paid upfront with a service fee being recognised annually. When the resident leaves, there's exit and refurbishment fees that are deducted from the upfront payment with the balance being paid back to the owner or their estate. This is a very low return on asset business but it makes use of the float from upfront payments from residents as leverage/float and is able to achieve 17% ROE. All this is interesting, but the most interesting thing is that Aveo is trading for 50% it's NTA. The value of Mulpha's 22.6% ownership is AUD $256 Mill at the current market value of AOG (MYR $740Mill) which covers the market cap of Mulpha today. Aveo is in the process of negotiations with Brookfield for a whole of company sale.

Other investments:

KLSE:Thriven Global Bhd (24% ownership) - Malaysian listed real estate developer. Value of ownership MYR $28.8Mill marked to market. Market price 37% discount to NTA.

Education Perfect (39% ownership): purchased stake for MYR $46 Mill. Has 1400 schools as clients.Unknown revenues and substantial admin costs looking at the employee roster on the website. Assumed worthless. For comparison, publicly listed company Kip Mcgrath has a similar market cap (ASX: KME) and is in the same industry.

New Pegasus (33% ownership): London property, equity worth MRY$ 116Mill.

Asset management business : Pindari Capital is a real estate focused fund that does direct real estate investing and debt investing along with a range of other property related services. Likely (but nor solely) used to fund Mulpha/Aveo projects. Book value and underwriting skill unknown. Assume no value.

Wine business : Owns a vineyard and produces wine. Assume worthless

Others: there are potential other investments which aren't listed in the reports. We will assume nil value.

Misunderstanding - The core misunderstanding by the market is the fact that Mulpha is listed in Malaysia while it's main operations are in Sydney, Australia. It is unlikely Malaysians understand Sydney property development outside of what they hear in the news, which has recently been about Sydney's falling house prices. Further exacerbating the bad sentiment, Aveo was the target of an investigation into the ages care industry in Australia with claims for mistreatment and unfair terms for their residents. This received negative press both in Australia and Malaysia. The current chairmans father, Lee Ming Tee, has a poor reputation amongst the Malaysian and Australian community for falsifying accounts and acted in ways to prejudice minority shareholders. He was sentenced to jail for one year in 2004. Since Lee's son has taken over, there has been little news of foul play.

Another reason for the misplacing is the relatively speculative nature of emerging markets. These factors combined with the illiquid, overlooked nature of the stock.

Management - The chairman, Lee Send Huang, who as taken over the reins of his father Lee Ming Tee in 2003, is a 48% owner of Mulpha. He shares the board of Aveo, as chairman, with one of his directors at Mulpha. The behavior of management has raised some eyebrows.

Mulpha has provided a number of ongoing, related company transactions to Aveo including Rent, Asset Management fees, Administration and Commission on sales. It is difficult to know if these rates are fair. Provisions of financial assistance are regularly issued to Mulpha Ventures (MYR $4 Mill/pa or 0.04% of NTA/pa). It is unclear what happens to these loans and how much of these loans get written off although these could be legitimate. Lee is a 61% owner and Chairman in SUN HUNG KAI & CO. LIMITED 新鴻基有限公司 (HK:0086). There are a number of SFC filings which highlight foul play in the securities trading company. Although there are a number of questionable actions by management but it doesn't appear that they are hugely detrimental to shareholders (except for Mulpha Ventures which is a negative both if it's legitimate speculation or fraud).

From an asset allocation prospective, management has said that it is willing to sell parts of its portfolio if it gets offers that are in excess of what they think the assets are worth. Their asset allocation has been good to date. They purchased a portfolio of 4 properties including the Intercontinental Sydney and Hayman for AUD $400mill sold the other two for AUD$85 mill and AUD $141mill leaving a coast base for the aforementioned properties of AUD $174 mill. Those two properties are, in the worst case, worth AUD$ 220mill.

Valuation - The thesis is that this is a discount to asset value stock with a catalyst that may turn the illiquid assets into liquid asset. It becomes a net-net. The core requirement for these plays is that the business have a history of profitability so that the value of the business does not evaporate as you wait for the market to realize the value of the assets, even if this catalyst doesn't execute.

