Last week, Gulf Finance House (GFH) announced that it would recommend distributing bonus shares. That comes on the heels of a share buyback program launched last year. The idea of a share buyback program is that shares of GFH are cheap and so it makes sense for the company to buy them back. The reverse, issuing bonus shares, makes sense for GFH when shares are expensive. So the two are, on the face of it, inconsistent if executed at the same time.

Is GFH Buying High and Selling Low?

How can we reconcile this? One idea is that GFH shares were cheap last year and are now expensive. According to the DFM, in the six months to February 14, 2019, GFH shares dropped by 34.68%. So the reverse is true. GFH bought when their share price was high and now is recommending issuing shares at a discount. The exact discount depends on the actual prices GFH triggered its share buyback program.

GFH’s Profits comes from Lawsuits

That’s not all that I found puzzling. The income statement shows a net profit of circa USD 115 million. However, there is income from the settlement of liabilities of USD 113 million. That’s not all. Tucked away in “Other Income” (see note 23) is a further USD 22 million of income received as settlement of liabilities. So basically GFH’s profit is from lawsuits, not from operations. Operations is showing a loss. This is not the first time that GFH benefits from lawsuits. I previously discussed GFH’s 2016 profit of USD 233 million that included USD 464 million from litigation, i.e. ordinary operations delivered a loss of USD 231 million.

GFH’s Related Party Transactions

So the quantum of income from operations is near zero. What about quality? One of the large components of the income statement, and possibly the highest quality as it is usually fee based income, is “Income from investment banking activities.” This stands at USD 40.1 million. If you check the notes, and note 27 “Related Party Transactions” in particular, you will see that USD 23.5 million came from related parties. So 59% of GFH’s investment banking income came from related parties and was not originated from independent clients. That isn’t as high quality as business sourced from independent clients because taking from one pocket and putting it in another pocket isn’t really generating economic value.

GFH’s Related Party Merry Go Round

Last week GFH announced the sale of USD 100 million of real estate to Terra Real Estate Investments. It is not clear who is behind Terra, but the article talks about “ [the transaction] had an instrumental support from leading Abu Dhabi investment group ADFG” and “ADFG is pleased to make this acquisition of high quality real estate assets from GFH in the regional markets of the GCC and North Africa.” ADFG is a related party to GFH – the Chairman of GFH is the CEO of ADFG.

GFH Final Thoughts

GFH has a loss from ordinary operations and once again shows a profit only because of the settlement of litigation. Furthermore GFH’s business, past and present, is reliant to a material extent on related parties. Which leads to the question: Why is GFH proposing cash and share dividends?