SINGAPORE (July 15): Towards end-June, a long-term United Engineers shareholder who has held his shares for more than 15 years, lamented the condition of UE BizHub City, the former UE Square, on Clemenceau Avenue.
“UE has great assets. But even prime assets need to be enhanced to keep up with the times. UE Square is really looking sad in the post-MRT landscape. It doesn’t have that shine and relevance anymore,” the shareholder says. Despite its moniker, United Engineers’ real value lies in its investment properties (see Table 1).
Now, with nearby Liang Court getting redeveloped or enhanced by its new shareholders CapitaLand and City Developments, UE Square will be looking even more forlorn, bemoans the shareholder, who goes by the name Lam. Last year, Lam was hopeful when two directors of Oxley Holdings, along with Oxley itself, started collecting UE shares. “Oxley has great execution abilities, which is exactly what UE needs now,” he says. Yet, nothing happened, he gripes.
That is because, despite requests by Oxley’s executive chairman and CEO Ching Chiat Kwong, UE’s current board has refused Ching or Oxley deputy CEO Eric Low a seat on the board. Together, Ching and Low have a deemed interest of 22.4%, which is the single-largest stake.
In 2017, when Oversea-Chinese Banking Corp was looking to divest UE, a consortium comprising units of Yanlord Land Group, Perennial Real Estate Holdings and Heng Yue Holdings acquired OCBC’s 36.44% stake in UE. Yanlord had the largest share of the consortium of 49%. Its deemed interest in UE is 17.9%. Perennial’s deemed stake in UE is 16.4%.
The consortium acquired the 36.44% stake at $2.60 a share, which was at a discount of 13.9% to its then net asset value of $3.02. As at March 31, UE’s NAV stood at $3.15. After the acquisition, Zhong Sheng Jian, chairman and CEO of Yanlord, was appointed executive chairman of UE. Roy Tan, managing director of UE, looks after the day-to-day running of the company.
Owing to a network of cross holdings over the past half century or more, UE holds a 67.6% stake in WBL Corp. In turn, WBL Corp used to own a 3.41% stake (21.4 million shares) in UE. Other shareholders of WBL were Straits Trading Corp and OCBC. UE privatised WBL in 2014 after a tussle for control with Straits Trading.
When OCBC divested UE to the Yanlord-Perennial consortium, the latter had to make an offer for WBL and acquired 28.12 million shares at $2.07 each. In February 2018, after the Yanlord-Perennial consortium had gained control of UE, the latter held an extraordinary general meeting to obtain permission from shareholders to acquire the 19.9% stake, or 55.96 million WBL shares, it did not already own, at $2.07 a share.
As the resolution involved an interested party transaction (IPT), the Yanlord-Perennial consortium could not vote. The resolution was not carried, with an overwhelming 67.44% of shareholders present or by proxy voting against it. By then, Oxley, Ching and Low held a combined 19% stake.
On Nov 30, 2018, a filing showed that Oxley divested of 6.3 million shares, bringing its deemed stake to 20.86%. On June 21, however, another filing showed Ching had acquired 4.77 million shares, taking the deemed stake of Oxley, Ching and Low to 22.4%.
UE places out subsidiary shares
On July 5, WBL announced the sale of its 3.41% stake in UE at $2.58 a share. Since the stake is below 5%, the buyer has not been named. Tan says: “These were shares held by WBL before its privatisation and before UE was sold.”
Asked why UE did not offer the shares to its major investors — Yanlord-Perennial or Oxley — he says: “Oxley’s last transaction was a sale of 6.375 million shares at $2.55 each.” He did not think the company would buy back at a higher price. “If we had approached one major shareholder, the other shareholder may have questioned why we didn’t approach him. Therefore, we didn’t approach all the shareholders,” he reasons. “There was a sale process and UOB Kay Hian was the financial adviser. There is a confidentiality agreement and the shares were sold to an unrelated third party.”
Whatever the case, the July 5 announcement was not very clear to retail investors and few realised it was about the sale of UE shares, even though the announcement stated that it was the sale of subsidiary shares. “United Engineers’ announcement is to comply with Rule 704(28A). The information disclosed in the announcement has addressed requirements of Rule 704(28A)(a) to (e),” confirms a Singapore Exchange spokeswoman. WBL is a subsidiary of UE and UE is announcing WBL’s sale of UE shares, which complies with the rules.
“There is no listing rule on how shares above a certain amount should be placed out. Also, the sale may not be within the control of UE, as this is WBL selling off its shares in UE,” the SGX spokeswoman says. WBL is an unlisted public company with its own board and accountable for its own fiduciary duties.
