OKH Global: More Than Meets The Eye?
OKH Global hit the headlines recently when shares of its Executive Chairman/CEO were force-sold by the banks to which they were pledged to. The share price plunged 79.7% on 21st March, and this was after a 33% fall the previous Wednesday. Within a week, its share price fell from 53 cents to 7 cents.
Such events often provide opportunities to enter as the market tends to over-react. The common understanding is that the fundamentals of the company remain unaffected by the sale of shares. Assuming the market is rational (and it often is), the share price prior to the crash should remain as a fair price for the company. Indeed, the share price has somewhat recovered to around 10 cents as of the time of writing (23rd March). However, investors (or traders) who are planning to hold out for more returns over a longer holding period should be aware of some these facts.
Share price exhibits signs of manipulation
Daily trading volume (represented by the green bars) of OKH Global has been suspiciously consistent in the past year for a small cap company.
If we expand the charts to a three year time frame, we can see that this consistency started way back in 2014. Since then, trading volume and share price have been fairly consistent ever since. Compare this to Koyo International which had the same group of investors responsible for more than 30% of trading in the company.
Even a blue-chip like Singtel does not have the trading volume consistency of these obscure small caps.
Coincidentally, OKH has two issues of convertible debt. I seldom come across convertible debt among small caps in Singapore, so this was certainly a surprising find.
The first was issued in November 2013 for SGD10.0mn. It is a discount loan (i.e it has no interest payments) and is redeemable at 1.5x the issue value in November 2016. Holders can exchange up to SGD5.0mn for OKH shares at SGD0.45 apiece. Knowing that they are entitled to 1.5x of their capital at redemption, OKH’s share price will have to be at least SGD0.675 (1.5 x SGD0.45) before there is any incentive for holders to exchange for shares.
The second was issued in November 2014 for SGD8.0mn to Zana Investor. It bears an interest rate of 11% and expires in April 2016. Holders can convert their holdings into OKH shares at SGD0.71592 apiece. Clearly, the incentive to convert only materialises if the share price is above SGD0.72.
There are two possible implications for the management:
If the management does not intend to redeem the debt with cash, there will be an incentive to drive the share price up. Unfortunately, it seems that the company does not have a choice now. The company recently announced that it was negotiating with Zana Investor to vary the terms of the debt. This is hardly good news – not to mention there is another SGD10.0mn expiring in 8 months time.
Alternatively, it is also possible that the management was aware that its share price was overvalued and took the opportunity to offer the option of convertibility as it would lower the cost of debt, holding all else constant.
Pledging of shares rides on share price
A high share price is definitely beneficial for the CEO/Executive Chairman when he is pledging his shares as collateral. Details of the private transaction are scarce, but timing is a crucial factor. Did he pledge his shares after or before the share price increased? If he did it before, there will be no incentive in having a high share price. This clears him of any suspicion.
Lastly, as a minor point, having the same person as the CEO and Executive Chairman is usually perceived as bad corporate governance because he or she will have carte blanche over the entire company. There is little check and balance. In OKH’s case, Bon Ween Foong who, as the CEO and Executive Chairman, effectively has discretionary control over the company seems to have incidentally made multiple corporate and personal decisions that hinges on the share price of the company.
