Monday, May 16, 2005

Blame the pension funds

According to a bit of market gossip, the pension funds have colluded together and agreed not to buy Dhofar Power's shares in order to keep the price low after the shares were listed. The IPO was at 1.42 rials a share. According to all analysts the fair value of these shares should be no less than 1.9. And yet except for the first day when the share touched 1.9 for a split second, it has been trading in the low 1.7s for all of the last week on very thin volumes. Dhofar Power is one of those "buy and hold" shares that pension funds love so much. It's an electrical utility that has a guaranteed income for the next 20 years. They will be paying dividends twice a year. Once the price reaches 1.9 to 2.2 it will stay there for years without fluctuation. This isn't a share for speculators. But it's obvious that the funds aren't buying.

So why aren't they buying? Currently at the present low price the number of shares on offer is very low. My estimate is that there must be around 4 or 5 million shares out there in the hands of Average Joe investors who bought them with the hope of selling at around 2. They might be willing to sell at 1.8 or 1.9, but not at 1.7. The pension funds are trying to keep the share low until these average joes give up and put their shares on offer at lower prices. That's when the funds will pounce and buy all what's on offer in one fell swoop.

Good for the pension funds, since they get to keep their buying cost low. I totally understand a fund manager's efforts to buy at the lowest price possible. But let's remember that these are government pension funds, not commercial investment funds. Don't they have any social responsibility? Is it ok for a government entity to be screwing the market this way?

The whole country is holding its breath for the Omantel IPO which is coming next month. People are selling assets and taking loans to free up cash for that IPO. The government is selling off 30% of Omantel's shares, of which the vast majority (21%) will be sold to Omani individuals. The conventional wisdom was that you buy the shares in the IPO at 1.3 each and then as soon as it's listed pension funds will buy them from you for more than 2 rials. And then 3 months later when foreigners are allowed to buy the share will go up even higher.

But if the pension funds play this dirty game again, then don't expect the share's price to go up by much until October or November. According to a broker: "don't expect the funds to allow the price to go to 2. They want it below that." If you're borrowing money to buy in the Omantel IPO, don't expect to sell quickly unless you have lowered your expectations. If not, prapare to pay interest or lock your funds for at least 4 months (the one month IPO subscription period + 2 to 3 weeks allocation and listing period + 3 months Omani only trading period).

If this is true, liquidity is going to be very tight in Oman this summer as 300 million rials will be locked-in with this IPO until the share price reaches a reasonable profit threshold.


Devilish said...

Great analysis !!
am thinking less cars sold this Ramadan !

OceanDream said...

Thats not fair at all. There should be some way to regulate stuff like this. What the pension funds are doing is not right. Then again, who is to stop them?

Arabian Princess said...

OD, if I understand right .. it cannot be regulated because pension fund are free to invest or not .. its not mandetory for them to buy Dofar Power shares.

However, as muscati mentioned, it should be a social responsibility from the pension fund managers. My question is, if the government interfered and made it mandotory for the pension fund to buy those shares, will it hurt or benefit the market. My thoughts are, the more the govt involvment in the free market, the risker it becomes to investors to invest (especially forign investment).

(if what I said was nonesense, excuse me coz my understanding of stock market is very weak) :)

muscati said...

AP, the funds definitely want to buy all the Dhofar Power shares that they can get their hands on. If it was up to them they'd buy all 6.8 million shares. There is no question about this.

The issue here is that they are intentionally manipulating the market into lowering the price so that they can buy it at the lowest possible price. I was watching the live market ticker on the MSM website and everytime Dhofar Power shares come on offer they are immediately matched by a lower bid. For example when shares are offered at 1.73 the matching bid would be at 1.72 or 1.71. This has been the case for 10 days so far.

My question is: is this fair?.

OceanDream said...

As limited as my knowledge of these matters is, I know for a fact that this can't be fair. Its just not right.

I was just telling Muscati that its not worth it to even sell our shares. Might as well keep them and receive annual divedend(t)s (is that how you spell it?).

Plus its not like we have alot invested,we both got less than 300 shares each when they finally allocated them.

Arabian Princess said...

Muscati, but they are not buying!! the issue I am raising is:
can there be anyway to force them to buy?? would that benefit the market?

muscati said...

AP, fact is collusion is against the law. If I decide, as an individual or even as a fund manager, that I will not buy this share because I want it to be lower, then that's perfectly legal. But when I collude with others to intentionally stay out of the market then we are colluding together. And that's against the law.

Imagine if it happened in another industry. Say for example if all construction companies decided together (unofficially) not to buy Omani cement. Would that be legal? There would be nothing on paper to prove that they're colluding, but since they're not buying cement then there must be some sort of agreement, right? It's absolutely the same here. How can all the pension funds together not want to buy this one share?

They're buying but at small volumes every day. The fact the volume of transactions in this particular company is declining day by day. This means the majority of people who own the share are holding on, waiting for a better price. What the funds are doing is that they're playing the waiting game. They keep pushing lower day by day. One day it will reach a tipping point and investors will decide "this ain't getting better, let's sell". At that point, trust me all of a sudden volumes will become huge and the vast majority of buyers will be pension funds.

In this particular case there is no harm to the economy. But if they do this for Omantel's IPO too, then the economy will hurt big time. Like Develish said, there will be less cars sold during Ramadhan. There will be a shortage of liquidity in the market. It will have a visible effect on the local economy.

I'm not saying that the government has to force funds to buy shares against their will. But it is their responsibility to investigate whether or not there is illegal collusion going on.

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