SINGAPORE (Mar 22): Pangolin Investment Management, which holds a 2.94% stake in Challenger Technologies through its Pangolin Asia Fund, is calling on other shareholders to reject Digileap Capital’s delisting offer at the company’s upcoming EGM.  

Pangolin says the offer price of 56 cents per share, which translates to a price-to-earnings ratio of 9.9 times, is too low and thus unfair to minority shareholders.

In a letter sent to The Edge Singapore on Friday, Pangolin explains its reasons for strongly advising other Challenger shareholders to reject the offer, which it deems “derisory”.

It starts off by highlighting Challengers superior fundamentals as an IT retailer with steady revenue stream, a cash-term business and no debt, and especially for the company’s strong sales and profitability amid growing competition and market challenges.  

In particular, Pangolin believes Challenger has too much cash on its balance sheet and based on its circular to the SGX, has not carried out any cash-raising exercises from the capital markets since 2007 – neither is it likely to do so in the foreseeable future, says the firm.

As such, it argues that the company should be valued by its cash flow to investors as it is of the view that companies are rated by cash returns, while investors want balance sheet and operational efficiencies.

“If Challenger increases payout, share price should be valued at $1.025 or 83% upside to current share price. In addition, they should return excess cash of $43 million or 12.5 cents/share as special dividend to shareholders. This will provide additional return of 22.3%,” illustrates the firm.

Pangolin’s case for a higher dividend payout is based on the fact that dividend payout for Challenger has been around 50% for many years, with excess cash not paid out despite low capital expenditure requirement.

In the firm’s view, Challenger can afford a 100% dividend payout ratio, as not much capital expenditure is needed in the near-term.

“Once earnings are all paid out as dividend, the dividend yield will rise to 10%. The share price will naturally react to a higher payout as cash will be returned to shareholders on a consistent basis. We estimate that the share price should increase by 83% from current price of $0.56 to $1.025 so that the dividend yield will normalise to 5.5%,” says Pangolin.

According to Pangolin, Challenger has an excessive amount of net cash which has been largely under-utilised, with a net cash balance of $63 million as at end-2018 now sitting in the bank and earning a “miniscule” 1% to 2% interest.

The firm is urging Challenger to set aside at least $20 million for a rainy day fund or working capital, and pay out the rest of the cash, or $43 million, as a special dividend of 12.5 cents per share.

“We reckon the fair value of the shares to be at least $1.025 based on recurring dividend returns every year plus an additional return of 22.3% if Challenger is paying out the excess cash on the balance sheet as special dividend. We strongly advise shareholders to reject this derisory offer during the upcoming EGM,” it adds.

To recap, Digileap Capital is a joint venture between the Loo family, Ng Leong Hai and Dymon Asia Private Equity (S.E. Asia) Fund II (DAPE II).

These major shareholders collectively own a 78.64% stake, and have given irrevocable undertakings to vote in favour of the offer.