Kinghorn Wants to Buy Your RHG Shares
Kinghorn Wants to Buy Your RHG Shares
It's exactly a week since RHG Chairman John Kinghorn told the company's shareholders that they couldn't receive a dividend because the company needs the cash to support its credit facilities. Or perhaps, in future, to invest in a new business (one shareholder reminded me after the meeting of the prospectus for the South Sea Company, founded in the 18th century: ‘A company for carrying on an undertaking of great advantage, but nobody to know what it is’).
Today, RHG announced an on-market buyback for up to 10% of the company's shares. It seems they have miraculously found some spare cash. I should be happy. Like many other members of The Intelligent Investor, I have too much of my portfolio in this one stock and need to sell some shares. The buyback should provide us with the ability to do that without substantially depressing the share price. And I have to admit, I had a good chuckle this morning at the way these guys behave.
But while I can handle selling my shares to someone else at a substantial discount to the underlying value, selling them to the company irks me. All we're doing is increasing the value per share for those that remain invested and, for the most part, that's John Kinghorn and friends. They'll probably keep doing buybacks until they're the only shareholders left, and then turn around and pay a massive fully-franked dividend. Now that would be a laugh.
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Good news about the buyback but I won't be selling into it. I'm happy for Kinghorne to take out 10% of the other shareholders though.
The NTA number should make pleasent reading at the half year results. I figure to hold at least until then.
The buyback isn't the ideal outcome but it's a better outcome than what was available before. The majority take home the winnings.
Still, I'm glad that you and Greg agitated for board action. I couldn't care less about how much Kinghorn and friends make. The experience has greatly enhanced your credibility and esteem.
This isn't all that surprising given management is incentivised by options, as you have mentioned previously, as a buy back for less than intrinsic value increases the value of the options, whereas a dividend decreases their value. It's not the most tax-effecient way to return capital to shareholders, but then we already know that management doesn't give a rats about its shareholders.
The buyback will also help management to save face by avoiding the decline the share price has been experience since the AGM (after a healthy increase after the EGM was first requisitioned).
The board are disgraces. No idea about corporate governance.
I may be a jaded old bugger but this looks like the usual screw the shareholders for the benefit of the holders of the options etc. again
This buyback decision is an amazing turnaround! At the recent RHG AGM, Stephen Mayne specifically asked John Kinghorn about a second buyback. The reply that "with the shares now trading at 70-odd cents, that decision [to buyback] is not that clear and obvious" seemed to rule it out.
Now, a buyback does appear to make sense!
Try Mr Mayne's website at http://www.maynereport.com/articles/2009/11/13-1458-5259.html and look at "Well done on the buy back. Will you be doing another, and considering recent profits, you should think about a shareholder dividend." for the audio.
We didn't get all we wanted, but shareholder pressure does make a difference!!
I thnk it is great news for shareholder, I am not selling as I think this buy back will add another 10 cents to existing shareholders, well done guys for spotting this opportunity for us.
i just cant hold back anymore,,,,why are we even wasting time analysing companies run by people like Kinghorn?. What ever happened to investing in companies that had "able & HONEST management" isn't this one of the most important values people like Buffett & Munger (whom we all love to say we try to emulate) look for, before even looking at a balance sheet ??Nobody who believes in the Buffetts way of investing would even have spent more than 1 minute on such a stock with someone like Kinghorn at the helm no matter how much value in the stock. Sorry, but this whole RHG thing has amazed me not because of Kinghorn but because people who aspire to be like Buffett ( & preach his principles) end up with stock like RHG !!!
We never want anyone to hold back, Nick, so I'm glad you've spoken freely. At TII, we aim to serve up a range of investment ideas to our members. Over the years we've pounced on stocks such as Cochlear, Westfield and Harvey Norman which might be considered 'Buffett stocks' along with more quantitatively-based ideas, which might be thought of as more 'Ben Graham stocks'. We're named after Graham's wonderful book, so I don't believe it's inconsistent for us to offer some ideas along those lines.
Also, I've sat in the audience in Omaha on several occasions where both Buffett and Munger have explicitly stated that, were they working with smaller amounts of money, they'd be buying very different stocks to the ones they do today. So I think it can be dangerous to limit ourselves to what are conventionally thought of as 'Buffett stocks' when Buffett himself might be interested in such quantitative bargains were he investing a much smaller amount of money.
