CFA Society Singapore
SINGAPORE (Oct 15): When I started investing in the 1990s, I quickly became intrigued by companies with assets that were overlooked by the market. In some cases, the asset in question was simply a pile of cash or liquid securities. Other times, it was a strategically located parcel of land that could be sold or developed. The one thing all these assets had in common was that they were not generating significant earnings, which is why the market capitalisation of the companies that owned them did not fully reflect their value. The way I saw it, buying shares in such companies was akin to buying their underlying assets at a bargain price.
Over the years, however, I discovered these sorts of stocks were not always good long-term investments. A balance sheet loaded with assets earning little or no return can be a symptom of a pernicious disregard for shareholders. Such companies might be in no hurry to tighten up their overly liquid balance sheets or realise the value of their underutilised assets. With little need to raise cash to grow their businesses, they have little reason to worry about the market value of their stock or pay attention to what small-time investors like me might want. In short, these stocks are often “value traps”.
These are unusual times, though. The long period of low inflation and loose monetary policy seems to be coming to an end. So is the abiding faith in marketoriented economic policies and international trade. Meanwhile, technology is disrupting everything. Yet, at the same time, the US subprime crisis is becoming an increasingly distant memory, and corporates are once more making big moves to position themselves for long-term growth. And, even as Asian markets are wilting in the face of tightening global liquidity, corporate insiders have apparently not lost their confidence in the future.
According to a report from OCBC Investment Research this past week, there were 87 share-buyback transactions in the Singapore market in the first 10 months of 2018. More than half of these transactions took place from July to September, when the market was plumbing new lows for the year. By comparison, for the whole of 2017 and 2016, when the market was rising, there were only 28 and 40 share-buyback transactions respectively.
We have also seen outright offers being made for some public-listed companies as their stocks took a beating during the recent market correction. On July 19, only a fortnight after the government imposed another round of property cooling measures, Hong Kong-listed Wheelock and Company announced an offer for its Singapore-listed subsidiary, Wheelock Properties, at $2.10 a share. At the close of the offer on Oct 2, the parent company held 90.1% of Wheelock Properties, up from 76.21% prior to the offer. Wheelock Properties is in the process of being delisted.
On Sept 27, Keppel Corp and Singapore Press Holdings announced a general offer for M1 at $2.06 apiece. Keppel also announced plans to take its 79.22%-owned subsidiary Keppel Telecommunications & Transportation private at $1.91 a share. Keppel owns its 19.33% stake in M1 through Keppel T&T. The local telecommunications sector has been bracing for the entry of a fourth player, Australia’s TPG Telecom, which is expected to commence service as soon as this quarter. M1 is widely seen to be the weakest of the three local incumbents.
These offers weren’t exactly a surprise. Market watchers have long speculated that Wheelock Properties would eventually be taken private. Like most other locally listed property stocks, it was trading at a steep discount to its book value. And, its controlling shareholder already owned a dominant stake.
The offer price of $2.10 a share was more than 20% above Wheelock Properties’ then-market price, but more than 20% below its book value of $2.60 a share as at June 30. The discount-to-book value was stark, given the nature of the company’s assets. As at June 30, Wheelock Properties had total assets of more than $3.25 billion. Almost $1.1 billion of this consisted of two prominent investment properties — Wheelock Place and Scotts Square Retail. More than $988 million related to its effective 22.5% interest in Hotel Properties (HPL) and its available-for-sale securities. And, nearly $854 million was in the form of cash.
At $2.10 a share, it will cost Wheelock and Company less than $598 million to acquire the nearly 23.8% of Wheelock Properties it does not already own. That is substantially less than the cash Wheelock Properties has in its coffers, which the parent will be able to tap as it pleases after the company is taken private.
Not surprisingly, some analysts and investors thought Wheelock and Company ought to have paid more. In fact, when the offer was announced, shares in Wheelock Properties initially leapt above the offer price. Yet, in the current tough market conditions, the $2.10 offer price proved sufficient to persuade just enough minority investors to part with their shares. Their loss was clearly the offeror’s gain.
Shares in M1 are now also trading above the $2.06 offer price, suggesting its minority investors are not overwhelmed by the offer.
Apart from Keppel and SPH, the other major shareholder of M1 is Malaysia’s Axiata Group, which owns 28.7% of the company. Yet, it is unclear what Axiata can do to block Keppel and SPH from gaining majority control of M1. Together, Keppel and SPH already control nearly 32.8% of M1. Their offer is conditional upon their ending up with more than 50% of M1. Even if Axiata sees long-term potential and value in M1, other minority investors might be inclined to just take the offer on the table.
