SINGAPORE (Oct 21): Chip Eng Seng’s net asset value as at June 30 stood at $1.29. Following its rights issue announced in August and completed in September, NAV fell to $1.15. Yet, CES last traded at 62 cents, and below the theoretical ex-rights price of 67 cents announced in the rights issue document. Why such a big discount to NAV and a discount to TERP?
The rights issue — which was only 53% subscribed — raised $96.3 million only because CES’s controlling shareholders, Gordon and Celine Tang, subscribed for the 46.85% of rights shares that were not taken up by minority shareholders. At the end of the rights exercise, the Tangs held 36.35% of CES, up from 29.73%.
In the extraordinary general meeting leading up to the rights issue, resolutions such as the underwriting fee to the controlling shareholders and the whitewash waiver, which allowed the Tangs to increase their stake above 30% without a general offer to the minorities, were voted through with comfortable majorities on Sept 13.
“That is like turkeys voting for Christmas. I sold my fixed income even though it gave me 6% yield and would have been backed by the hotel,” says a former bondholder who wants to be known only as Ms K. She is referring to the 442-room Park Hotel Alexandra, which she believes is relatively undervalued. CES issued $100 million 6% notes due 2022 in March this year. Thus, although CES’s net gearing was relatively high in the first half of this year — as at June 30 gearing was 1.8 times — Ms K remained comfortable.
She is uncomfortable, however, with the direction the company is taking. In August, CES announced a one-for-four rights issue of 156.5 million new shares at 63 cents apiece to raise monies as part-payment for a spending spree on assets that have questionable synergy with its property development and construction business.
Array of acquisitions
This year alone, CES has been snapping up schools, childcare centres, lagoons, hotels and construction-related companies. On Oct 14, CES announced it had entered into a 70:30 joint venture with partner Tropical Developments to acquire the remaining leasehold interest in a lagoon in the Maldives. This lagoon has a tenure of 50 years from Aug 9, 2016. CES Hotels (Maldives) will contribute US$7 million ($9.6 million) to the initial capital contribution, which will be funded by internal resources.
In October 2016, CES and Park Hotel co-invested in a Maldives resort project worth US$65 million, with CES holding a 70% stake and Park Hotel 30%. The resort, Grand Park Kodhipparu, opened in 2QFY2017. Amin Construction, of which Tropical Developments is also an affiliate, was its main developer and contractor.
Elsewhere, CES is developing its property located at 51 Pirie Street in Adelaide, Australia into a new Hyatt Regency hotel.
The education-related purchases include Invictus International School; Amdon Consulting; Repton International Schools; Tarneit West Childcare; White Lodge Education Group; American Scholar Group (ASG); as well as a partnership with The Perse School Cambridge International to set up an elementary school in Singapore.
In March 2018, CES announced it would diversify into the education sector, with the rationale that education both provides a wider business and income base, and comprises construction, development and ownership, management and operation of assets.
On Sept 20, CES proposed to acquire Sembcorp Design and Construction, a wholly-owned subsidiary of Sembcorp Industries, for $49.9 million. The synergies are obvious, given SDC’s building and construction capabilities.
Challenging financials
For 2QFY2019, CES’s earnings dipped 67.4% y-o-y to $4 million from $12.2 million. Revenue fell 7.2% y-o-y to $237.4 million. Revenue from the property development and construction divisions fell 9.9% y-o-y to $169.8 million and 10.3% to $44.8 million respectively.
Operating cash flow was negative. The company had declared a dividend of four cents a share for FY2018, or $25 million, and this was paid out in the first half.
As at June 30, net debt rose and cash levels fell as did shareholders’ equity. Although the rights issue led to a cash infusion in 3QFY2019, gearing is likely to remain elevated at 1.5 times. At any rate, $50 million of the rights proceeds will be used for property development, $20 million to finance strategic investments in education, $10 million for hospitality, and the remaining $16 million for working capital. Meanwhile, analysts have dropped coverage of the stock this year.
The Tangs gained control of CES in a married deal and this transaction is now under the scrutiny of the Securities Industry Council. The couple — currently Singapore’s 28th richest, according to Forbes, with a net worth of US$1.3 billion — had acquired their 29.73% stake in CES for $200.1 million on Oct 5, 2018. This amount is just a little short of the 30% threshold, which under the Singapore Code on Take-overs and Mergers, would require them to buy out minority shareholders at the acquisition price of $1.08 a share, 14.8% higher than the Oct 5, 2018 share price of 94 cents.
Following the acquisition, Celine was appointed non-executive chairman of CES, while two executive directors related to the former controlling shareholders resigned. Raymond Chia Lee Meng, then executive chairman and group CEO, also stepped down as chairman, although he remained as executive director and CEO.
The Tangs also own stakes in Singapore-listed Suntec REIT, ARA US Hospitality Trust, Eagle Hospitality Trust, Cromwell European REIT, OUE Commercial REIT, OKH Global and SingHaiYi Group. Celine is currently managing director of SingHaiYi, which also has Neil Bush, brother of Jeb and former US president George W Bush, as its chairman.
So far this year, shares in CES have dropped 5.4%, which, according to the Singapore Exchange’s construction focus, is one of the worst-performing stocks so far.