Those are my thoughts, though I'm certainly open to further discussion if people think they are flawed.
Sorry Greg..i have to agree with Nick..we are all sheep to the many wolve type company directors and investment bankers that live off of and feed on their shareholders. Its taken me a few years but I'm now starting to identify them and I for one will not be interested companies like that no matter what. Its always been the reason we have not bought RHG shares right from when it first listed. I saw it with Timbercorp but chose greed instead of integrity and it cost us dearly..
Well, I disagree.
Any time we have an opportunity to buy $1 of assets (in this case good old cash!) at significantly less than $1, I'm happy to sit up and take notice. If it didn't have any warts (and I consider Kinghorn to be a wart!) on it, it would not have been so cheap.
I think TII does a very good job of describing the risk vs. reward scenario in their recommendations, from memory RHG was a Speculative Buy until we started to see the cash coming in, was a Buy around 30 cents, and got downgraded to Hold around 70 cents.
I would consider my risk tolerance to be high, and my investing time horizon to be long.
Not everybody is in the same boat though, so people need to manage their own risks accordingly, and not get into something labelled "speculative" if you don't have option to ride it out or see your whole investment go down the gurgler!
Keep it up TII, I'm always interested to see these kinds of opportunities where the risks are understood.
I can understand your frustration Nick but I'm compelled to remind you that Buffet spent over $5 billion on buying into Goldman during the GFC (around 6 months ago) and the guys that run that company make Kinghorn look like a choirboy. I believe Buffet has tripled his investment since. Pardon the cliche but opportunities are where you find them. At these prices, RHG is just too good to pass up and I've added to my already considerable holding.
I couldn't say it any better than how 'fingers crossed' already has.
Keep up the great work guys
It makes me feel sick that there is nothing we can do about it...is this a public or private company. There is no regard for anyone outside the internal management. You sometimes question investing when things like this happen.
if the directors never distribute the cash and use it up NTA could be $4 and I would not touch it. RHG Management waste shareholder money, just distribute it all and start looking for new jobs boys.
I tend to agree with Nick, but I also appreciate and respect Greg Hoffmans response. It's a very important issue, but perhaps one without an easy answer. If the answer was simple, then perhaps value investing would be simple. I believe the onus has to be on the subscriber to ponder the arguments put forward by TII, and form their own opinion. I can't help but thinking, however, that deep and time consuming analysis is wasted on a management that cannot be trusted. A Warren Buffet may be able to buy sufficient influence to ensure that the future has some bearing on the present finacials, but otherwise, if you can't trust the current management, what do you really know about the future? Sure, this risk can be mitigated by having a large and diverse portfolio (Graham style) - but then, in this approach there is little value in deep & detailed analysis. By performing deep analysis, I would suggest TII is indicating a level of confidence in the future of a company that is more consistent with a concentrated (Buffett type) portfolio. I wonder if some of the past disasters, such as TIM, could have been avoided by refusing to invest in companies lacking integrity and indpenendence, or with a... let's say, excessive focus on corporate spin and superficial things. I'm also wondering if we should be concerned about the likes of IFM (although I'm still undecided on this one) and CXP. Having said all of that - I value TII, but it does not remove the need for us all to think for ourselves and take responsibility for our actions.
Mars, as for TIM vs. IFM/CXP I couldn't think of two sets of business situations that are further apart so what do you mean?
Hi All
I totally understand Greg's comment about the relation ship between TII & Benjamin Graham. The only thing i will say is that although i believe that Benjamin Graham was the father of value investing ( & i have read Securities analysis & the intelligent investor ,,,) to me, the Warren Buffett we all love & adore is just as much a product of Charlie Munger as he is of Benjamin Graham. i take nothing away from Graham, but we still all lean towards Grahams way of investing even though he could only dream of the returns buffett achieved with the influence of Munger.
I just dont like being in partnership with greedy people no matter what the upside because sooner or latter im going to get burnt ( did i say partnership? I cant imagine Kinghorn thinking of shareholders as partners !!) but in all honestly i really hope whoever put money into RHG gets a positive outcome.
You're right, they are vastly different, and my comments may not have been completely fair.
I had a look at Corporate Express, but found no sense that management was independent or low on typical corporate BS. The company has many other wonderful attributes, - i am just not inclined to lock my money in, long term, unless I feel management is independent to a reasonable degree. And unless there is an arbritrage (sp?) opportunity, or some other short term opportunity (which I have no expertise in) I'm only interested in the long term.
