Thursday, October 04, 2007

Global Voice - Issuance of 32 Million Euro Convertible Bonds

I read with some amazement and trepidation the latest announcement by GV relating to their business expansion. They are issuing 32 million Euro worth of convertible bonds (CB) to "accelerate rollout of metro networks and associated services in London, Berlin and Munich". The interest rate on the bonds is 3%. They also need the funds to complete the commissioning of a datacentre in Amsterdam and another next-generation long-haul network in Germany. The conversion price for the bonds is S$0.191 (19.1 Singapore Cents). Recall that in April 2006, GV had issued about 35 million Euro worth of convertible bonds as well, with an interest rate of 3% payable semi-annually.

The question which begs asking is: why does GV need to raise so much cash in order to operate ? Recall that in the RTO of Horizon.com, GV had already purchased the entire metropolitan fibre network at a fraction of the original cost. In fact, one can say that GV had ownership of these assets, which they can subsequently deploy to generate recurring revenues. Back then, utilization rate was very low at 1-2% and it was touted that if utilization increased, then shareholders would see a dramatic jump in revenues, and the company would turnaround from the red. There was intensive coverage of GV during FY 2005 by CIMB and DBSV which promoted the company and said that the metropolitan fibre was about to "take off". Apparently, nothing much came out of it eventually as the company managed to report a loss during each half-year reoprting season. This is despite the fact that it was snaring more and more contracts on a regular basis and building up their customer base. I had highlighted this point before in my review on GV some months back when I analyzed their 1H 2007 financial statements.

So if one glances at the income statement for 1H 2007, it is glaringly obvious that finance costs have increased significantly, up a whopping 630% from 1H FY 2006 ! The announcement of another 32 million Euro worth of convertible bonds only serves to exacerbate the problem of high interest expenses as the interest paid in future years will almost double as compared with FY 2007. Don't forget that being convertible bonds, they also carry the potential to be extremely dilutive once exercised, and the conversion price is not all that far away from the current market price of around 17 to 17.5 singapore cents. A discerning shareholder should then wonder: why does the company need to raise so much cash if it has secured enough contracts over the last 12 months to sustain its operational cash flows ?

The amount raised is not small by any standards and would further raise their interest-bearing borrowings under long-term liabilities in the Balance Sheet to about 61 million Euro. Take a quick glance at the Cash Flow Statement from 1H Fy 2007 and one can see that the operations are not generating sufficient operating cash flows to enable the business to sustain itself, which is probably why they are doing a "fund-raising exercise" every now and then. They already have a 35 million Euro cash outflow for 1H FY 2006; now they are going to have another 32 million Euro outflow for 2H FY 2007 ? When will it end ?

Assuming that even if GV DOES have the means to sustain its operations through the generation of recurring cash flows from their key customers, remember that they still need to service the interest payments, and try to gradually reduce borrowings as well. This all seems like an uphill task for the company as they struggle valiantly to return to the black.

Finally, why are GV undertaking to invest in more assets to bolster their current network ? As I recall, GV already has their fibre network in the regions indicated in the press release, so why are they purchasing another datacentre and another network ? There is insufficient information given to shareholders as to what are the nature of the assets to be purchased, and how these will contribute to improving their value proposition and competitive advantage. This factor, coupled with the opaque reporting for each of their contracts, means that shareholders have no inkling on whether the company is managing to improve revenues significantly or slightly.

The announcement of the new convertible bond issue was the proverbial straw that broke the camel's back. I divested myself of Global Voice once and for all, and incurred a loss of 4.2% (excluding brokerage) on this "long-term" investment. Suffice to say that if I had done my proper due diligence initially when I considered this company, I would probably not have bought it at all. This is my worst investment mistake thus far as I have incurred a huge opportunity cost in locking up my funds in a stagnant company. I will be providing details of this mistake in a future posting under "Investment Mistakes".

Thus, my portfolio now contains only 5 companies; Suntec REIT, Ezra, Boustead, Pacific Andes and Swiber.

12 comments:

Simon said...

yup, given the present situation, it does appear that GV's actions does not serve to add value to shareholders.

Must have been quite difficult for you to finally take the action to sell. =)

musicwhiz said...

Hi simon,

Well, surprisingly it was not too hard to do. I guess I had already done my analysis on GV in August 2007 when they released their 1H FY 2007 results; thus I was not surprised by the latest development which I construed to be a fund raising exercise (irregardless of what the CEO says).

