Member Info for Nobull

Straycat, hi
"Applying that rationale (albeit twenty odd years later), what do you think Jaap Huijskes’ motives were when he initiated the 2019 buyback?"

I have no idea. I think it is a good question to ask at the AGM. I don’t have an adequate understanding of the VCP, the LTIP and the DBP (not read them). Nor do I know what the amount of stock out on loan was during this period. I would want to be sure our BoD was not trying to lift the share price to trigger the satisfaction of a particular director’s performance criteria (share price appreciation is often one of the performance criteria?) to deliver a shed load of free shares for themselves. In short, whether it was totally self-serving or not.

“His motives, as Chairman of GKP, are an issue of real concern to me.”

They are to me too. I am not against buybacks but I want to be sure they are done below fair value and that they are done for right motives.

" if the market price is above the company’s estimated fair value, what is the incentive of being a holder whether they are doing buybacks, dividends or nothing?"

None. Logically, you should sell. But in the real world, some investors will have CGT problems that inhibit them from selling out all at once. I suppose occasionally there might be exceptions where a bidder might pay more than fair value simply because they expect to get economies of scale that change the fair value of what they are buying, and some people may hold on in the hope of such a bid arising, and shares trading at above fair value might indicate the market thinks some corporate event is going to change the FMV . I don't know. Not enough investment experience in these matters.

"Let me know when you've actually worked through the example I suggested"

No need. You are behaving like a child in a school science experiment insisting Darwin's theory of evolution is all wrong. You simply refuse to accept the concept that buybacks can be value destructive or value accretive (or neither as you insist they always are) and that they are just a return of excess capital. You haven't grasped that it is more complicated than that. How do you explain Buffet's comments on share buybacks if they never destroy or create value and are just a return of excess capital?

Buffett on buybacks
“ Nevertheless, it appears to us that many
companies now making repurchases are
overpaying departing shareholders at the
expense of those who stay. In defence of
those companies, I would say that it is
natural for CEOs to be optimistic about
their own businesses. They also know
a whole lot more about them than I do.
However, I can’t help but feel that too
often today’s repurchases are dictated by
management’s desire to “show confidence”
or be in fashion rather than by a desire
to enhance per-share value.”
Warren Buffett
Berkshire Hathaway 1999 Annual Report

PS The value of the profit stream associated with excess cash on the balance sheet in any DCF calculation should maybe not be the interest rate at which it is currently earning but the rate it would earn if it was re-invested in the business, if higher, as the loss of cash has an opportunity cost. You do not get it, do you?

Take comfort, Terry Smith, Phil Oakley and Warren Buffet all disagree with you. It is sad that our chairman, like you, doesn't understand buybacks either, otherwise he wouldn't have claimed they were value-accretive at the time he did.

"Doesn't matter to the DCF how many shares were bought back. "

A DCF, as you know very well, can be done at the company level or at the per share level. There will be a change at the per share level when shares are cancelled. The DCF value of *the company* changes when is a loss of cash (the loss of the income stream associated with that cash) (the numerator). In a DCF value per share, the magnitude of the denominator, the number of shares, falls. You seem to be insisting both numerator and denominator fall in proportion to one another so that value is never created or destroyed. How realistic is that? It may happen sometimes, but I don't think Warren Buffet, Terry Smith or Phil Oakley agree with you that it always has to be like that.

TM, hi. We can all have our own view on what fair value is (as long as its backed up with a DCF calculation based on reasonable assumptions). The point is to get the company to state what they think the DCF value is so that they are not free to just buy back shares when it suits them rather than us. Sure, we might want to disagree with any discount rate or long term oil price they use, but it would be a start.

For example, MP Evans publishes a DCF valuation of its plantation assets, using an independent valuer, once a year in its annual report, using a pre tax 16% discount rate and a $600 long term palm oil price, IIRC, which generates a £12.65 a share valuation. The same company is putting buybacks back on the AGM agenda, after having been defeated in previous year by an acquisitive shareholder who maybe wanted to accumulate more shares without competition from the company. Buybacks against some standard such as a fair value calculation limit their misuse. JMV.

"The only reason they're not doing buybacks is because key shareholders want to take money off the table and at least recover their initial investment."

That may be.

But it is still right never to do buybacks above fair value. It is you who doesn't get it.

If excess cash is on the balance sheet and a company decides to return it through buybacks then the DCF value of the income stream associated with that cash needs to be less than incremental DCF value associated with having fewer shares in issue.

"Why did GKP buy 20m if they only actually needed 2m? And why did it take them twelve months and a shareholder revolt cancel them?"

That's a great question to ask at this AGM. Maybe they were trying to keep the share price high to achieve particular performance criteria, not that buybacks are likely to be very effective at doing that when more powerful forces are at work lowering future earnings expectations or are pricing in greater uncertainty surrounding the achievement of those earnings.

