As the April 25 AGM of Great Eastern Holdings G07 (GEH) approaches, minority shareholders were keen to table resolutions to enhance the valuation of the stock and its ROI by increasing the liquidity of GEH shares.
Minority shareholders have cited liquidity issues and are concerned that Oversea-Chinese Banking Corp (OCBC), which owns 88% of GEH, may acquire the remaining less than 2% it does not own, at a price less than the embedded value per GEH share of $36.59.
Should GEH’s free float fall below 10%, the shares will be suspended and the acquirer may offer the remaining investors an exit. But what happens to investors who do not submit their shares in a privatisation offer?
On April 4, RCH, an investment holding company owned by a fund managed by Tower Capital Asia, Blanca Investments (a Temasek Holdings entity), and certain members of the Eu family, entered into a conditional sale and purchase agreement (SPA) to sell their 86% interest in Eu Yan Sang to a consortium led by Rohto Pharmaceutical Co and Mitsui for not less than $687 million, valuing Eu Yan Sang at $800 million.
A special purpose company (SPC) owned by Rohto and Mitsui will be established upon fulfilment of the conditional SPA. This SPA will make a takeover bid for the remaining 14% of Eu Yan Sang shares it does not own. The Eu family will reinvest partially into the SPC. If the SPC is able to own 100% of Eu Yan Sang, Mitsui will own 30%, Rohto 60% and the Eu family 10%.
Mitsui invested in Eu Yan Sang through a fund in November 2022 as an indirect investor. The existing interest in Eu Yan Sang through its fund holdings will cease as a result of RCH’s sale of the Eu Yan Sang shares, and Mitsui will re-invest in Eu Yan Sang through the SPC, utilising the proceeds from the sale.
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In 2016, RCH acquired Eu Yan Sang for the equivalent of $269 million or 60 cents per share. The Mitsui-Rohto offer valued Eu Yan Sang at $1.80 per share.
An investor (let’s call him A) who failed to submit his shares to Righteous Crane Holdings (RCH) in 2016 just held on to his shares.
“I wasn’t comfortable that the privatisation of Eu Yan Sang was done at the right price. I knew a hedge fund had refused to sell. I stayed on as a private investor.” says A.
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A is a sophisticated investor who invests in private funds, holds a CMS licence and is aware of the potential value of the company. So did A’s ship come in on April 4?
A says: “A lot was done by Tower Capital to raise the valuation of the company and now it is worth 2.5 times more than the exit offer eight years ago.”
“I have had bad experiences in the past such as Far East Livingstone Shipyard (FELS) back in 1987. It was bought [by Keppel] for less than two times its net cash,” A recalls. Another less-than-worthy privatisation was the acquisition of ICB by United Overseas Bank U11 (UOB) when A owned ICB shares.
So why did A think the Eu Yan Sang offer in 2016 was a lowball offer? “I knew a hedge fund refused to sell. I also have an investment in the Tower Capital fund that acquired Eu Yan Sang. I just stayed on as a private investor.”
Mitsui said it has contributed to the expansion of Eu Yan Sang’s business “by helping to enhance the value of the Eu Yan Sang brand and supporting the company’s overseas expansion”.
This led to Mitsui’s decision to re-invest in Eu Yan Sang with Rohto and the founding family through the SPC. “Leveraging the competitiveness of Eu Yan Sang’s brand and products in Asia and Rohto’s R&D and marketing capabilities, Mitsui will work to create an innovative new business,” it says.
As for the latest offer, A has not said if he will continue as a private investor or sell his stake, although he sounds like he is inclined to sell his stake.
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What makes a privatisation target?
When market watchers attempt to divine which stock is likely to be the next privatisation candidate, a few pieces of the jigsaw need to fall in place. For one, the company needs to offer real value. The more liquid the balance sheet (check its liquidity ratios) and the higher the cash flow (both operating and free), the better. For listed companies, the starting point may be a significant discount to book value which can be the net asset value, or better still, net tangible assets (NTA). But this should not be the only yardstick.
What else? Not all assets are created equal. In the story titled “Value Traps” published in Issue 1068, Jan 9, 2023, of The Edge Singapore, we said different types of assets and liabilities in a company may not be valued correctly unless it is cash.
Companies that usually trade at very low P/NAVs tend to have little cash. For instance, companies that are trading at a P/NAV of 0.5 times and below are usually companies that own more illiquid assets than cash as illiquid assets are more difficult to value.
Take a look at Table 1 and the stocks that are trading at low P/NAVs. Ho Bee Land H13 is undervalued; so are Hongkong Land, City Developments, Wing Tai Holdings W05 , UOL Group, Frasers Property TQ5 and GuocoLand F17 . Ho Bee Land’s balance sheet isn’t very liquid. Its liquidity ratios are low along with interest cover while its debt ratio is high. More than that, according to its FY2023 ended December 2023 financial statement, some $479 million in bank loans are due this year.
