✨ BJCORP Update - Is Jalil Resigning as CEO of BJCORP? (Update: Jalil has resigned)
And what might the potential impact to BJCORP's share price be from that?
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Edit (21/3/22): Jalil has officially announced his resignation.
If you’ve been following my blog, you’ll know that my favorite stock by far in the present day is BJCORP. In my BJCORP Part 1 report written in November 2021, I mentioned how I thought it had a minimum upside of 300% within 5 years with relatively little risk:
I won’t regurgitate the entire 10,000-word report here, but the gist of it was that BJCORP’s new CEO Jalil was able to articulate the importance of optimal capital allocation in his 3-year turnaround strategy. Given that optimal capital allocation is the protagonist of William Thorndike’s fantastic book The Outsider CEOs (where Warren Buffett is also featured), I was genuinely impressed by this. His acquisition of 3.6% of BJCORP’s outstanding shares over the following months made me feel that the possibility of his resignation prior to completing BJCORP’s turnaround was a black swan risk - which by definition cannot be efficiently hedged away completely (unless you’re heavily allocated towards cash).
However, in a surprising turn of events, it was announced in yesterday’s local financial news that Jalil would be stepping down as CEO of BJCORP. He also trimmed his outsized 3.6% stake in the company’s outstanding shares by about 10% (i.e. ~0.4%) - this transaction is verifiable, as it was reported to regulators as required by the local bourse regulations. Also, apparently a new CEO has already been identified. Given how Jalil’s appreciation of optimal capital allocation was one of the main thrusts of my BJCORP investment thesis in November, obviously his departure would render that thesis null and void.
However, what was strange was that the act of his resignation itself was not reported to regulators, as required by local bourse regulations. As you can see from BJCORP’s corporate announcements on the local bourse’s website, there is only the announcement of his stake being trimmed yesterday - but no announcement of him resigning as CEO (which is also a necessary reporting requirement).
We know this is unusual because, quite coincidentally, another domestic listed company (JF Tech) also had their CEO announce his resignation yesterday - and his resignation was reported to regulators, and appeared as a corporate announcement on the local bourse’s website:
Also, while the local investment community was waiting with baited breath for the local bourse’s corporate announcement of Jalil’s resignation, the man himself made this ultra-casual tweet at around 8.30PM last night:
Maybe I’m biased, but that doesn’t seem like very professional behavior for someone who’s supposed to be an outgoing CEO right? Remember this is the Internet, there are people out there who get frustrated by the hands of a clock icon being offset to the left by one pixel.
Also, it was only a week ago (March 12) that he gave this interview on a local television news network (which by the way, is fantastic - do give it a listen):
Click the box below to read the transcript of the above interview:
On top of that, the dominant local financial daily The Edge apparently just reported that two of BJCORP’s key listed subsidiaries BJFOOD and SEM (which control the operations of Starbucks Malaysia and 7-11 Malaysia respectively) attracted the attention of Taiwanese Uni-President Enterprise Corp (which manages both Starbucks Taiwan and 7-11 Taiwan) in a potential acquisition of the former two by the latter.
The context here is that the disposal of Starbucks Malaysia and 7-11 Malaysia in a potential acquisition would be hugely profitable for BJCORP’s shareholders - considering that they have both historically been low-growth, highly cash-flow generative, mature businesses (as discussed in my BJCORP Part 2 article linked here). Coincidentally, BJFOOD’s share price also climbed +8.1% in yesterday’s trading:
Keep in mind that up to this point, everything we’ve covered is still within the realm of speculation. None of the material events relating to BJCORP as discussed above - i.e. Jalil’s resignation or the disposal of BJCORP’s subsidiaries - have been confirmed by reliable sources.
The only thing we can say has happened with certainty is Jalil’s trimming of his 0.4% stake in BJCORP at a loss - which to be fair is definitely a red flag, and might imply that Jalil plans to resign as CEO eventually. But you can also see how Jalil’s resignation is not 100% certain either - with the breadcrumb trail up to this point providing inconsistent clues as to what might actually be happening.
What happens to BJCORP’s share price if Jalil resigns?
If you’ve read my BJCORP Part 1 report where I laid out its investment thesis, you’ll know that my investment thesis for BJCORP was basically a minimum post-turnaround upside of 3x - while the downside was relatively capped. Obviously, I did not account for what I perceived at the time to be a black swan risk of Jalil potentially resigning as BJCORP’s CEO - especially considering that he had just picked up 3.6% of BJCORP’s outstanding shares slightly before that.
To be clear, the remainder of this article will assume the possibility that Jalil eventually resigns - since that development is no longer a black swan risk. Given the newly available information, not attempting to estimate the downside from such a development can only be described as irresponsible - regardless of whether it actually happens or not.