The $2.06 offer price is 26% above the level at which M1 had been trading before the offer was unveiled. It also translates into a price-earnings ratio (PER) of 14.3 times and an enterprise-value-to-earnings before interest, taxes, depreciation and amortisation multiple of 7.6 times. Shares in M1 had fallen as much as 61% from their peak in March 2015, amid fears of technological disruption and intensifying competition.
“To deal with the fast-changing landscape and increasing competition in the Singapore telecommunications sector, M1 will need to undertake extensive business transformation requiring long-term shareholder and management commitment,” Keppel said in a statement about the offer. It added that majority control would enable it to drive strategic and operational changes at M1. “This would include digital transformation, cost-management initiatives… growth initiatives into new market segments and optimisation of the balance sheet to unlock value,” Keppel said.
On the other hand, Keppel T&T is trading just below the $1.91 a share its parent is offering to pay. According to its last annual report, Keppel T&T has a logistics business with some 3.5 million sq ft of warehouse space across six countries. It is also quickly building a portfolio of data centres. The offer price is 40% more than the level at which Keppel T&T had been trading, a 24% premium to its book value, and translates into a PER of 16.4 times.
Under the scheme of arrangement, approval is needed from more than 50% of the number of independent Keppel T&T shareholders, representing at least 75% of the value of Keppel T&T shares voted at the scheme meeting. Keppel is required to abstain from voting at the meeting.
Next privatisation play?
Is the big selloff in the market an opportunity for more controlling shareholders of public-listed companies to launch general offers? Are more Singapore-listed companies likely to be taken private? How can investors identify potential privatisation candidates?
OCBC Investment Research, in its recent report, noted that a handful of mid-sized property stocks bounced following the offer for Wheelock Properties. These included Wing Tai Holdings, Ho Bee Land, Bukit Sembawang Estates and GuocoLand. The research house also produced a list of locally listed stocks that have low free floats and are currently trading below their book values, the same key attributes that are likely to have made Wheelock Properties a viable privatisation candidate. Among the more wellknown counters on the list are IndoAgri Food Resources, Sinarmas Land, Pacific Century Regional Developments and Elec & Eltek International.
The two largest companies on this list by market capitalisation are property players United Industrial Corp and HPL, which are currently trading at discounts of 38% and 2% to their book values respectively. Interestingly, ownership of each of these companies is dominated not by a single shareholder but by two shareholders. UIC is more than 50%-owned by UOL Group, which is linked to billionaire banker Wee Cho Yaw. An entity linked to Philippine tycoon John Gokongwei owns a further 37%. UIC has a market capitalisation of over $4.1 billion. As for HPL, 56.3% of it is owned by an entity called 68 Holdings — 40% of which, in turn, is owned by Wheelock Properties and 60% by entities linked to local tycoon Ong Beng Seng. Separately, Ong has an interest in a further 23.8% of HPL. Wheelock and Ong had used 68 Holdings to make an offer for HPL back in 2014, at as much as $4.05 a share. From June 26, 2019, Wheelock and Ong will have the right to require 68 Holdings to distribute all its assets in specie. HPL has a market capitalisation of more than $1.9 billion.
Positioning for growth
My own view is that the potential upside offered by these privatisation candidates is not worth the risk of nothing happening. I would much rather hunt for companies that have the financial and management wherewithal to expand their businesses independently during these turbulent times.
For instance, shortly after shares in M1 jumped on the offer from Keppel and SPH, there was a fillip of excitement in StarHub’s shares as the company announced plans to boost operational efficiency, in part by laying off about 300 people, or more than 10% of its total staff headcount. The programme is expected to realise $210 million in savings over a three-year period, from 2019 to 2021. The announcement had some analysts raising earnings forecasts and lifting their recommendations on the stock.
Then, there is ST Engineering, which said last month that it would pay US$630 million ($868 million) for MRA Systems, an original equipment manufacturer of engine nacelle systems for narrow- and wide-body aircraft. An engine nacelle is the casing that houses an aircraft engine, providing efficient aerodynamics during flight and thrust reversal capabilities. The price tag for MRA Systems, which is being purchased from the troubled US industrial behemoth General Electric, is only 12 times its earnings, according to some analysts. The acquisition is expected to provide an immediate boost to ST Engineering’s bottom line and move it up the value chain in the aerospace sector.
As with StarHub, ST Engineering delivers a significant portion of its total return to investors through dividend payouts, which is handy, given the widespread nervousness in the market.
This story appears in The Edge Singapore (Issue 852, week of Oct 15) which is on sale now. Subscribe here