Oxley’s management raises questions
Oxley’s management and Ching had wished that the shares were offered to them before being placed out and he does not buy the IPT reasoning. He believes that if the shares had been offered to Oxley, it would not have required UE’s shareholders’ approval, a reason Tan gave to a daily publication.
“This is because the sale was for $56 million. On the basis of the group’s latest net tangible assets as at March 31, 2019, the sale would represent approximately 2.52% of the group’s NTA,” Ching writes in a letter to SGX, the Securities Industry Council and the Securities Investors Association (Singapore). Under the listing rules, an issuer must obtain shareholder approval for any IPT of a value that is at least 5% of the group’s latest NTA.
“Further, it is also not clear why the sale could not have been to Oxley even if the sale constituted an IPT, which required shareholders’ approval. Such a shareholders’ approval process can always be conducted and should not, in any case, be the sole determining factor in impeding the sale,” Ching writes.
Another issue that was puzzling about the sale was its discount to UE’s book. The Yanlord-Perennial consortium acquired UE at a smaller discount to book value, compared with the 18% discount to book at which the July 5 placement was made. UE’s NAV is now $3.15.
“[Note] that UE has substantial assets such as UE Square, 79 Anson Road and the Rochester Mall. Against the backdrop of raising asset prices over the years, the NTA of UE could logically be expected to exceed the current NTA of just $3.15, which far exceeds the sale price of $2.58 of the sale shares and therefore begs the question of whether the best price has been obtained for the sale,” Ching says in his letter.
“It is also [emphasised] that Oxley has stated in the past that we will subscribe for, and support, any fund-raising exercise that UE would conduct. Accordingly, had there been a rights issue or if the sale had been brought to our knowledge or attention, either of them would have garnered our support.”
Tan says: “Oxley mentioned 1½ years ago that they did not want to be diluted, so we didn’t raise cash via a rights or placement.”
UE cites need for cash
Ching’s other bugbear is UE’s citing that the $56 million raised from the sale of UE shares will be used “to fund the group’s investment opportunities and for general working capital purposes”. Why can’t UE raise funds through, say, a higher gearing ratio, he wonders. UE’s net debt-to-equity ratio of 0.44 times is modest by the standards of other listed developers, Ching says, and the company has cash-on-hand of $278 million.
“This brings to the forefront the question of whether the board has truly considered either using its $278 million cash pile and/or gearing up to achieve its funding needs. [As] a corporate vehicle, it is not uncommon for companies to look into obtaining bank borrowings for their operations and such an avenue would therefore typically be the first port of call for most companies,” Ching points out.
“We need the cash because we’ve participated in many opportunities,” Tan says. For instance, UE narrowly lost out on the government land sale for a land parcel at Clementi Ave 1, where it bid just $20 million less than UOL Group.
Last year, UE had the winning bid of $368.8 million ($830.4 psf per plot ratio) for GLS at Dairy Farm Road. “That caused our debt-to-equity to rise from 0.23 times [as at Dec 31, 2017] to 0.43 times [as at Dec 31, 2018],” Tan says. “We will be launching in the fourth quarter.” The 99-year leasehold site, which has a land area of 19,648 sq m and a maximum permissible gross floor area of 41,260 sq m, will consist of residential with commercial spaces on the first storey, including a gourmet supermarket, childcare centre, food court, F&B outlets and retail shops, UE’s annual report says.
Tan also says neither Ching nor Low are on UE’s board because “the lead independent director, Teo Ser Luck, said the board of directors wanted a diversity of board members. Otherwise, there would be another property magnate on the board. Also, I would struggle to bid for property because I would have to go to the board and, if the other companies [Yanlord and Perennial] are also bidding for land, those board members would have to recuse themselves,” he explains.
Not standing still
Elsewhere, Tan says UE has implemented asset enhancement initiatives for its buildings and is bidding for opportunities that come along. “We have been doing AEI. We did AEI on the Alexandra Road property (UE BizHub West), which [will be completed] this year and on 79 Anson (UE BizHub Tower), which has just been completed,” he says. “UE Square (UE BizHub City) is more complex because we own 83% and it [has] single strata [title], as the residential units were sold.”
“How convenient,” remarks disgruntled shareholder Lam, who remains unconvinced that the current board and management are moving fast enough to make a difference to UE’s earnings. In FY2018, UE’s net profit sank 36% y-o-y to $55.76 million, and in 1QFY2019, net profit fell 14% y-o-y to just $7.7 million.
Dividend per share has also been falling, and in FY2018, at three cents per share, DPS is the lowest in 10 years (see Table 2). In addition, if the first quarter’s earnings trend continues, this year’s net profit could also turn out to be the lowest in 10 years.
No surprise, then, that Lam is unhappy, as are Ching and Low.