By law, the BoD should be forced to publish a DCF calculation showing the discount rate used, the anticipated cash flows, the long term oil price used and then have their heads chopped off if they do any buybacks above the fair value thus calculated. JMV.

"I think Straycat refers to ... not allowing those treasury shares to be used to feather their own respective nests, and at a time when goals were not met?"
Thanks Solafire.
"I notice that the HR director will receive a further whopping amount of shares"

Now I get what IC means when it referred to "corporate governance issues" in one of its GKP write-ups, albeit before that announcement.

"Whatever the Co does the F/Y nos will be one of the more interesting REA has
reported for many a year..." Agreed.
Not stupid to sell out - nobody could have foreseen the huge rise in the price of CPO and coal, and nor could they have foreseen the Ukraine invasion and the anticipated disruption to sunflower oil production. The only clue maybe was a comment in one of the annual reports that CPO had been trading below its 10 year average for some time. ATB.

"The treasury shares (19m of 20m purchased) were cancelled because without that action neither Jaap Huijskes nor Jon Ferrier could have commanded the required 80% shareholder approval threshold for re-election at the 2020 AGM."

I thought shares held in Treasury carry no vote. This is why they are deducted from the no. of shares in issue when computing the percentages various stakeholders own. As far as voting is concerned it makes no difference whether shares are held in Treasury or are cancelled, surely?

I wouldn't trust my own forecast in a million years on this stock: the combined leverage is so high that one small mistake in the revenue figure could leave the eps figure out by miles; also, the size of the pref div arrears chosen to be paid is a finance cost that reduces eps attrib to the ords, so you might have to guess right the amount of pref. arrears they will pay too, I wonder, to be anywhere near close to getting the eps attrib to the ords right.

One poster on RE.B thinks they might pay all £12.24m (72m x 17p) or $16m of arrears this year. With a $1700 CIF Rotterdam price, one would hope we were getting $1,000 ex-mill gate after the dreadful $375 Export Levy and $200 Export Tax and $100 imagined freight cost to Rotterdam, which would be higher than the average ex-mill gate price we got for FY2021, and yes, this high ex-mill gate price might make it possible to pay off all the pref. arrears at once, but I can't imagine they could turn a profit on the ords if they do that. Fingers crossed they are exploiting the high coal prices and have started to sell andesite.

"When are these two dividend payments to be made?"

First one, the interim, on 13th May. The second is a Final, and is subject to AGM approval, but if approved is likely to be paid in the first or second week of July.

"Personally I'd be much more in favour of management getting a lot more options but with an at the money strike rather than nil cost. They'd have to be a lot more because the inherent value at the time of grant is much lower but at least then if the stock doesn't perform versus the level at grant they expire worthless. Currently, the LTIP options always have value (outside of bankruptcy). It may be less at exercise than the value at grant but management can more easily shrug that off."
An interesting and thoughtful point of view. Thanks.

"(I haven't checked but I would fully expect the LTIP and VCP plans to protect holders of options against the effect of dividends (and buybacks, splits etc etc). All else being equal a dividend causes a lower stock price. A lower stock price would lower the value of a nil-cost option unless they're protected.)"
Yes, that makes sense if the idea is to protect the value of the award from the time of grant - but then the dividends should be locked up until the vesting date, and only handed over if the performance criteria, where applicable, have been met, I wonder?

"When they are issued the recipient is entitled to all the benefits ascribed to them. They are never issued but not allotted."

Putup, many thanks for all that info. My fault for not reading the documents you mention. I struggle to understand why they should be entitled to dividends prior to the vesting date, but as you say, the answers will all be in the documents I ought to have read and understood. It's as bad as HMRC taxing dividends at 40% (instead of at 7.5%) because the shares were xd on the date of death . How grasping can these people get? I agree with most people that almost all the value created has mostly been due to oil price movements rather than anything the Board has done. Many thanks.

"The shares will be issued fully paid and will rank pari passu in all respects with the existing issued Common Shares of the Company." So who gets the divdends on these shares on 13th May if they are issued but not allotted to anyone and if they rank pari passu? I am heartily sick at hearing this news. It reduces my dividend on 13th May. And the Board has delivered nothing.

correction:
rather, it will be the forward looking statement about whether our company is able to obtain these high international prices or their equivalent less export deductions THAT MATTERS

"Incoming before results ??" Yes, it is possible, but I think the most likely reason is the clue in the palm oil price curve (front month, March 2022 dropped today after an utterly mega rise of about 500 ringgit yesterday, but the whole of the rest of curve out to back month, March 2023 has risen quite a bit today, pointing to good profits, previously unanticipated, for the rest of FY2022). I wonder if most of the palm oil price curve has risen due to an anticipated short supply of sunflower seed oil from Ukraine later on this year? I am not expecting any surprises when FY2021 results are published; rather, it will be the forward looking statement about whether our company is able to obtain these high international prices or their equivalent less export deductions: new rules require a permit to be obtained to export CPO, I wonder, and the permits are probably only granted if the exporter agrees to make a decent amount available to the domestic market. JMV.

