Orbis in vicious circle
at PaperlinX #1
What started as a
promising virtuous contrarian cycle for Orbis now seems to have become a
vicious circle. What went wrong?
For a quick background,
first review Table 1 of Key Shareholders showing movements in substantial shareholdings in PaperlinX over 2007-2011. It
is sourced from Annual Reports 2007-11 and ASX Notices.
What is interesting is why
Orbis moved from 12.96% to 18.46%? More about that soon in Orbis in vicious circle at
PaperlinX #2
Orbis is a
self-proclaimed “contrarian (deep-value)
equity investor”. Unfortunately they
got it wrong with PaperlinX. Maybe its time for Simon Marais to accept his
mistake and move on. Here
are some facts for consideration.
Fact 1 Graeme Shaw, an analyst at Orbis since
September 1997, indirectly holds PXUPA
Fact 2 Simon Mawhinney, an analyst at Orbis since
February 2006, directly holds PXUPA.
Fact 3 Brett Rock, an analyst at Orbis August 2005 - February 2011, established Jencay
Australia Investment Fund launched in July 2011 – see here.
Jencay states: “This Fund will only buy securities listed
on the Australian Securities Exchange (ASX) that Jencay considers to be
bargains. If bargains are scarce it is
usually a reliable indicator that the market is overpriced and the Fund will
hold cash at those times, ready to pounce when the inevitable correction
happens.”
In its latest,
and only, quarterly report for September 2011 Jencay reports PXUPA as its
largest investment at 8.1% of equity exposure - hence bought since July 1.
Jencay’s Summary
Investment Case: “Perpetual preference
share issued by the world’s second largest paper merchant with operations in
Europe, North America , Asia
and Australasia . Current price is 25% of face
value with a running yield approaching 30%. We believe that even in a
liquidation scenario (considered unlikely) investors would receive a multiple
of the current share price given the solid asset backing (consisting of paper
inventory and receivables) and ordinary equity buffer in place.”
Fact 4 Orbis launched its Orbis/SM Australia Opportunity Fund
on 1 July 2011 also. Strange coincidence. Full details available here.
In its latest,
and only, quarterly report for September 2011 the fund reports PXUPA as 6.7% of
equity exposure - hence bought since July 1. Second strange coincidence.
Fact 5 On September 7, 2011, Simon Mawhinney was
reported as saying about PaperlinX:
"The amount of
value destroyed in this company is unimaginable," says Simon Mawhinney, an
analyst at Orbis Investment Management.
Mawhinney says it’s
too early to comment on Marchant.
"We are hoping
that he is able to stem the losses and return the company to
profitability," he says. "We will never get our money back on this
investment but we would expect to do well from here."
But he adds a note of doom. "In this instance, it might
just not be possible. I don't know what will win out, good management or
terrible macro trends. But at this stage, I wouldn't be confident
that management can do it," Mawhinney says.
Click to view his statements & those of Toby Marchant We can only assume Simon Mawhinney’s comments were made with his boss’s
imprimatur.
But what did his boss
say elsewhere?
August 29,
2011
“Buy back hybrids,
PaperlinX told”
reports the AFR, see here.
PaperlinX’s biggest
shareholder has called on the troubled paper merchant to rid itself of its
controversial hybrid debt instruments.
Simon Marais,
managing director of Orbis Investment Management, said that by buying the
instruments back over time, the company would help remove the overhang on its
shares.
“Wind back the hybrid with a buyback, rather than pay a
dividend,” Simon
Marais said. “Then in three or four
years’ time, reinstate dividends. PaperlinX would have the same expense as
paying a dividend. This should be good for unit holders. This would be better
for equity holders [longer term] and debt holders, as they would get some
liquidity.”
Ed Comment:
1.
All
hybrid holders want is their income because PXUPA was sold as a fixed
income investment.
2.
If
PaperlinX hadn’t sneakily stopped the Dec 2011 distribution, after a plethora
of positive financial news preceding its AGM, then possibly none of this would have
happened. I for one would be sipping Pina Coladas, blissfully
ignorant of PaperlinX’s real problems,
3.
Because James Orr gave me the bum’s
rush I dug deeper,
see PaperlinX in Denial
published November 19, 2011.
January 5,
2012
“PaperlinX deal looks
dead at birth”
reports the AFR, see here.
Simon Marais was
reported to say “the way forward for the two parties [PPX and PXUPA] was very different”
Ed Comment:
1.
Understatement to date, because the reasons for the issue of the two classes
of security are totally different; as are the motives of their respective
buyers. Investors buy equity (PPX) for growth and corporate debt (PXUPA) for
income.
2.
Like
Shaw, Mawhinney and Rock, Orbis too could have bought PXUPA from the outset, just
as it has now done at Orbis/SM Australia Opportunity Fund.
3.
Everyone
knows and respects Orbis for its contrarian deep-value style of investment – high
risk with high rewards. Please don’t blame passive fixed income investors when
your plans go wrong.
Simon Marais then
went on to make more generally antagonist towards about hybrid holders. It’s a
good read, especially near the end where he said:
“The way it will be settled is this management or new management will get the company
back on the right footing and perhaps buy the hybrids bit by bit back over 10
years.”
Ed Comment:
1.
Does
Simon Marais know more than is on the public record? Perhaps PaperlinX should
respond here?
2.
Has
Simon Marais become disillusioned with the Board and Toby Marchant?
3.
If
a 10 year moratorium on PXUPA distributions, and thus PPX dividends, is the
best suggestion from one of Australia
4.
Suggesting a moratorium on distributions and
dividends for a decade is pure spin. Depending on whether or not PaperlinX
meets its banking covenants at 31 Dec, it could be game, set and match for
PaperlinX sooner rather than a decade later. All that then remains is to thank
the ball boys and girls, or the boys and girls with the balls to stand up and be counted.
Embittered investors in
other failed businesses, including fixed income/hybrid investors, have learned
to stand up for their rights as best demonstrated by certain actions funded by
IMF (Australia) Limited – see here
Regardless of the views
of Orbis, or the Board of PaperlinX, the motives for investing in PPX or PXUPA
are different and by definition adversarial; because debt always ranks before
equity. The ultimate means of exiting these respective investments will be determined by
equity, not rhetoric.
For those naysayers who’ve
delighted in telling me about the rights of PaperlinX to not pay distributions,
I remind them that the “right” is temporary whereas the rights of debt versus
equity are permanent.
Re Orbis
I’m neither a past nor current client of Orbis but
respect it as an astute investor. I don’t enjoy seeing any investor lose money.
The purpose of this post is to highlight the
conflicting messages emanating from the Orbis camp.
Simon Marais no doubt speaks with authority, and probably
some personal financial pain, as he holds 50% equity in Orbis Investment
Management. For the professional backgrounds of Drs Marais and Shaw and Messrs
Mawhinney and Rock, all mentioned above, see here.
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