In investing, we all have to be objective, rational and decisive. Once I identified the various factors which made GV a lousy investment, I did not hesitate to cut-loss immediately.

Regards, musicwhiz

Kharsp said...

Hi MM,

apparently the RSS feed still doesnt work.. hvta continually log in to ur pg to check for updates, anyway juz bought myself Security Analysis.. hvta slowly pore thru the book.

mebe u may wanna advise ur readers on the bks they shd read? i hv the fol bks:

Winning Investment Habits of Warren Buffet and George Soros
The New Buffettology
The Intelligent Investor
Security Analysis

personally i recommend others to read in tt order wif the first bk hving many gd references

Kharsp

musicwhiz said...

Hi kharsp,

Sorry about the RSS feed thingy, apparently it is turned on in my settings but I do not know why it does not work for you. I think you can check back once every 2 days as that will generally be the frequency for my postings (unless I am on biz trip, then it may be longer but I usually announce on my blog before I leave for biz trips).

I will do a posting some day on recommended books to read. Some I currently own are The Intelligent Investor, The 7 Sins of Investing (which I will do a new series on) and Warren Buffett Wealth. I did flip through Winning Investment Habits at the bookstore and it's very good for a first-timer as it summarizes a lot of Buffett's wisdom into easy to read tenets. I have also seen the new Mary Buffett book but have not read or bought it yet. Security Analysis is a little too quantitative, heavy and technical (not to mention expensive !) and I will probably give it a miss.

Thanks so much for your contributions and please continue to visit.

Have a great weekend :)

Regards, musicwhiz

Anonymous said...

Investments ideas are rare... guess your gv divestment will put you in a good position for new investment... i've been following bio-treat quite closely, keen to look at it from the financial perspective for value investing?

musicwhiz said...

Hi Anonymous,

I am not sure on the management and credibility aspects of Bio-Treat, thus am not inclined to be vested in it for now until some semblance of explanation comes to the surface regarding Mr. Wing's 30% stake in the company.

Regards, musicwhiz

Anonymous said...

Musicwhiz,

I agree with you on the 'dodgy' management of Biotreat. There is lack of transparency and both sides play it out like child's play. It is a pity that this is a company with good earning and growth potential to be 'tied down' by silly management squabbles. I wish they, existing mgt, can just come clean on the allegation. Surely, if the existing mgt has done nothing wrong, it can't be too difficult, say sue for deflamation. Unless they too have something to hide.

Simon said...

hey,

Anyone know where i can get some of the old broker research reports?

i went to the Society of Remisiers webpage, but they only have the recent reports. SGX website's collection of research reports is also not entirely complete too

musicwhiz said...

Hi Anonymous,

Yes, frankly it's a pity that Management cannot seem to "come clean" with what's happening. Even when reading BT's report (Hock Lock Siew), I had a distinct feeling that no one knew what the heck was going on (not even the Management !). While the suggestion to suspend trading in Bio-Treat's shares was a little extreme IMHO, it still does not preclude the fact that transparency is sorely lacking !

In terms of water treatment, I would say margins are becoming less attractive now for players as more companies join the fray. Newer players like Epure and Memstar (recently listed) may give Bio-Treat a run for their money. Even FF Wong of Boustead mentioned that BOT water projects in China do not have attractive rates of return, which is why he is setting his sights on the Middle East instead.

Regards, musicwhiz

musicwhiz said...

Hi Simon,

As far as I know, there is no way to access the older reports. For myself, I save every single report and have archives dating all the way back to March 2006 (it would have been even further back but I lost my HDD to a crash around that time).

So, unless you know of a broker or analyst working in the respective research houses, it would be difficult if not impossible to obtain the older reports.

Cheers, musicwhiz

Anonymous said...

on btt again, the mgt response is "measured" for obvious reasons such as litigations issue, not only mr wing is a big shareholder but such issue only cast a very bad light on a company. it is comfort to know that some of the bot tot projects have recurrent revenue, and also big fund managers such as global basic fund are in.. come 10 oct, we shall see if the recent purchase of some 29% of btt (apparently from mr wing) have any furhter leads.

musicwhiz said...

Yes, it will be interesting to see their next results. I will be keeping track of this company as well as the other water companies to see how they fare, and whether they can maintain decent margins.

Cheers, musicwhiz