Aabar Daimler hedging analysis

[Sanity]

From reading Aabar's 1H/09 financial footnotes, it looks like the Company made a very wise decision to hedge its Daimler acquisition.
The footnotes on hedging suggest that the company had entered into a sophiscated set of hedging agreement(s) to ensure that its unrealized profits in the range of approximately USD 36 (Euro equivalence) to USD 50 is protected, and in exchange it gave up the profit at the lower range (between USD 27 to US 37). I am not 100% sure about the exact range to the dollar, however, they are a close approximation.

Today, the shares of Daimler is trading about 43 USD, it reached a high of 48 USD on the NYSE. By extention, I assume Aabar's unrealized profit has already been secured to up to 48 USD per share. That most likely mean, that Aabar's September 09 would show Daimler a derivative gain if the share prices were to become USD 40, let say.

This a is very sophisticated move. Since Daimler shares have been trading above USD 75 / share most of the time in the past 10 years.
Essentially it uses, the first USD 10 / share profit to pay for an insurance for profit up to USD 50 if reached at any point before the 2010 or 2012 whatever the exact date may be.

By extention it has secured profit from USD 37 to USD 48. This extract USD 11 should show up on its next quarter financials (which ends in less than 30 days). The share price on June 30 2009 on the NYSE (DAI) was about UDS 37. We are talking about another USD 11 of sure gain.

We all need to get into the details, and not rely on speculation and rumors.
Why the income state shows a loss while comprehensive income shows a gain? This is because the strict treatment of derivative instruments. Aabar did not enter the hedging agreements a merely bets. It uses the first USD 8 or so profit to pay for a further upside range of profit. The two trade off is linked together. I dont think the USD 8 dollars equivalent insurance is payable now. Nor will it get the insurance money next month should shares fall. All is settled on due date which could be 2010 or 2012, as there is no cashflow change (see the cashflow statement).

All in all, Aabar is a very sophiscated company, seized a great opportunity in a rare moment, and managed to insure its bets the most optimum way. Insurance against devaluation, upside profit, thin trading, potential share manipulation, etc. and free to ride on further upsides.. historically DAI has been a great value proposition. Just in case, it is covered.

Hope the explanation is helpful to people and not to act in panic.

Pls verify the details yourselves.

[Joe]

This move was good to protect some of the profits they made, minimal, but this way they will miss out on any mid term (1-2 years) up potential of DAI, and they payed dearly for that... in my opinion they are betting against their own initial decision to buy DAI at 20. They must believe DAI will tank again to 20s Eu or below !

They bought a collar, which is equiv to buying a put and selling a covered call at higher strike price.

- If DAI price goes up, profits goes to call holder

- If Price tanks badly then yes they are protected.

Overall in my opinion, they overpayed for the RE deals of 5 B or so in AD by about 40 % (reasons unknown, even though I suspect most of you know it)

so the big hope for Aabar was maximizing their DAI investment profits which should cover for all other deals, overpayed or not...

now that we all understood that their profits from DAI has been caped to relatively small amount with no potential to benefit in the mid term... this took the magic out of it, and this huge investment and capital is now stuck and frozen with limted profit potential...

The promise of Aabar being the next star next couple of years is now dead. Time to dump it.

[Sanity]

Breakdown of Estimations
DAI shares 100,000,000.00
Today's Value USD 43.5 / share -
Highs reached last month USD 48 / share

#of Aabar shares 3,128,000,000

in Terms of Aabar value in DAI (AED per share )
and Estimated effect of hedging
Benefits accruing to either Aabar or Counter party
incremental value /share cummulative / share
AABAR
USD 25 AED 2.92 AED 2.92
USD 25 -27 AED 0.23 AED 3.15
USD 28 - 36 AED (0.93) AED 2.22 USD 37-48 now only upto USD 48 AED 1.40 AED 3.62 estimated to show up Sept 30 2009
USD 48-50 AED 0.23 AED 3.85
USD 51 -60 AED 5.00 AED 8.85
USD 61 -70 AED 5.00 AED 13.85
US 71 -80 AED 5.00 AED 18.85
etc all accruing to Aabar
June 30 2009 value / share AED 2.22
further estimated amount in the money today: AED 1.40

Counter Party for Hedging

USD 25 AED -
USD 25 -27 AED 0.93
USD 28 - 36 counter party loses if falling below range
USD 37-48 now only upto USD 48 counter party loses if falling below range
USD 48-50 counter party loses if falling below range once reached
Above USD 50 nothing to do with Counter Party

further upside has nothing to do with the hedging counter party. Unlike some hedging arrangement, the interest of both party's here are coincidentally aligned
ie. If shares go up, from 25-27 USD Counter Party gains. And Aabar has its insurance premium paid for by the market.
once reached any point between 37 to 50 USD and later falls, Countery Party Loses. So it does not encourage Counter Party to dump or short the stock
Above USD 50 all profits belong to AABAR, and it would be best for both Parties not to see the shares falling.

In a time of volatile worldwide slow recovery, AABar has reached its objective of protecting a portion of its profit at the expense of 93 fills per share. Nothing more than that. The amount has been written off. From here on, only gains are booked with insurance coverage.

The alternative would be to ride blind into a volatile world market. Here we have a case where Aabar shareholders have the benefit of hindsight, by knowing what is the price of DAI. Yet still so many versions of stories are told. In terms of dumping, by the way, more than 50% of the shares on the limit down day was pickuped at limit down aggressively...so feel free to dump more if you have any left. In the end it is a stock for people who understand...and not those who watch from a distance with envy.

