iCapital (ICAP, 5108): Closed-end fund in Malaysia

Review of August 2024 quarterly release

Tan Teng Boo (CEO of iCapital) seminar at Hotel NEO+ Penang in 8th December 2024

Investopedia link

iCapital.biz Berhad is a closed-ended equity fund launched and managed by Capital Dynamics Asset Management Sdn Bhd. It invests in the public equity markets of Malaysia. The fund invests in stocks of companies operating across diversified sectors. It invests in the stocks of undervalued companies. The fund benchmarks the performance of its portfolio against the KLSE Composite Index. iCapital.biz Berhad was launched on 19 October 2005 and is domiciled in Malaysia.

An undervalued stock is priced lower than its true value. Undervalued stocks can be profitable investments because they may increase in value over time. Unfortunately, we do not see any analyst coverage interested in this small-cap company, which is the only closed-end fund in Malaysia.

iCapital price close charts: 1y, 3y, 5y, and long term 19 years since establishment since 2005 index benchmarks:

• The orange line (iCapital Berhad), light blue (EWM may refer to the iShares MSCI Malaysia ETF), and deep blue (S&P 500, SPX, and SPY these indexes may be used interchangeably).

iCapital price close charts: 1y, 3y, 5y and long term 19 years since establishment in 2005

The S&P 500 index (deep blue line in chart) started to crossover the iCapital (orange line) in April-June 2019.

Voronoiapp.com

The unknown company in Malaysia 🇲🇾 almost has a chance to beat the S&P 500 but runs short. The advantages of a passive investing approach, such as an index fund following a major index like the S&P 500, and the drawbacks of active investing, Investopedia link.

iCapital metrics 1y price return -1.8%, 3y price return 35.1% and 5y price return 19.2% (captured date 17 Jan 2025), and long-term price return over ~150% since December 2005. Another metric of a company is the market mean in mathematics.

Market cap for 1y Mean was 428 (MM) market mean, 3y Mean 352 (MM) and all years Mean since establishment in 2005 was 305 (MM).

A short intro

iCapital is a small-cap company overall compared to a medium-cap larger than RM 2 billion. It is the only CEF company in Malaysia unfortunately.

Investment Company: A firm that pools money from investors to purchase securities. This can include mutual funds, CEFs, and other types of funds that invest in various asset classes.

The Company’s historical growth was approximately 8% annually, with a track record of nearly 20 years from October 2005 to May 2024.

2024 annual report link

No dividend was paid except for two special dividends issued in 2013 and 2021 (8 years ago). Finally, the CEO of iCapital decided to offer an Interim Dividend (with a Dividend Re-Investment Plan) on 05 Nov 2024, suitable to former employees who invested in ICAP but retired later while keeping dividends to pay for living expenses.

iCapital researched companies in KLSE via its Company research arms via the Company’s writing ✍️ arm and distributed every week to subscribers who are interested in fundamental researched thoughts in Malaysia. The Company also wrote about whether the Company is invested or skipped. The Company prefers long-term value to trading in the market similar to the CEO’s thoughts, parallel to Warren Buffett, CEO of Berkshire Hathway who preferred long values.

iCapital.biz Berhad, a closed-end fund in Malaysia, is not allowed to invest in Chinese equities primarily due to regulatory restrictions, limitations, and regulations.

Depending on the schedule, the Company also organizes monthly visits to venues in Malaysia’s Penang, Ipoh, and Malacca states. The company promotes and raises awareness regarding investment and value investing among the young generation of students in higher education institutions and performing arts schools.

The biggest and the most important area that we need to improve is the quality of shareholders. As shown at our last year AGM, we spoke about the example of Scottish Mortgage. We have shown an example based on Berkshire Hathway. We showed the policies of another large closed-end fund in London where they intentionally because they want to have their share price at a sensible level intentionally sought to go after retail investors or individual investors. That is an area where almost 100 percent of our shareholders are individuals, almost 100 percent.

Future of ICAP: Q&A session in 2023

All numbers below are quoted in Million or MM (abbreviation to million) by default unless explicitly specified.

I may need to update the quarterly result due in January for the FY Q2 2025 release in November.