What is your issue? If you bought in 2020 then you are DEFINITELY IN THE MONEY.
My issue is I'm maybe not better off than if I'd bought physical oil instead of GKP shares (I stupidly didn't understand the PSC when I bought - I didn't realise I'd be giving the KRG 84% of my share of the oil sale proceeds). I do not like our board giving away some of my rewards to the new HR director and I do not like being told a load of complete b*llocks by the chairman about the buybacks being value-accretive (they maybe soon). My other issues are with my fellow alleged shareholders and the seemingly daft requirement only ever to post positive thoughts on these forums. I post how I see things. Yes, I have a large unrealised profit here, but not enough, and I am mindful I could have a big loss if the title risk goes bad (30p share price say for a binary litigation play with no revenue) - I don't know yet what the uninvested dividend stash I've got will be taxed at, but if I am taxed lightly on those, then title risk going bad wouldn't be so detrimental - I'll have got back a good deal of my/my relative's entry price if I only have to pay 7.5% instead of 50%.

Straycat, I have never had any connection with this company prior to April 2020 (My relative/now me are new investors here). FY2022 will be a very good year, revenue and profits wise. But profits and eps are forecast to drop off in 2023, but despite that we trade on only 4.2 x FY2023 profits. A PE of 7x , at the risk of boring everyone to death, is a 14% earnings yield, and that's about right for the risk taken investing in Iraq (tenth from the bottom of Transparency International's table on corruption perceptions?) so there is scope for our share price to go to £3.50p, at least until or if there is an forecast eps upgrade (the falling R rate makes things a bit heavy going next year, I wonder?). My guess the reason we don't trade on 7x 20203 eps is we are waiting for the PSC validity issue to be sorted out and for SH-13 and S-14 to be more productive (I can't see any reason why the remedial work that is being done on those wells won't work so I expect renewed higher production volume guidance before final results). Personally I don't want buybacks at the wrong price or dividends when I don't know if I have to pay 50% tax (trust rates) or 7.5% on them, and I don't like value destructive acquisitions and I worry about entrusting the BoD to make value accretive acquisitions when they have bought so few of our shares with their own hard earned cash (the Chairman is particularly bad). Yes, I am impossible to please. I get that. I value shares on future events, not on what has happened in the past. And, no, I don't like seeing a useless cash mountains diluting the ROCE. Yes, I probably need to see or shrink or get out of this stock, but I'm locked in for now. However, I am right about buybacks:

Even the Lex column got buybacks wrong, so Putup is in good company on that one:

The press gets it wrong
“ The way in which cash is returned
to the shareholders is irrelevant.”
8 January 2010: FT Lex
This is wrong – Buying back shares
when they are not cheap destroys
value for remaining shareholders. (Terry Smith)

and The Sage of Omaha would seem to agree with my view:

Buffett on buybacks being needed to be done at the right price:
“ When companies with outstanding
businesses and comfortable financial
positions find their shares selling
far below intrinsic value in the
marketplace, no alternative action
can benefit shareholders as surely
as repurchases.”
Warren Buffett
Berkshire Hathaway 1984 Annual Report

Straycat, I am in full agreement with you about the last buyback being incompetently managed.

Putup, re your 21:47 post yesterday on buybacks: maybe it is that you don't like me expecting our BoD to have an outcome as an objective. If outcomes arise from things that are often outside our BoD's control (oil price movements, exchange rate movements, changes in growth rate due to FDP being approved/rejected, change in quality and size of earnings stream due to title risk changes) then I get that it is reasonable just to see a buyback as purely a distribution like a dividend.

I see buybacks as bets on future events that materially affect the outcome, and that buybacks can leverage the effect of those outcomes, both up or down, so I prefer buybacks to be done below intrinsic value (DCF value) and never above. The fact that the risks can change after a buyback (perhaps requiring a different discount rate to be used) , and this changing the intrinsic value to be below the price that was paid for the cancelled shares is unfortunate, but it happens.

Terry Smith has a paper here on the subject "buybacks - friend or foe"
https://www.fundsmith.co.uk/media/pnbnh5we/share-buybacks-pdf.pdf

"One of the most important facts that is continually overlooked is share buybacks only create value if the shares repurchased are trading below intrinsic value and there is no better use for the cash which would generate a higher return. Most buybacks destroy value for remaining shareholders, and management is able to get away with this as the current accounting for share buybacks conceals their true effect."

My simple view is that if a stock re-rates and £100m needs to be added to the market cap (because the PE ratio has, say, doubled), the £100m extra market cap is spread more thickly over the remaining shares in issue if there was a buyback before the PE ratio doubled. I hope this helps explain our differences. If not, I'll have to think again and revisit your post. ATB.