I won’t regurgitate everything from my BJCORP Part 1 report here, but my intention with this article is to discuss enough from it to assuage your concerns about the potential risk of permanent loss of capital from this possible development of Jalil resigning as CEO:
Financials
In order to estimate BJCORP’s potential share price downside, we shall start by assessing the most objective figures that are least subject to interpretation - their financial statements. The main objective here is to estimate BJCORP’s going concern risk as a company - and in the event of a liquidation event, how much shareholders can expect to get back on their equity investment.
To start with, let’s take a look at the figures in their balance sheet as shown above. In order to reduce the room for subjective interpretation, I will just use the line item carrying values as stated in BJCORP’s financial statements - without making any adjustments (e.g. 50% of Trade Receivables to account for net realizable value). I’m sure there will be some among you who might disagree with this approach - but bear in mind that this exercise is simply intended to serve as a stepping stone to make your own adjustments, rather than to be taken at face value. And as we’ll see later, I will be using some comfortably conservative assumptions as we attempt to estimate what the potential liquidation value might be in a potential liquidation event (i.e. worst-case scenario for shareholders).
The way I’ve approached this estimation is to:
sum up the carrying values of selected Non-Current Assets and Current Assets of RM 13.0 billion (as highlighted in yellow in the screenshots above);
deduct from that the value of their Total Liabilities of RM 11.3 billion;
in order to arrive at an estimated Liquidation Value of RM 1.7 billion - or about RM 0.30 per share (with an outstanding share count of 5.7 billion).
As this figure exceeds BJCORP’s current market price of RM 0.25, I would venture that it at least passes the sniff test. I understand if some of you may disagree with which specific Non-Current Assets and Current Assets line items I selected to estimate BJCORP’s Liquidation Value. But keep in mind that I’m not simply deducting from them the carrying value of their Borrowings + Leases of RM 7.0 billion (i.e. Total Debt), but the entire carrying value of their Total Liabilities of RM 11.3 billion. So even if you think other Asset line items might be more appropriately selected, this should at least be conservative enough.
Also, if we’re just taking the value of their Dilutive Net Assets per share at face value, that estimate of Liquidation Value skyrockets to RM 1.06 (as listed at the bottom of their balance sheet in the screenshot above). Thus, even in the super-unlikely event of a potential liquidation, shareholders can still expect to be made whole if they had acquired BJCORP’s shares at RM 0.25.
Why do I say that a liquidation event for BJCORP is super-unlikely? Well, consider how despite BJCORP having been unprofitable at the shareholder level for the better part of the past half-decade (as shown in the screenshot below of their FY21 AR), their creditors (i.e. banks) have still been happy to refinance their borrowings over time. This is because most of their key listed subsidiaries are highly cash-flow generative businesses - e.g. Starbucks, 7-11, BToto - which I’ve discussed extensively in my BJCORP Part 2 report linked here:
The point I’m trying to make is that despite pre-turnaround BJCORP’s penchant for consistent unprofitability, the conglomerate actually has healthy cash flows - and as such is not faced with any going concern risk whatsoever. If you’d like more granular detail surrounding their historical cash flows and corporate liquidity, I’d recommend taking a look at my free BJCORP Accounting Deep-Dive - Part 3c: Cash Flow Statement report linked below:
In any case, I hope I was able to demonstrate in my explanations above how: 1) there is excess liquidation value from BJCORP’s current share price, and 2) there is negligible going concern risk due to BJCORP’s healthy cash flows. In all likelihood, if you hold onto the shares, they will recover from Monday morning’s expected fire sale prices.
There is actually one more item which I think is worth discussing as it relates to their balance sheet in the context of providing downside protection. In my BJCORP Part 1 report, I discussed how their Land Assets as held on the books (at cost) have a carrying value of roughly RM 1.75 billion - as shown in the screenshot below taken from that article:
Keep in mind also that the bulk of these Land Assets were acquired by BJCORP many moons ago (>10 years) - which means that the current fair value of these Land Assets should be appreciably higher than their current book values. But in any case, the book value of these Land Assets alone are already RM 1.75 billion - which can be sold off or collaterized relatively quickly to provide an additional liquidity buffer to the conglomerate’s activities in a cash flow pinch.
While none of this is to say that BJCORP’s share price will definitely recover to their Net Asset Value in the absence of an upside catalyst, at the very least we can have some assurance that there is a floor on how low its share price will stay.
Putting all the above together, we can see how the downside risk from permanent loss of capital for BJCORP shareholders who acquired their shares at RM 0.25 per share is very much within tolerable levels.
What Action Should I Take If I’m A BJCORP Shareholder Today?
For context, allow me to clarify that despite all the uncertainties regarding the recent developments (as discussed above), I still think that it is highly prudent to assume that Jalil eventually resigns. In this way, even if he doesn’t end up resigning, at least the only direction BJCORP’s share price can go from there is up.