Review of quarterly results report

08 August 2024

Net income

Review of Net Income based on August 2024

iCapital income is largely composed of interest and dividend income with the larger income source from dividend income received apart from the smaller interest income by the Company (75% in August result) contributing to RM 3.135 million.

80% of the company’s income was used for professional fees and other operating expenses. Negative -40.547 in the “Net fair value changes in investments” line in the Net Income statement was derived from the “Fair value changes of equity instruments” line in the balance sheet statement. See the minor math in FVOCI reserves in the following Changes in equity see click to scroll below.

iCapital market price of 457.80 to profit after tax (PAT) recognition of 0.523: 875.34x based on individual quarters or 137.36x when annualized based on the recent 4 quarters.

Cash flow

Cash flow for operating activities revealed the Company’s proceeds from disposing of partially based FY Q1 2025 filings compared to FY Q4 2024 filings. I suspected these were Kelington Group Berhad—Warrants and Wellcall Holdings Berhad, amounting to an addition of 6.89 to the Company’s cash flow. The Company also purchased Globetronics, reducing the cash flow stream by -2.70, a new addition to the iCapital portfolio of long-term investment strategy.

iCapital is recognized as a negative addition to the Company’s FD (fixed deposits) for more than 3 months to be considered a reduction in cash flow analysis.

Total FD and bank balances are ~72 million and ~20 million.

My cash level % was calculated based on Cash divided by Long-term investment ratio

In May 2020 the manager would like to maintain the cash level % at the top 8% despite hiccups in February until November 2021, during the start of the COVID-19 endemic phase when the manager decided to invest more of the securities.

The Company’s long-term investment fund grew from 155.81 in November 2019 to 513.36 in May before lowering to 468.61 in August 2024 due to lower market sentiment among the purchased securities held by the iCapital. The manager would like to maintain a minimum cash level of 2% to 4%.

Bamboo Value Investing: A good way to understand his eclectic value investing philosophy is to use the analogy of the bamboo. The bamboo has tensile strength greater than steel and can withstand compression better than concrete. Capital Dynamics Global

iCapital Q1 FY 2025 long term value investors

Balance sheet

Assets

August 2024 balance sheet

Current assets make up 17% of total equity, primarily consisting of fixed deposits and bank balances, with the remaining assets being other receivables, deposits, and prepayments.

83% of the Company’s non-current assets are primarily invested in small-cap and mid-cap securities, invested in long-term growth over a year or more. The Company bought Globetronics and sold part of shares of Kelington Group Warrants and WellCall Holdings.

Changes in equity

Carryover from the previous asset quarterly year attributable to 603.14 million plus profit after tax (PAT) plus earnings of 0.523 million due to interest income plus negative -40 million due to fair value changes of equity amounting to total equity 563.11 mil at the current quarter year of August 2024.

The Company's book value (BV) decreased 6% from the previous quarter a year ago to the total equity value in August.

Fair value reserves

A fair value reserve is a bookkeeping account that tracks the net change in the fair value of an asset. It’s used to separate fair value gains and losses from other profits and losses:

Fair value reserves represent the cumulative net changes in the fair value of financial assets that are classified as fair value through other comprehensive income (FVOCI). ​ These reserves reflect unrealized gains or losses on these financial assets, which are not recognized in the profit or loss statement but are instead recorded directly in equity. ​ The changes in fair value are recognized in other comprehensive income until the assets are sold or otherwise disposed of, at which point the cumulative gains or losses are transferred to retained earnings or another appropriate equity account.

The fair value reserves formula is used to calculate the changes in the fair value of financial assets that are recognized in other comprehensive income (OCI) rather than in profit or loss. ​ The formula is:

Fair Value Reserves = Fair Value of Financial Assets at the End of the Period — Fair Value of Financial Assets at the Beginning of the Period + Any Gains or Losses Recognized in OCI During the Period ​

Where:

Fair Value of Financial Assets at the End of the Period is the market value of the financial assets at the end of the reporting period. ​

Fair Value of Financial Assets at the Beginning of the Period is the market value of the financial assets at the start of the reporting period.