With regards to IFM, I'm not so certain. Once again, the business has many wonderful attributes, and is very underappreciated at the moment - which is great. However, again, management doesn't seem all that independent. I'm also concerned that cash flows have dropped dramatically due to, as far as I can tell, vastly increased R&D expenditure - but management has not had the decency to state this in simple language - or ANY language! It concerns me, because it makes me wonder if 'R&D' is being used as a place to hide rising operating expenses. Perhaps I'm being unreasonable, but if management are not upfront, then I think we are entitled to think the worst.
Thanks, I see what you mean.
I've pretty much always found that a business with some kind of sustainable advantage has come with management that is usually not independent - they probably made the business. But I like it that way.
I don't blame them too much if they cut a few corners here and there because nobody is perfect and that is human nature. Instead I judge them as Munger said...
“The only duty of corporate executive is to widen the moat. They must make it wider. Every day is to widen the moat. We gave you a competitive advantage, and you must leave us the moat. There are times when it is too tough. But duty should be to widen the moat. I can see instance after instance where that isn’t what people do in business. One must keep their eye on ball of widening the moat, to be a steward of the competitive advantage that came to you.”
Fail that and I would cut them.
Hi Justin. With regards to you comments of 27 Nov, perhaps I need to clarify what I mean by 'independent'. I mean independent in thought and action, ie NOT following the 'institutional imperative'. I'm generally looking for managers who have the conviction to do their own thing, rather than just speak platitudes, corporate spin and whatever is the fashion of the day. Yes, this usually means I'm inetersted in 'owner managers'. Being 'independent' simply because one has minimal ownership or because one isn't an employee - that doesn't ineterest me. I can forgive a lot of mistakes and foibles from a manager who thinks/acts as an owner manager and has the genuine desire to improve the long term economics of a business - ie widen the moat.
Thanks Mars, but I don’t know if I have ever observed it as clear cut as you might be suggesting when it comes to making all but the easiest of excluding decisions. Platitudes, corporate spin and whatever is the fashion of the day (and some institutional imperative) comes every time with communication no matter who is reporting but the key is if there is any substance mixed in there as well.
For me, so long as management at least acknowledges somewhere in their annual reports, printed speeches and press releases that they are working towards what is important to the businesses strategy i.e. working towards lowering costs in a low cost business or improving the product(s) in a business with a differentiated strategy (and not vice versa) then the rest of the reports can be written like a Mills and Boon as far as I am concerned because we can’t always know the background or motivation behind the communication.
Since these communications are one of the few avenues we have to judge management I found it useful to first have a preconceived idea of what I expect management to be referring to (and not to) in their discussions – no matter how briefly mentioned and what else is said in the report.
I would go as far as to say on average if there are at least two paragraphs by a Chairman and four or five by the CEO per annual report that hit the target then I’m generally happy. The rest is usually spin or platitudes or references to topical issues as you mentioned. In these cases it needs to be over looked as it’s not relevant and may lead to excluding businesses and managers actually doing well but communicating poorly.
Try printing off the last 10 years commentary by a CEO and Chairman from the annual reports of a company you are interested in and then read them back to back (helps to have a 10 year financial summary for reference). See how quickly you start to skim and ignore much of what is said year in year out that is useless but see how what is ultimately important for future success does actually get noted somewhere amongst the dribble by the better operators.
Justin, I don't disagree with what you're saying. This is investing, possibly more art than science, and one cannot be too black & white. But I still hold that the degree of corporate spin, deceptive language, and supeficiality, is a strong indicator of the culture of a company. For example, look at companies with simple no-nonsense annual reports, and you will TEND to find owner managers with a long term desire to build the business - rather than focusing on the share price.
But yes, there are examples of businesses with colorful annual reports, with the obligatory glossy snaps of smiling employees, who are also owner manager type businesses with great leadership. As we've already stated, we can forgive a lot of foibles if the management has a true desire to build the business for the shareholders - and widen the moat.
When the language of management indicates that this is not the focus, then we cannot trust them as long term shareholders.
Let's hope Billabong doesn't do away with the glossy pics!
It might interest everyone to know that the Australian Leader's Fund has increased their shareholding of RHG by another +1%.
http://www.asx.com.au/asxpdf/20091201/pdf/31mgwpw3r7spfz.pdf
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