On April 1, Isetan (Singapore) announced that it had received an of[1]fer from Isetan Mitsukoshi Holdings to acquire the shares that the latter doesn’t own through a scheme of arrangement (SOA). The price being offered is $7.20. The undisturbed price of Isetan on March 26 was $2.84 versus its book net as[1]set value (NAV) of $2.58. Often, Isetan would trade below its book value.
Why did Isetan Mitsukoshi, which owns 52.73% of Isetan (Singapore), offer $7.20 per share?
According to a group of long-term shareholders, the SOA offer still values Isetan below its intrinsic value. The reason is that Isetan adopts historical cost accounting (like City Developments). Its properties are valued at cost, with less depreciation and impairment. As a result, the valuation of its investment properties and its property, plant and equipment (PPE) are likely to be less than what they could receive on the open market.
Based on the revaluation surplus that Isetan has in its annual report for its investment properties (25.77% of Wisma Atria and 50% of Kallang Pudding Lane) of $308.9 million, and the book value of its investment properties of $25.8 million, the surplus is $283.1 million. The Edge Singapore previously indicated this is a $6.86 per share surplus. A $6.86 surplus implies a $ revalued NAV (RNAV) of $9.44 per share.
Low dividends
The revaluation surplus does not consider Ise[1]tan’s other properties under its property, plant and equipment (PPE). Based on the annual report, the property part of PPE is carried in the balance sheet at $14.673 million as of Dec 31, 2023. The minorities argue that this value should be included. The PPE properties comprise the Isetan Office Building on Havelock Road, a 50% stake in Kallang Pudding Warehouse and a unit at Valley Park. The Isetan Office Building and Kallang Pudding Warehouse are freehold, and the Valley Park condominium sits on 999-year land (pretty much freehold).
The annual report states that these properties’ fair valuation is $47.85 million. Based on the fair value of its investment properties and those that Isetan (Singapore) uses for its business operations, the RNAV is around $10.21.
One of the shareholders, widely known as Mr How, has held his shares since the company’s IPO in 1981. The 88-year-old says: “Most people are not unreasonable; they are looking for a fairer offer. At the last minute, [the Japanese] cannot kick us out at $7.20. If they don’t agree to a better offer, we will wait for them to liquidate.”
Chatting with How was like getting a glimpse into the past. More recently, he campaigned for Isetan (Singapore) to disburse its $60 million tax credits by the end of 2007. Companies were given five years’ notice from Jan 1, 2003 — when the one-tier corporate tax system came into effect — to Dec 31, 2007, to allow them to utilise the outstanding balance of their section 44A tax credits. “Every year, the dividend was very low, and all the profits were not fully distributed. Then came the 2007 deadline. Eventually, they gave us $1.20 in tax credits. The company declined to distribute the full tax credit. One of the rea[1]sons was that Isetan (Singapore) would have to pay more tax in Japan,” he says.
See also: Frasers Property: Narrowing the discount
Disbursing more dividends to minority shareholders in Singapore seemingly doesn’t bene[1]fit Isetan (Japan). This point was reiterated in a letter by David Gerald, CEO of Sias, in 2007, who said that the majority shareholder having to pay additional tax in Japan on the dividends is not a good enough or acceptable reason for Isetan (Singapore) not distributing its Section 44 tax credits to minority shareholders.
Over the years, How has had differences with Isetan’s board of directors. In 1988, Isetan had a rights issue at $5.10 per share. “Isetan (Japan) also subscribed to this, but two to three months later, after the rights issue (in 1989), Isetan (Sin[1]gapore) had a private placement. Isetan (Japan) sold their shares from the rights issue and private placement.”
As How recalls, Isetan (Japan) “mopped” shares at as low as $1.03 during the Asian Financial Crisis and the closure of CLOB (central limit order book) in 1998. CLOB aimed to enhance foreign investment and liquidity in the local stock market but unintentionally fuelled speculative trading during the 1997–1998 financial crisis.
Better price
Following the privatisation offer, the minorities have written to the Isetan (Singapore) board and Isetan Mitsukoshi, asking for a better price. Their rationale is if the two RNAVs, of $9.44 with just the fair value of the investment properties, or $10.21, which is the RNAV of the entire company, value Isetan at a significantly higher value than $7.20, surely Isetan Mitsukoshi should be able to better its $7.20 per share offer.
A caveat to this is the remaining land tenure of Isetan’s 25.77% of Wisma Atria stake of 37 years; the freehold lease belongs to Ngee Ann Kongsi. Market observers have also pointed out that there may be only one buyer of Isetan’s stake in Wisma Atria, Starhill Global REIT P40U , who owns the remaining 74.23% of Wisma Atria, including the office tower.
Additionally, if Isetan (Sin[1]gapore) continues operating in Singapore, it will need its office and warehouse. Nonetheless, Ise[1]tan’s annual report indirectly points to a revaluation surplus of $6.86 and an RNAV of $9.44.
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Despite the illiquidity, Isetan’s operating and free cash flow have been positive. In FY2023 ended December 2023, the company generated an operating cash flow of $10.9 million despite announcing a net loss. More than being in a net cash position with positive cash flows, and despite its extremely modest returns since the 1980s, Isetan has outperformed benchmark indices.
Using data from Bloomberg, Isetan’s total shareholder returns (TSR) from the earliest available data (April 3, 1986, to May 21) is 5.5% CAGR for price returns alone. With dividends reinvested, the company’s TSR is a steady 8.1%. Comparatively, the benchmark MSCI Singa[1]pore would have given the investor 6.6% CAGR returns, with dividends reinvested. Over a shorter period of 10-, five-, three-, and one year, Isetan’s TSR CAGR with dividends reinvested is 4.8%, 15.8%, 21.0% and 142.5%, respectively. The benchmark STI’s returns over the same periods are 4.1%, 5.1%, 6.7% and 8.7%. Ise[1]tan has outperformed the STI in every comparative period.
Growing Isetan
Isetan Mitsukoshi plans to grow its Singapore business by delisting Isetan, believing this will allow it to respond to market trends more effectively. Market watchers, however, have suggested that Isetan Mitsukoshi may want to exit Singapore altogether. If this is the case, then How and the minority shareholders may have a reason to press for the higher RNAV of $10.21.
Following Isetan Mitsukoshi Holdings’ announcement of the intention to privatise Ise[1]tan (Singapore), on May 10, Oversea-Chinese Banking Corp announced an offer to buy out the minority shareholders of Great Eastern Holdings G07 and to delist the insurer. On May 19, RE&S Holdings 1G1 received an offer to privatise.