Any Gains or Losses Recognized in OCI During the Period includes any unrealized gains or losses that have been recorded in other comprehensive income during the period. ​

This formula helps in determining the fair value reserves, which reflect the cumulative unrealized gains or losses on financial assets that are measured at fair value through other comprehensive income (FVOCI).

The fair value changes were derived from total equity differences between the current quarterly year and the previous quarterly year after PAT exclusion to arrive at -40.547 MM (see the calculation below).

CEF (closed-end fund) company recognizes Fair value through other comprehensive income (FVOCI).

Financial Assets Through Other Comprehensive Income: The financial assets are initially measured at fair value plus transaction costs. Subsequent to the initial recognition, the financial assets are remeasured to their fair values at the reporting date with fair value changes taken up in other comprehensive income and accumulated in the fair value reserve, except for the recognition of impairment, interest income and foreign exchange difference of a debt instrument which are recognised directly in profit or loss. The fair value changes do not include interest and dividend income.

Financial assets through other comprehensive income

The FVOCI reserves derived from the previous quarter’s fair value reserves of 210.497 in May, plus fair value changes (derived previously) and retained earnings, reached 163.194 in the FVOCI reserve at the closing of August.

BV_preceding_quarter_year = 603.136
BV_current_quarter_year = 563.112
PAT = 0.523

BV_changes = BV_current_quarter_year - BV_preceding_quarter_year
fair_value_changes = BV_changes - PAT
# Fair value changes: -40.547
print("Fair value changes", fair_value_changes)

prev_fair_reserves_quarter_year = 210.497
transfer_retained_earnings = -6.756
FVOCI = prev_fair_reserves_quarter_year + fair_value_changes + transfer_retained_earnings
# FVOCI: 163.194
print("FVOCI", FVOCI)

In the August earnings result, the manager decided to dispose partially of shares of Kellington Group (Warrants) and WellCall Holdings shares in August, reducing fair value to 10.35 from 16.84 and 2.14 from 2.69 based on the previous May and August filings.

# Kellington Group (Warrants) partial dispose
transfer_retained_earnings = 10.35 - 16.84

# WellCall Holdings partial dispose
transfer_retained_earnings += 2.14 - 2.69

# Partial liquidation to trasnfer to retained earnings: -7.03?

The liquidation of partial shares based on August amounted to -7.03 before transaction fees -3.9% cost. -6.756 was reported after the transaction cost.

Investment portfolio invested porfolio before and after transactions in May (right figure) and August (left figure)

The figures above show a list of companies that are invested in iCapital securities mandated by SC 🇲🇾 for disclosure to investors. Note the changes in Kellington Group (Warrants) and Wellcall holdings before and after transactions in May (right figure) and August (left figure) reduction of shares in August.

The liquidation of partial shares based on August amounted to -7.03 before transaction fees. -3.8% cost based on -6.756 in Changes of equity entry arose after disposal of investment was reported after transaction cost).

The Company sold parts after FVOCI and decided to purchase Globetronics resulting in unrealized paper gain in August.

The number is consistent with the manager’s disclosure to (the Securities Commission Malaysia) so far and the transfer to retained profits.

Retained profits

FVOCI reduction to transfer is quoted as a transfer to retained profits arising from the disposal of investments in the entry journal.

Closing the loop, starting with retained profits obtained from May 2024, total retained earnings, including PAT and transfer to retained earnings from FVOCI earnings (negation operator), will be 259.918 million (note the green hilite) both in the Balance sheet and “Changes in equity” statement in August.

# Continuations

prev_retained_profits = 252.639
total_retained_earning = prev_retained_profits + PAT - transfer_retained_earnings
# Total retained earning: 259.918
print("Total retained earning", total_retained_earning)

NAV per share (Net Asset Value per share) since 2019

NAV per share inclusive of dilution of shares is more appropriate for closed-end funds and mutual funds.

Equity value is the generic term for all equity in the market, Equity value vs NAV, both name vocabularies are interchangeable.

“Equity value” refers to the total market value of a company’s outstanding shares, essentially representing the value belonging to shareholders after all debts are paid off, while “NAV” (Net Asset Value) is the per-share value of a fund calculated by subtracting its liabilities from its total assets, providing a more theoretical intrinsic value of each share within that fund; in simpler terms, equity value is the total worth of a company to its shareholders, while NAV is the calculated value of each share in a fund based on its underlying assets and liabilities.

