SINGAPORE (June 17): A reader of The Edge Singapore who owns shares in Challenger Technologies asked me last week if I was going to write anything more about the company’s proposal to delist from the Singapore Exchange. I didn’t think I was. But after reading the exit offer letter and circular to shareholders, both dated June 12, I changed my mind.

For one thing, it seems that the offeror — an entity in which Challenger’s CEO Loo Leong Thye and his family hold a 70% stake — is getting ready for a showdown with Pangolin Investment Management at the extraordinary general meeting scheduled for June 27. Pangolin has said that the exit offer price of 56 cents a share is too low, and the firm is reportedly canvassing other minority shareholders to join its effort to scupper the delisting plan. To prevent the delisting, at least 10% of Challenger’s shares have to vote against it at the EGM. Pangolin’s funds reportedly own some 2.94% of Challenger.

Now, Loo has provided some intriguing background to his engagements with Pangolin. According to Loo, Pangolin had made two “unsolicited offers” to sell its Challenger shares to him. “The first offer was received in October 2017 wherein Pangolin offered to sell its stake at 43.5 cents a share, and the second offer was received in March 2018 and did not state the price at which Pangolin would be willing to sell its shares,” Loo said in a statement.

Loo claims it was these unsolicited offers that prompted him to begin exploring the possibility of a delisting for Challenger. “Instead of doing a transaction with a single shareholder, I wanted to make an offer to all shareholders and began looking for a partner to start this process,” he said, in the statement. The Loo family is now pursuing the delisting in partnership with Dymon Asia Capital.

Loo’s statement about his engagements with Pangolin has been included in the circular to shareholders of Challenger. The information, in my view, could undermine Pangolin’s current position that the stock is worth substantially more than 56 cents, and create mistrust within the coalition of dissident minority investors that it is trying to build. Yet, this new information could also raise fresh questions about who else had knowledge of Loo’s intention to delist Challenger, and the circumstances around the setting of the final dividend for FY2018.

Dividend discord

Challenger’s share price fell through most of 2017 but rebounded in September of that year, just one month before Loo says Pangolin made its first approach. Then, in February 2018, one month before Loo says Pangolin approached him the second time, Challenger’s share price rose even more strongly. The stock traded sideways for the rest of 2018, before rising strongly in the early months of 2019.

On the face of it, the performance of Challenger’s business does not appear to have been the main driver of its share price. In particular, as the stock rallied early this year, Challenger was getting ready to report a poor set of financial numbers for 4Q2018 and propose a lower final dividend. On Feb 15, Challenger said its revenue for 4Q2018 declined 5.7% y-o-y to $83.9 million, while its earnings declined 1.8% y-o-y to 1.66 cents a share. It proposed a final dividend of two cents a share, versus a final dividend of 2.2 cents a share for FY2017.

For the full FY2018, Challenger reported a 0.5% y-o-y decline in revenue to $320.2 million, but a 21.8% y-o-y rise in earnings to 5.64 cents a share. Despite the sharply higher earnings, the total dividend for FY2018 was 3.1 cents a share versus 3.3 cents a share for FY2017.

On March 18, about a month after the release of these results, Challenger called for a trading halt in its shares. On March 20, it unveiled the delisting plan. Clearly, Loo would have known that a delisting plan was in the offing when the decision on the lowered final dividend for FY2018 was made. But when did the rest of the board become aware of Loo’s delisting plan? And, how much of a role did Loo have in determining the final dividend for FY2018?

Challenger tells me, “The delisting proposal was provided to the board, and after review and consideration by the board, the joint announcement was made on March 20 to launch the proposed voluntary delisting.” The company adds that the board as a whole decided on the dividend.

Whatever the case, the decision to set the final dividend at a level lower than the previous year, even though the company is sitting on a huge cash pile and a delisting plan was about to be unveiled, has riled up some minority investors. At Challenger’s annual general meeting on April 29, the resolution to pay the final dividend was passed with only 91.1% support, making it the least popular resolution to be put forward at the meeting. Indeed, the 8.9% of shares that voted against the dividend resolution could well be a rough indicator of the amount of support Pangolin will be able to muster in its effort to block the delisting at the EGM later this month.

Comparing P/B without ROE?

Apart from some potential fireworks between the offeror and dissident minority shareholders at the EGM, the independent financial adviser (IFA) to the non-conflicted directors of Challenger could find its work coming under uncomfortable scrutiny too.

Deloitte & Touche Corporate Finance has said that the financial terms of the exit offer are “fair and reasonable”, effectively giving Challenger’s board the green light to recommend that shareholders vote in favour of the delisting. Yet, some segments of the IFA letter, which is appended to the shareholder circular, left me scratching my head.

For instance, there was a lot said about the exit offer price versus the historical book value of the company. But there was no explanation of exactly why book value is a relevant financial metric for the company. Challenger does not own a lot of valuable hard assets. As a retailer, most of its assets at any given time are likely to consist of inventories and trade receivables.

Stranger still, while price-to-book value is among the valuation metrics that the IFA uses to compare Challenger to companies with supposedly similar businesses, it does not mention the return on equity of any of these companies. Is a comparison of P/B ratios meaningful if it is not normalised for ROE?

Other valuation ratios considered by the IFA in the comparison exercise were priceto-earnings, enterprise value-to-sales and EV-to-earnings before interest, taxes, depreciation and amortisation. Given the nature of Challenger’s business, and the fact that it has cash holdings equivalent to about one-third of its entire market value, I would have thought that the most sensible comparison would be reflected by the EV-to-Ebitda ratio.

According to the IFA, Challenger’s EV-to-Ebitda ratio implied by the exit offer price is within the range of comparable companies, but below the median and average. On the other hand, Challenger’s EV-to-sales ratio implied by the exit offer is within the range of comparable companies, but below the average and above the median. What about Challenger’s P/B ratio? You guessed it. It is above the range of comparable companies — by quite a long way.

Of course, I’m not saying that the work done by Challenger’s IFA is any less useful than the work done by other IFAs on similar transactions. However, given the intense interest Challenger’s delisting is likely to garner, Deloitte & Touche Corporate Finance should perhaps brace itself for some brickbats.

This story appears in The Edge Singapore (Issue 886, week of June 17) which is on sale now. Subscribe here