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CLIQ Energy Berhad - Why list without a business, or even investment opportunities?

Kiran Rameshchandra
Investor Central

10/4/2013–Warren Buffett preaches that it’s better to buy a good company at a fair price, than to buy a fair company at a good price.

With CLIQ Energy, listed on Bursa Malaysia on April 10, investors have bought no company at all, whose value is anyone’s guess.

Despite its name, CLIQ Energy has no energy business.

In fact, it has no business operations at all.

When it lists, it will be a shell company – a so-called Special Purpose Acquisition Company, or SPAC – whose shareholders and directors hope that it will buy an income-generating business at some point in the next three years.

When investors buy the stock, they will be buying nothing but the dreams of the eight directors.

Incredibly, they piled in during the Initial Public Offering, with the ratio of supply to demand reaching 7.34 times.

It’s the second special purpose acquisition company (SPAC) to be listed on Bursa Malaysia, the first being Hibiscus Petroleum listing in 2011.

Ninety percent of the up to RM 450 mln in IPO proceeds will be kept in a Trust Account, which will be administered by Deutsche Bank.

If the company doesn’t make an acquisition after three years, this money will be returned to shareholders.

1. Will this stock be completely rumour driven?

In the absence of a viable business, investors will have nothing to go on except announcements of any acquisitions – and prior to that, rumour that such an announcement is imminent.

CLIQ will use the IPO proceeds to buy low to moderately risky oil and gas (O&G) assets in the Asian and Oceania regions.

The shares issued to the public come with an equal number of tradable warrants with an exercise price of 50 sen, expiring three years after listing.

Hence, the warrants might mitigate the downside risk of shares.

The prospectus has provided two scenarios - minimum and maximum – for the subscription of shares.

But management’s 20% stake will remain intact as it will adjust its holdings accordingly after converting the redeemable convertible preference shares (RCPS) to ordinary shares.

2. Why start a Special Purpose Vehicle?

Ordinarily, companies go public after proving themselves to be a sustainable business, having used private equity or seed money to get started.

They use the capital they raise to expand in a way that they couldn’t just by using cash flow.

But to use a listing as seed money is extraordinary.

What other options did management consider before forming a SPAC?

Why couldn’t they raise seed capital, and start a business first?

Further details can be found on page 4 of the prospectus.

FINANCIALS

The company has disclosed its historical financial information based on the audited financial statements since incorporation on 3 February 2012.

Given that it has not had a business, it made a loss of RM8,805 for the financial period ending March 31,2012, and a loss of RM2.2 mln for the period ended 30 November 2012, mainly due to staff costs.

CLIQ highlighted that any decline in oil and gas prices may result in lower revenue and adversely affect the future profitability of whichever assets or company it ends up acquiring.

Further details can be found on page 7 of the prospectus.

GROWTH DRIVERS

Apart from an industry overview, CLIQ has not specified any growth drivers.

Its long-term strategy is to have a portfolio of oil and gas assets with production and development compromising 75% and exploration for the remaining 25%.

Further details can be found on page 80 of the prospectus.

MANAGEMENT

CLIQ Energy’s management team has a lot of experience and relevant skills, who comes from Shell, Petronas Carigali, Sime Darby, SAAG, Esso, Perisai Petroleum and Santos, the prospectus says.

The management team will hold 20% of the company through an investment holding company called Best Oracle.

The team players are Ahmad Ziyad bin Elias, Kamarul Baharin bin Albakri, Dr. Chang Kok Lip, Kamaroll Zaman bin Abd Aziz and YM Tengku Daud Shaifuddin bin Tengku Zainudin.

The prospectus says Ahmad Ziyad bin Elias is the managing Director and CEO with more than 30 years of experience as a geophysicist, engineer and entrepreneur in the oil and gas exploration and production (E&P) sector.

He owns Orogenic Group, which provides E&P evaluation services as well as geological, geophysical and geotechnical services to the upstream oil and gas sector.

Intriguingly, page 163 of the prospectus highlights that one of the group’s independent directors, Abdul Hamid bin lbrahim is an employee of Resourceful Petroleum Ltd, a British Virgin Islands company which sounds like the sort of business CLIQ wants to acquire.

However, Abdul Hamid bin Ibrahim's interest is mitigated by the fact that he is merely an employee of Resourceful Petroleum and does not exercise significant influence in making strategic decisions in the company.

Furthermore, he is a non-executive Director at CLIQ and not actively involved in the management and day-to-day operations of the group.

So, CLIQ’s board believes that Abdul Hamid bin Ibrahim's involvement in Resourceful Petroleum Ltd will not give rise to a conflict of interest with the group’s proposed businesses.

In addition to his independent directorship at CLIQ, Abdul Hamid bin lbrahim is also a director and shareholder of companies listed on page 120 of prospectus.

These include Barakah Offshore Petroleum Berhad, BJ Services (M) Sdn Bhd, Bold Prism Sdn Bhd, BP Plastics Holding Berhad, Cancer Research Initiatives Foundation, Gemporia Sdn Bhd, Muhibbah Engineering (M) Bhd, Timah Delapan Sdn Bhd, Zamrud Damansara Sdn Bhd.

3. Will management be able to dedicate time to CLIQ, given their external commitments?

CLIQ has eight employees, five of whom represent the management team.

We notice that Dr. Chang Kok Lip and Kamaroll Zaman bin Abd Aziz have no other commitment except CLIQ.

4. Given that management holds just a 20% stake in CLIQ, how much should investors be concerned if the group is taken over?

Management held 73.3% stake in CLIQ Prior to the IPO.

But after the IPO their collective stake will fall to 20% while IPO investors will hold a maximum 77.7% stake.