NAV (Wall Street Prep)

Despite the fundamental value of NAV, we are not able to provide the actual value (theoretical intrinsic value) due to the fluctuation of stock price (uncertainties in the market). However long-term value over years should stabilize as with properties of matter, from particles, gases, and liquid form to solidify matter in the physical world.

The Company updates NAV value on its website regularly, an average of four times a month, with additional occasional postings up to 5 times for greater clarity.

The Excel table in the figure above was extracted from the TIKR terminal on every quarterly release to report to shareholders and should be consistent with the Company filing to SC 🇲🇾. The roll-up in the table was collected for 20 quarters based on the TIKR terminal services from November 2019 to the current date.

NAV per share was at its highest at 4.31 before declining to 3.90 on 5 Dec 2024. iCapital's weekly NAV per share update provides some clarity; however, the Company does offer NAV quarterly.

Fund’s NAV % 1y return declined to the lower at 11.63% in August stabilizing to ~11% at the end of 2024, comparable to MSCI Malaysia but does not beat the market benchmark.

I haven’t tabulated the MSCI Malaysia comparative table yet for a fairer comparison to the Market.

Fund’s NAV % 3y return was lower than average normally posted ~10% in August released? December Fund’s NAV % 3y return recovered to 18.35% matching the average.

The fund's NAV per share annual growth percentage at 4y, 3y, and 2y returns since December 2019 were 32.6%, 24.4%, and 17.1%, respectively.

Buffett values good value, but he may tolerate growth stocks in his portfolio as long as they are priced reasonably.

I have also inserted a cell at Shares outstanding diluting to 141.04 from the previous long timer 140 since the establishment of iCapital Malaysia in place of innovative dividend policy that went ex on 05 Nov 2024.

The fund market price per share of iCapital has declined sequentially to 2.88 in December (including dilution of shares to 141.04 on 6 December) from the near high of 3.16 in May.

The fund market price on 3y return was 39% in August, and appreciation was more forgiven. This is lower than the top 53% return obtained in May. The 35% return appears to be a suitable target.

The longer-term price trend has converged to a 1y and 3y return to 11.76% and 39% on Dec. The company’s break-out began in 2023, largely due to the prolonged impact of the COVID-19 crisis.

The fund discount percentage formula could provide better clarity to the underlying asset.

**Discount/Premium to NAV: **The discount/premium to NAV is a percentage that calculates the amount that an exchange traded fund or closed end fund is trading above or below its net asset value. This metric can be a valuable metric to track how far away a security is trading away from its true value. This is an important metric for closed end funds specifically because CEFs don’t issue any additional shares after its initial offering. This can cause the price to stray away from the true net asset value of the holdings in the CEF.

Fund discount to NAV % for three years from August 2020 to May 2023, affecting market sentiment from the COVID-19 crisis, putting the stock down to a deeper discount at the range of -30% to -42% discount. From the beginning of February 2023 to December 2024, the stock resumed to ~-23% in terms of Fund discount to NAV % ratio based on quarterly valuation (see the orange line below).

The company’s P/E ratio performance ratio has been poor despite the current sentiment based on Fund discount to NAV %. The market is much more favorable today than in the past despite deeper discounts.

See the Fund market price chart below:

NAV per share and Fund market price trend chart

Conclusion

iCapital investment portfolio consists of 31 companies, the 3 top largest portfolio companies based on fair value as a percentage of NAV are SAM and Equipment 17.25% (formerly change of company name, LKT INDUSTRIAL BHD in 2018), Kellington Group 14.48%, and Padini Holdings 10.12%. As of the end of August, 41% of the company’s portfolio companies represented its total wealth.

My loose ends.

The holding company, a CEF company, pools funds from purchased securities by a manager investing in various asset classes, but an independent valuation was not evaluated like the analysts. Valuation of a company, whether based on frothiness, market sentiments, or personal biases, is challenging without the assistance of independent valuation.

Assortments of relative ratio valuations, such as the traditional P/E ratio, P/NAV, PEG ratio, dividend yield, and DCF valuation, provide a better comprehensive investment.