Activist investor Quarz Capital Management Asia has collected more than 6% of Teckwah Industrial Corp, according to an SGX filing dated Apr 14 this year. Almost 80% of Teckwah’s profit before tax is from its logistics business where it stores and moves items for companies such as Philips. A further 14% of PBT is from printing and packaging.

In FY2019, Techwah reported a profit after tax of $8.96 million, up 13.4% y-o-y. Its gearing ratio of 16.8% as at end-2019 was based on gross debt, and the company is in a net cash position as at Dec 31, 2019, to the tune of $21 million. For FY2019, Teckwah paid out 1.5 cents in dividends which translates into a payout ratio of 21%, and yield of 3% based on its last done price of 50 cents on July 27. Shares of Techwah are trading at a discount 0.79 times its net asset value of 63.4 cents.

In an open letter to Teckwah’s board, Jan Moermann, chief investment officer, and Havard Chi, Director and head of research at Quarz Capital write that Teckwah can raise its payout ratio to 80% and dividends to 3.15 cents which would give a much higher yield of 6.3%. Teckwah will continue to retain more than $40 million of net cash which is estimated to increase by around $5 million per year from free cash flow, the letter says. In FY2019, Techwah generated $19 million of free cash flow.

The duo at Quarz Capital point out that there is a lack of information on the company’s strategy and an ill-timed overvalued acquisition could stunt growth.

“The firm made an untimely acquisition in April 2019, paying $9.1million for a 70% stake in Profoto at an estimated rich premium of 2.6x its book value. With the acquired business highly exposed to the events and digital print for shopping malls and retail segments, the acquisition is likely to be loss-making these 2 years due to Covid-19,” the letter says.

“Despite the languishing financial results, Teckwah rewarded its directors and key personnel with compensations which increased significantly from $4.3million in 2009 and peaked at $6.3 million in

2017(+45%). As net income to shareholders fell 40% y-o-y in 2018, directors’ compensation of $2.7million rose to a staggering 38% as a ratio of Net Profit to shareholders,” the letter continues.

The best way to narrow the gap between NAV and price is to commit to a dividend hike, articulate a clear growth strategy for the non-print business, and enhance corporate governance, the letter adds.