This leaves the shareholder registry open to a takeover. Or is this even the aim?

Further details can be found on page 111 of the prospectus.

KEY RISKS

CLIQ Energy has highlighted 33 risks related to its business and the industry, starting with the most obvious:

No operating history

As the group does not have any operating history, it is not possible to judge whether it can achieve its business objective.

Arbitrary issue price

It’s also harder to come up with an issue price, than if they had assets and a cash generating business.

5. How was the issue price of 62.5 sen arrived at?

The prospectus says that the issue price was determined based on the minimum proceeds to be raised by a SPAC in accordance with the Securities Commission, general condition of the securities markets at the time of the IPO, and on subscription by Best Oracle and Initial investors.

In other words – it was arrived at arbitrarily.

How could it be any different, when there are no earnings and no book value to speak of.

The prospectus also says that it has no plans or arrangements with any prospective acquisition candidates.

This sounds surprising.

6. If it didn’t see any opportunities, why start the business to begin with?

In sitting around drinking coffee and discussing whether or not to go into this business, wouldn’t they already be thinking of various opportunities?

Hence, it will not generate any revenues until it buys an asset or company.

Liquidation price would be lower than issue price

There is no assurance that it will be able to complete an acquisition within the three years they have given themselves.

So, the group may be forced to liquidate its assets.

This will lead to a lower per-share distribution than the issue price, due to the expenses incurred in running the business for 36 months.

Additionally, there would be no distribution with respect to outstanding warrants – they would expire worthless.

7. So, how much have they budgeted for running the business?

No budget was disclosed in the prospectus, except that they have arranged initial money from Best Oracle and initial investors to run the business, which includes everything from salary to cost of examining acquisitions.

Net proceeds of this IPO not held in the Trust Account may be insufficient to run the business for at least the next 36 months

CLIQ currently has RM7.6 mln cash in hand plus it will receive a maximum of RM43.5 from the IPO proceeds.

It believes the money available to them outside of the Trust Account will be sufficient to operate for at least the next 36 months, assuming that a qualifying acquisition does not occur during that time.

However, that’s not guaranteed.

It could use a portion of the funds not being placed in trust to pay for due diligence of a potential acquisition.

It could also use a portion of the funds not being placed in trust as a down payment for a particular proposed acquisition.

Fully dependent on the expertise and experience the board and management team

Clearly, with no assets at this time, it’s all up to the management.

Therefore, retention of the team is critical.

8. What employment contracts and non-compete agreements has management signed?

The management team will have to be associated with CLIQ for a minimum period of 3 years and they would be paid RM3.24 mln per annum.

No non-compete agreement given in the prospectus.

Limited resources compared to well-established entities with similar business objectives

In short, others can do it better.

There are well-established firms competing for the same assets, and they have more experience, and more technical, human capital and other resources to buy them.

Additional financing problem

If the net proceeds of the offering aren’t enough to buy any particular asset, it might have to go back to the market to sell more shares.

And then there’s the operating cost to think about.

CLIQ may only be able to complete one acquisition with the IPO proceeds

CLIQ doesn’t want to make a series of small acquisitions – but ideally one big one costing at least 80% of the amount they have in the Trust Account.

At the same time, this means a heavy concentration and little diversification.

Further details can be found on page 37 of the prospectus.

ONGOING LITIGATION

The company is not engaged in any litigation and arbitration, either as plaintiff or defendant.

No surprise, given that it has no business operations.

Further details can be found on page 196 of the prospectus.

DIVIDEND POLICY

CLIQ Energy intends to pay dividends to shareholders, but only after it completes an acquisition.

And if they have enough cash flow and profits to pay for it.

The Preference Shares are apparently not entitled to any dividend, which suggests that in the event of a break-up of the company they would receive the first proceeds.

Further details can be found on page 167 of the prospectus.

IPO PROCEEDS

RM 312.8 mln for acquisition of target asset(s)
RM 1.4 mln for redemption of balance RCPS by management
RM 35.8 mln for working capital
RM 13.6 mln for listing expenses

The prospectus highlights that CLIQ has raised RM1.7 mln from Best Oracle and RM9 mln from the initial investors, which will be used for administrative and operating expenses prior to the IPO.

Further details can be found on page 13 of the prospectus.

We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.

So far, we have not had a reply (which is why you are seeing this message).

ISSUE DETAILS

Total Offer Size: 486 mln shares
Price per share: RM0.75/share
New shares: 486 mln shares
Placement shares: 402 mln shares
Public shares: 83 mln shares

As the public issue shares come with an equal number of warrants, the reference price for the shares and warrants were fixed at 62.5 sen and 12.5 sen respectively.

KEY FINANCIALS AT LISTING


Market cap: RM 206.3 mln / RM 644.1 mln
Price/Book: --
Price/Earnings: No earnings

There are only four (4) reasons companies list:
1. Raise fresh capital for expansion
. This is the most virtuous reason, because new shareholders can take part in the growth of the company.
2. Allow existing shareholders to (partially) exit. Frequently this means the best growth days of the company are behind it.
3. Change in laws and regulations. Such as when revised foreign ownership restrictions force existing shareholders to pare down their stakes, even though they might not want to do so. While this gives you the opportunity to buy into companies, you must ask yourself whether how the company is impacted by excessive regulation.
4. Raise the company's profile. New shareholders must ask themselves whether an ego-trip by existing shareholders is a good enough reason to buy into a stock.

"Sharing the growth" is frequently stated in the IPO's publicity material as the reason for listing, but that's just the marketing pitch.

The real reason is only ever one of the four stated above.

Download the prospectus here.


©2013 Investor Central® - a service of Hong Bao Media

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Key financials at listing