Table 2 shows the scores for each company, reflecting its investment-worthiness. The scoring metric encompasses multiple variables. These include balance sheet strength ratios, how cheap the stock is trading which is reflected by its yields, and a price-to-value growth comparison that incorporates revenue growth, net profits and cash flows. This is purely a quantitative analysis, and based on this metric, Sinarmas Land A26 and Guocoland are relatively the most undervalued. Investors seeking undervalued stocks may explore these companies for further analysis.
The right valuation will only be determined when a sale takes place. In the event of a hurried sale or liquidation, assets could also be sold at marked-down prices.
Market watchers need to look no further than Manulife US REIT’s valuations and what it expects in a sale. Additionally, Keppel Pacific Oak US REIT’s manager is reluctant to divest any properties now because of discounts to valuation. In January, OCBC Credit Research said that valuations — even those conducted by independent valuers — may be less reliable in accurately reflecting the current pricing an owner is likely to obtain in the investment sales market.
“While this may be less of an issue for S-REITs where the properties are mainly for cash flow generation, it could pose challenges for S-REITs facing credit stress and needing to monetise their properties,” says OCBC Credit Research.
It’s about interest rates again
Developers, property-heavy companies and REITs rely on the interest rate cycle to lower their cost of capital and often a company’s weighted average cost of capital or WACC can determine how markets value their shares.
What if interest rate cuts are delayed? In a report dated April 9, Morgan Stanley points out that Asia is moving back towards the pre-pandemic low-inflation environment. Yet, Asian central banks are reluctant to cut nominal rates.
“Fed rate cuts are getting priced out and the dollar is still strengthening while Asian currencies remain on the weaker side. Central banks may be cautious that the potential for further currency depreciation may yet impart some upside to inflation, bringing the risk that inflation does not stay durably within target. Hence, we have been highlighting that Asian central banks will wait for the Fed to begin cutting rates in June (our US economics team’s base case) before they embark on policy easing,” Morgan Stanley says.
In addition, with the Fed giving mixed messages while sending 10-year US treasury yields higher, real estate companies and S-REITs may revert to the doldrums. It also means that real estate companies with assets in places like London, Frankfurt, Hong Kong and the US will have difficulty monetising their balance sheets.
Interestingly, Ho Bee Land’s management plans to hold on to its London properties. A letter to shareholders by Ho Bee Land’s chairman and CEO in its annual report says its London investment properties are well-occupied.
“Despite the headwinds in the commercial real estate sector, our rental income from our London portfolio remained stable at GBP91.6 million in FY2023 (compared to GBP92.2 million in FY2022),” the letter says. The Scalpel attracted attention when Ho Bee Land acquired it in February 2022 for GBP718 million or the equivalent of $1.31 billion. It was last valued at GBP554 million.
Separately, CDL’s management has articulated a strategy to divest $1 billion of assets. These would include some of their legacy assets in Singapore such as strata-titled units and perhaps unsold residential units on Sentosa Cove while securitising their overseas rental portfolio. EdgeProp Singapore has reported that CDL has launched 44 strata-titled industrial units at Cititech Industrial Building on Aljunied Road and 53 units at Citilink Warehouse Complex on Pasir Panjang Road for sale at $147 million.
What happened at Isetan
In FY2023 ended December 2023, Isetan (Singapore) announced a net loss of $1.159 million and did not declare any dividends compared to a dividend of 3 cents in FY2022. Isetan also said its bond holding decreased to $26.386 million in FY2023 compared to $27.326 million. However, interest income earned in FY2023 increased by 70.21% y-o-y.
Over and above its bond portfolio, Isetan is in a net cash position although net cash declined to $69.8 million in FY2023 from more than $74 million in FY2022. In addition, Isetan reports positive operating and free cash flow.
On April 1, Isetan Mitsukoshi, the holding company of Isetan Singapore , offered minority shareholders $7.20 per share to privatise the company via a scheme of arrangement. The offer is well above Isetan’s NAV of $2.58. Its 26% stake in Wisma Atria and its Kallang Pudding warehouse is valued at historical cost less depreciation and accumulated impairment losses. As at end-December 2023, the valuation stood at $25.8 million.
According to Isetan’s annual report, the fair value of the investment properties as at end-December 2023 is $308.9 million. If the fair value of Isetan’s investment properties is used, the surplus per share works out to be $6.86.
Isetan Mitsukoshi says that it needs to “secure the flexibility of [Isetan Singapore’s] management to achieve efficiency of management resources by making it a wholly-owned subsidiary”. Hence, it is offering existing shareholders an exit on reasonable terms.
The scheme of arrangement is conditional upon the approval from a majority in number representing 75% in value of the shareholders present and voting at the shareholders meeting. Isetan Singapore needs to also seek approval from the High Court. Isetan Mitsukoshi will not exercise its voting rights at the meeting for shareholders. If either the approval of shareholders or the court of law is not obtained, the privatisation fails.
In September 2022, a privatisation offer for Frasers Hospitality Trust ACV at 70 cents per stapled security did not garner the necessary 75% vote in a scheme of arrangement. It failed by a slither. FHT is trading at 46 cents per share as at April 9.
Isetan shareholders will be looking to ensure that something similar does not happen to this latest privatisation offer.