Earnings are irrelevant in this case as fair values are changing year to year on the properties and affects the earnings figure. Cashflow from operations is a better measure. In the past 14 years (2005-2018) 2012 was a cashflow negative year due to European debt crisis' effect on sales. 2009 was a cashflow positive year and 2008 was a loss making year despite relatively high revenues (I suspect its because of high volumes of properties under construction and high expenses which were not recovered in proportional revenues).

The portfolio of businesses and properties looks different today than it did in 2012. Today, 7 out the the top 10 properties are cash generative while in 2012, only 5 were. The other 5 were development sites which are highly capital intensive so it is expected that the business will remain profitable as long as the portfolio is mainly cash generative properties.

The value of the assets is the most part of the business. My summary is as follows (see the link for details):

Sum of the parts Value (MYR)Property Development 2357.01
Hotels & Resorts 1538.43
Investment 28.80
Aveo Group 742.05
Asset Value 4666.29
Cash 150.57
Liabilities -2654.60
Net Asset Value 2162.25
*The detailed valuation can be found here

Mulpha's market cap today is MYR $700mill while my conservative valuation is MYR $2160mill (Margin of safety of 65%). This valuation doesn't take into consideration the strategic value of the assets nor does it consider the potential uplift from ongoing planning proposals. It also only takes into consideration the top 11 holdings and excludes any other investments other than Aveo.

The average return on equity has been 6% over the last 5 years. A business like worth around about its asset value. Given how conservative I've been in the valuation, this is a very cheap business.

The debt appears to be quite high, however, in property deals, the individual assets can either be loaned against individually or bunched up into a cross-collateralized debt facility. It is likely that the commercial investment assets are bundled up into a single facility with one bank. It's also unlikely that the bank will call the debt on the portfolio of bluechip assets on a large debt facility. At times, development loans can be rolled up into the large facilities, which reduce the risk of the bank seizing the development site but also expose the entire portfolio to a potential bad development project. Often, large mature companies with experienced management teams and a proven track record have more bargaining power with a bank. It is even more true for clients with large facilities. It is unlikely that the debt is a major risk here.

Competitors with similar assets such as other Australian ASX listed developers Mirvac, Crown, Lendlease and Stocklands have ROAs of 4-8% and PEs of 9-20. ROA is comparable but the PE is 3. The industry average price/NTA for hotels/resorts/cruiselines is 0.53 while for travel/leasure/hospitality it's 0.90. Mulpha i cheap by all measures, especially for the quality of the assets.

From a probabilistic perspective, if we assume that the price will reflect only 7/10 NTA in 10 years with no growth, then Mulpha’s stock will return 11.3%. Given that a property cycle in Sydney is generally accepted to be 5-8 years it is more likely than not that the market will revert to the mean within 10 years. Another way to look at it is to say that if there’s a 6% chance every year that a catalyst will occur, odds will be in your favor in 10 years.

Now, if we assume that Aveo shares will reflect 70% value with no growth, in 5 years, it will return 6.9% plus 2% dividend yield to return a total of 8.9%. I think these are conservative scenarios for both cases. If the businesses improve, buy back stock, pay dividends, properties revalued, continual development of properties, reopening of the Hayman resort or any other catalysts, then the return will be higher. In this case, we're saying that we need a greater than 10% chance a year that a catalyst will occur. In just the past 12 months, there have been 2 equity purchase offers which makes the 10% chance look quite realistic.

Catalyst - In the potential sale of Aveo, Mulpha is the largest shareholder in Aveo and since Lee is chairman of both companies, it is likely that he wants to see Aveo's 50% discount to NTA close, at least partially. Lee would likely be able to deploy the capital back into the Sydney property market given its position in the property cycle.

There is a risk that if the price drops further, Mulpha will make a low ball bid, however this is unlikely given the cash balance of Mulpha (MYR $150mill cash vs Aveo's MYR 2180 Mill market value of shares not owned by Mulpha). It is likely that his interest are aligned with the shareholders at Aveo and wants to see a deal get done.