Make your own calculations and verify the details.

[sharewadi]

Hello sanity and welcome to the place-your-bets-behind-the-hedge-please Abu Dhabi stock forums .

Thanks for a great analysis of the Aabar Daimler deal. That's clarified things for me some (I knew I should have kept my mouth shut). And thanks Joe for a great reply from the other side of the fence. It's good to see these thoughtful posts that can help all of us try to understand stocks and companies in Abu Dhabi in more depth.

See also the Aabar 2009 1H results for some more general comments.
_________________
UAE IPO list | posting guidelines

[sam111sam]

[Sanity]

All the information can be extrapolated from foot note 12 of the financial statements released a couple of days ago. If one were to read it in conjuction with the cashflow statement, and following the price range of DAI on the NYSE including prices in March 31 and June 30 2009.

Hedging instruments are complex, and often being unfairly presented by IFRS standard, so the other varieties of unfavorable deals would not escape scrutiny.

However, it makes things hard for a good fund manager or company to explain them in details on its financial statements.

The footnote is clear to hedge trader, but not to typical bankers or accounts. This is not to say that the disclosure is not clear. It is one of the best. That is the way the languages on derivatives are typically presented and approved by the big auditors.

[adbulls]

[sam111sam]

[ixtira]

Property investment is only approx 20% of AABAR’s book (mostly Al Reem Island)

Total Assets = 28 Million AED, Total Investment Property = 6 Million AED

The total income from property is just 310,000 AED or a return rate of around 5%

It’s the other 80% of AABAR’s book which causes investors so much concern!

[Sanity]

FY Q2 09 Approx. Daimler
Price recorded (USD)/Share 37 already old news

Add'tl hedging income (AED) Other comprehensive income (AED) Total Add'tl Income (AED)
As of 05/Sept/09 @45 1,095,000,000 2,920,000,000 4,015,000



guestimates to be reflected in Next Quarter if other income were to remain static This would be already in the money (protected)
FY Q2 09

If @40 2,920,000,000 1,095,000,000 4,015,000,000
if @45 1,095,000,000 2,920,000,000 4,015,000,000
if @50 - 4,745,000,000 4,745,000,000


Today's Aabar Net Asset Value is guestimated to be : 1.2 AED more or 4.7 AED/ Share

Mind you that the acquisition was funded by cheap money, not entirely its equity capital. It has a portion the acqusition funded by defacto risk free leverage. Hypothetically, if you were offered (one thousand) 1,000 shares of Emaar at AED 2.5 today, and unprotected until 2010 vs. (ten thousand)10,000 shares of Emaar at AED 2.5 leveraged with cheap money and partially capital protected, which one would you choose ? The answer is obvious.

My opinion: it is trading at a 45% discount today's book. Whether it could be 1 Dirham more in the books or not - makes no difference.

[sam111sam]

[Sanity]

As of Sept 10 2009 (DAI.DE) is Euros 33 in Germany plus and (DAI) USD 48.50 on the NYSE / share

The media seemingly still not understanding it.. the headline regarding the clarifications Aabar spokesperson "insists" that it has made money ? Even the media find it difficult to understand something that is not complicated.

Sam111 ask also some seemingly intelligent question... if you had only read the message, the unanswer is quite simple. If the shares were to fall to Euros 25, The company will get to book a hedge income of approximately 7 Eurso x exchange rate x 100 mil shares, since the range is protected. About AED 4 billion on September 30 09. As Euros 25 / share equals to the closing price of June 30 09. There is not additional comprehensive income. There would be an estimated Forex loss on the Euro loan which is naturally hedge by the shares of about 3% x Euros 2 billion = about AED 30 million (almost not noticeable).

If it is stays at Euros 32 per share, then people who likes used Toyotas would have a notional misunderstanding of AED 5 billion in their mind.

Great time to arbitrary such weakness.

It is a dog eat dog world.

[Joe]

This question for Sanity related to Aabar or anyone else who can help.

I Re-reviewed Aabar Q3 report, and I am looking at the info provided in it regarding the Hedge they did. They say:

"These collars are in the range of EUR 36.41 - EUR 27.41 and EUR 27.04 - EUR 18.72 per Daimler AG share for a period between 10 June 2010 and 24 September 2012".

A collar how I understand it is, buying a put option (to protect investment in case stock price drops below this put strike), and selling a covered call at higher price to cover for the cost of the Put (equivalent to transfer the profits above call strike to call holder).

In your earlier analysis in this thread you say if DAI price goes above 36.41, from that point on, all profits are for Aabar.

This is what I do not understand

How I understood, Aabar has 2 collars

First Collar, Expiry 10, June 2010
How many contracts ? Unknown
Bought Put at strike 18.72
Sold Call at 27.04

Second Collar, Expiry 24 Sept 2012
How many contracts ? Unknown
Bought Put at strike 27.41
Sold Call at 36.41

So now price of DAI is around 35,

so the first Collar is in the money for the Call holder from 27.04 to 35. Also, Aabar is repsonsible for this Call, which is covered by its DAI shares... Correct me if I am wrong plz...

and second Collar Call is also about to cross 36.41 and be in the money, and Aabar would be responsible for this call, which is also HOPEFULLY covered by it s DAI shares

Am I tottaly wrong here or what ? because If my understanding is right, I do not see how this matches your previous assessment that after DAI cross 36.41 and goes above that, all profits go to Aabar !

Explanatin appreciated