I imagine that BJCORP’s share price on Monday might experience some panic selling - and that the downside volatility experienced is likely to be high. I will refrain from suggesting what that maximum drawdown might look like, as I don’t have an informed opinion on that. However - given everything that I’ve discussed above about the current state of their cash flows and balance sheet position - I would venture to say that I do at least have some degree of confidence that the share price is capable of eventually rebounding to its lowest level over the past 5 years prior to Jalil’s entrance in March 2021 - which was around RM 0.17, as shown in the screenshot below:
Assuming an entry price of RM 0.25 as suggested in my BJCORP Part 1 report, a permanent drop to RM 0.17 would represent a loss of about -33%. Obviously this is not pleasant, and no excuse should be made for this loss. But keep in mind that we’re also referring to the lowest share price BJCORP has ever treaded over the past 5 years - including during pandemic times. If we allowed a “post-pandemic premium” and assume that the share price can eventually rebound to RM 0.20, that represents a -20% loss - which is at least somewhat tolerable, considering that this is a black swan risk materializing (as compared to how some other stocks have fared recently also due to black swan risks of a similar nature materializing).
In this vein, I would suggest that there is no necessity to respond with immediate urgency when trading opens on Monday, and the expected stampede for the exits occurs. There are several reasons why:
Firstly, I think there is negligible going concern risk and there is excess liquidation value (as I’ve covered above).
Secondly, I have a good feeling that BJCORP’s share price can at the very least recover to above RM 0.17 after Monday - which means that there is still time to observe and reevaluate calmly once the dust has settled.
Thirdly, I have no confidence that participating in a fire sale is likely to guarantee being able to dispose of my position at a higher price than simply waiting it out.
Fourthly - what if Jalil actually ends up not resigning? While I don’t think this should serve as a base-case scenario, it does remain a distinct possibility. And should that actually be the case, disposing of my shares at the bottom of a fire sale does not appear to optimize the balance of risks as presently distributed.
While I do not presume to be in a position of offering advice, I do want to provide accountability for what I plan to do come Monday morning - I simply intend to observe the developments as they develop over the next week, and then reevaluate my options once things have settled down.
Possibility of a Pump-and-Dump?
There is a popular theory going around local investing circles that BJCORP’s founder Tan (and its largest shareholder) and his recently appointed CEO Jalil had worked in concert to plan out this outcome all along (i.e. a pump-and-dump). Allow me to provide you with some historical facts about recent share price developments - feel free to arrive at your own interpretation as you see fit:
As you can observe from the charts above, neither Jalil or Tan made any money from their insider trades in aggregate (searchable on Bloomberg). The insider trades of both parties’ reflected buying patterns which started about halfway down from the peak share price attained in March 2021, and then averaged all the way down in much larger quantities. If this is how you carry out a planned pump-and-dump… well, it’s your money.
Some also point out how Tan actually managed to sell 40 million shares at the very peak share price of RM 0.45 - as observed by that little red marker at the very top of the share price pop in March 2021 (in the chart above). This amounted to a cool sale of 40 million shares, which totals to a colossal RM 18 million in disposal receipts - certainly a healthy gain for the average everyday man.
However, Tan is not your average everyday man - according to Forbes, he is currently the 24th richest man in Malaysia with a net worth amounting to USD 915 million as of mid-2021 - or in excess of RM 3.8 billion. So this cool RM 18 million gain that he apparently made from his “pump-and-dump” added a measly 0.5% to his overall net worth. Which he then promptly gave back through his subsequent ill-timed insider buys over the following months (as observed from the above chart). Like I said, if this is fraud, you really need to learn how to fraud better.
Anyway, I think the facts speak for themselves. I just wanted to touch on this matter to acknowledge its existence, nothing more.
Conclusion
The purpose of this article was to provide accountability for the recent developments, and is not intended to justify the materialization of the black swan risk of Jalil potentially resigning in any way. While I did try to mitigate the position’s risk in advance as much as possible (as discussed in my earlier report) - I will be upfront that at the time of my investment, I did not consider the possibility of Jalil’s resignation as anything more than a black swan risk. And for that, perhaps apologies are due.
I will also be completely transparent in that I do not presently know how to efficiently hedge away all black swan risks. The only way that I can imagine doing that is to allocate heavily towards cash - but that comes with its own upside tradeoffs as well.
Keep in mind that the universe isn’t biased - Hibiscus’ recent rally was also due to a black swan event materializing (i.e. the recent Ukrainian War). However, that one was to the upside and resulted in my conservatively estimated intrinsic value of RM 1.13 for Hibiscus (+250% return since April 2020) already having been reached much faster than I expected - due to developments bearing exactly the same nature of uncertainty as BJCORP’s today:
The only way I can think of to efficiently manage black swan risks is to acquire shares at a significant margin of safety to intrinsic value - since that gives you plenty of room to err and still escape with your principal somewhat intact. While BJCORP’s potential maximum loss of -33% may not qualify for that definition, I genuinely did try to observe this value investing principle in arriving at this decision. Please rest assured that I do want to be accountable for this development - and let’s see how things continue to develop over the next week.
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