Management act questionably at times, however this does not seem to be at the loss of the shareholder. Furthermore, the business seems to be the chairman’s permanent capital vehicle for Lee, which suggests that if the sale of AOG completes one of these scenarios is likely to occur:

  1. the cash is redeployed into other assets. This is most likely given that this is the permanent capital vehicle for Lee and the current opportunity set in Sydney property.
  2. the cash is returned to shareholders via buybacks. Possible and preferred, especially given the current discount to asset value. It has done this in the past and keeps a mandate renewed annually to repurchase up to 10% of the issued shares annually. This is possible. There is a very small chance that the business buys back 60% of the shares outstanding and concentrates Lees shareholdings to 75%, which would allow him to delist. There's a 25% minimum free float requirement. The management may then delist and attempt to offer a low ball bid for the remaining minority shares. This seems unlikely. This would take 3 years to execute and can be monitored through quarterly reports.
  3. the cash is returned to shareholders in the form of special dividend. This is the most unlikely unless:
    • the cash is distributed to shareholders, including Lee.
    • the Lee uses the cash to purchase 30% of the excess shares to hold 75% of the float and delist. I find this unlikely. Furthermore, there may be tax implications for Lee in this case and given Lee's fathers business philosophy, it seems that the family prefers to control more assets with a smaller equity base by making more acquisitions.

While not all above scenarios are ideal, they would all be value accretive in some way shape or form, and should allow the shareholder to exit if management chooses to do something distasteful.

Summary - This is a business selling for less than asset value which is profitable. There are compound misunderstanding which make for compound mispricings. Conservatively, Mulpha is selling for 35% of it's value, with optionality. It's average ROE over the past 5 years is 6% which deserves a a value around book. This is not a perfect situation, there are some risks around management and uncertainties around the catalyst, however, there is a point where the opportunity is priced so cheaply that these risks are accounted for.

Both Mulpha and Aveo are cheap and have their own risks/rewards and are priced that way. Aveo would pay out cash and is listed in a low country risk market, while Mulpha would see the capital redeployed via the hands of management. Both businesses are controlled by the same management team, the main difference is how much uncertainty you're willing to deal with, but the way they're priced now, you get what you pay for.

Disclosure - I own shares of Mulpha & Aveo. This is not a recommendation to buy or sell any securities, nor is it financial advice. All information presented is believed to be reliable and is for information purposes only. Do your own research before purchasing any security

A note on Sydney Housing (Macro) - Theres a reason this is the last section. Because normally I wouldn't even bother mentioning macro trends but there are some tailwinds which might help Mulpha. The last 6 months to 1 year has seen the "bursting of the property bubble" in Sydney. This was due to tighter lending regulations on foreign investors (introduction of doubling of stamp duty) as well as APRAs restriction on investment mortgage loans which dried up capital flows from overseas. In the last month, a confluence of positive forces have converged. Interest rates have been lowered twice from 1.5% to 1% which is a historic low. APRA removed the restriction on new investment only loans and APRA also removed the 7% serviceability requirement for mortgages.

It was anticipated that Labor would win the most recent election, and if they did, they proposed changes to the dividend tax credits as well as proposed changes to the 50% capital gains discount on the sale of a residential property to 25% as well as the deletion of negative gearing which allowed investors to include mortgage interest payments as an expense to an individuals taxable income. Liberal won and the positive reaction was seen immediately in a stock market rally. The positive effect on housing was also seen in auction rates. During peak bubble, auction rates were 80 percent, they fell to 40% when the bubble burst and since the election have returned to 60%. Anecdotal evidence speaking with my mortgage broker suggests that business has increased 2 fold since the trough.

Got any thoughts? Email me:

ASX: MGC - MG Unit Trust Units

24 June 2019

Market Cap: AUD $64Mill

Share Price: AUD$0.35

Background - Murray Goulburn was one of the largest dairy food producers in the Asia pacific region up there with Fontara. It had a cooperative structure with the supplier/farmers which owned the business while there was another linked entity that was publicly listed and profits were distributed between supplier/farmers and shareholders using a profit sharing mechanism.

Long story short, conflicting incentives of management bonus scheme lead to inflating dairy prices. The structure lends itself to unaligned interest between management of a publicly listed company who are also responsible for the profits of the supplier/farmers. Add forecasting of a commodity price which is un-forecastable leads to certain disappointment and you get class actions from both the shareholders and farmers. Saputo made a bid and bought out the business for a special dividend of AUD$0.80, leaving only the listed entity liable for 2 litigations which held cash and equivalents of AUD49c as of April 19.

The entity was a part of 2 class actions, 1 of which has been settled as of announcement on 24 June 2019. This was settled for AUD42mill and management anticipates 80% to be covered by the insurance company (AUD1.5c/share payable by company). The other is still outstanding and trial mediation is set to occur in September 2019 while the trial is set to begin in February of 2020. The two class actions had overlapping elements and revolve around similar events.

The company has proposed a delisting with reduced cost of insurance premiums being its primary motive. It also reiterated that the entity would be wound up following the conclusion of the litigations and remaining equity will be distributed to shareholders.

Valuation - AUD43c. Margin of Safety 28%

    • AUD $0.49 per share remaining from 15 April 2019 announcement
    • less 20% of AUD42mill settlement = AUD1.5c/share (the rest is assumed to be paid by the insurance company)
    • Leaves AUD43c
    • Current Market Price AUD35c

Summary - At a 28% MOS There is 8c discrepancy between price and NTA. If the result for the remaining litigation is similar (AUD1.5c), 8c should be suffice to cover overheads and the resulting litigation fees. Even in the worst case, if shareholders are made to bare 100% of another AUD$42mill (AUD7.5c), investors would come out flat.

Other Shareholders -

  • Nordly's Investments has gradually purchased 19.55% of the remaining company
  • Mercantile (a corporate raider which also drove the liquidation of AKF) is a 5% stakeholder too.

More information -

Disclosure - I own shares of ASX:MGC. This is not a recommendation to buy or sell any securities, nor is it financial advice. All information presented is believed to be reliable and is for information purposes only. Do your own research before purchasing any security

Got any thoughts? Email me:

ASX: AKF - Ask Funding

6 July 2018

(This is one of my archive post from a Value Investors forum in July 2018. I subsequently sold the stock for a 160% profit within 2 months.)

Market Cap: AUD $1Mill

Share Price: AUD$0.021

Background - Australia-based pre-settlement and disbursement lender who was taken over by corporate raider Sir Ron Brierley (Mercantile ASX:MVT). The Annual report states that "The Company has continued to service and amortise its loan book with the sole objective of delivering the surplus funds to shareholders". The business how now requested removal from the ASX listing and plans to do a 10% on market buyback. The company has announced that it will conduct the buyback at NTA.

Investment Thesis/Valuation - AKF recently completed a unmarketable parcels share buyback at NTA 6.03c (as of end of March 2018). Current price 2.1c, MOS 65%. Objective is to sell during the on market buyback.

Other Shareholders - Largest holders are Mercantile 71.4% and Wilson Assets Management 12.7%.

Risks - Writing down of unrecoverable loan book. AKF may write down 2m Matrimonal Loan (3.1c/share) leaving the NTA at 2.93c. Court order was to pay the 2.8 m in Feb but has since been appealed. On market buyback may occur at prices far below NTA. MOS is 65% more than covers these risks.

Catalyst - Delisting & On market buyback

Got any thoughts? Email me:

My Niche

22 June 2019

I’m an investor from down in Australia and I’m currently living in China. I’m a small value investor that prefers to focus on illiquid, micro-cap and overlooked businesses that are selling with an obvious margin of safety. Concentration doesn’t bother me and common sense is my main strategy.

My reference point for value is Buffett's Partnership Letters (Sanborn Map and Commonwealth Trust case studies). What doesn't interest me is markets where people smarter than me can work out a price target of $110 for a business selling at $100. I’m looking for obvious value, no excel. From a bottoms up approach, I’ve found that areas like US OTCs and HK micro-caps show these opportunities.

The reason these opportunities existing is 3 fold:

  • Informational edge- Insider trading based on privileged information is unlikely, however, show up to an AGM where you’re the only investor, I’d say you could get some sort information edge if others simply don't care to show up. I try to find companies that a lot of people don’t follow.
  • Analytical edge- I’m not smarter than Columbia business graduates or analysts who invest full time and for their livelihood, but those guys usually invest big sums at big institutions. I try to find companies that don’t move the needs for institutions and aren't worth their time.
  • Behavioural edge- Fund managers are always trying to make quarterly returns so that their investors don’t pull their capital and give it to the fund next door. Investing for myself, I’m able to truly keep the long term in mind. I don’t care about quarterly performance as long as the business as an investment has bright future prospects or there is a strong case of good returns. I’m not going to fire myself and as a result, I can be patient.

I’ve found that a confluence of the above 3 factors can be found in overlooked markets and in securities that aren’t sexy. That’s why I like the HK and OTC markets.

I’ll post ideas I find here and I'm more than open to any and all feedback or questions.

Email me: