In a recent discussion, an analyst who declined to be named says Singapore has always had a lot of deep-value plays which trade at very low valuations for years.
However, “when the major shareholder gets fed up and makes an offer, he won’t make a super high offer, given the deep discount the stock has been trading at. So, the company becomes ripe for activism,” he adds.
Take the example of TTJ Holdings. On May 20, TTJ’s major shareholders made a voluntary conditional offer (VCO) for the shares in TTJ they do not own at $0.23 per share, via an entity called THC Venture. The offer values TTJ at $80.38 million.
The announcement couched the offer as an opportunity for investors to exit their investment at the highest volume-weighted average price (VWAP) in the past 12 months. This was in addition to other reasons such as higher costs, fewer contracts, difficulty in accessing labour and the high cost of maintaining a listing.
However, Lim & Tan, a local broker, wrote in a May 23 report: “Although this offer of $0.23 represents a premium over its VWAP price, the deal puts TTJ Holdings to be valued at 0.63x book as it has an NAV of 37 cents. Additionally, given that they have $32 million net cash (9 cents per share) and a record order book of $187 million, we think management is being opportunistic in an attempt to privatise the company on the cheap just as the inflexion point of the construction sector is on an upturn. Note that this offer is not final, and taking the above into consideration, we recommend investors to hold out for a better offer.”
Based on its 1HFY2022 ended January financial statement, TTJ had a net cash position of around $29.1 million and equity investments valued at $1.7 million. Interestingly, TTJ had just completed the sale of property, plant and equipment in Johor for around $13.3 million, for assets that were valued at $11.7 million. This would result in a cash infusion which would take its cash holdings to more than $42 million, translating into cash per share of 12.1 cents.
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Among the investors looking for a better offer is Patrick Wright, an Australia-based investor. Wright first invested in TTJ at 11 cents back in 2020 during the depths of the pandemic. He recently acquired more TTJ shares at 17 cents. In addition to TTJ’s cash pile, Wright argues that TTJ’s steel business could be worth as much as $50 million to $60 million to a private buyer.
The case of Roxy-Pacific
The rationale behind privatisations can be said to follow a standard template. The most recent privatisation was that of Roxy-Pacific Holdings by the Teo family.
Roxy-Pacific’s circular cites a challenging environment as a result of Covid, the offer price is the highest VWAP in the past 12 months, trading liquidity is low and shareholders can realise their entire investment without having to incur brokerage and other fees.
There are a couple of challenges peculiar to the construction, property and hotel sectors though. “As a result of the ongoing Covid-19 pandemic, the construction of development projects continues to face prolonged challenges due to global supply chain disruption and labour crunch, leading to rising material and labour costs as well as higher tender prices for new projects. The company may also face increasing risks of delays in project completion and potential penalties from late delivery exacerbated by the increasing risk of default by construction contractors,” adds the circular.
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The company owns a handful of hotels, including Grand Mercure Roxy Hotel in Singapore, Noku Kyoto Hotel, Noku Osaka Hotel, one in the Maldives and another in Phuket. To be sure, 2020 and 2021 were difficult years for hospitality. “Continued weakness is expected in the hospitality industry as business travel and retail tourism remain significantly below pre-pandemic levels with a longer and more uncertain road to recovery in light of the recent emergence of the Omicron variant,” the circular says.
On the other hand, shortly after the privatisation was completed in February this year, borders reopened and travel resumed. Japan has not fully opened but anecdotal evidence shows scores of Singaporeans and other nationals waiting to make a beeline for Japan this winter.
Developers have the added uncertainty of the impact of additional property measures. From Dec 16, 2021, developers will be burdened with an increase in additional buyer’s stamp duty (ABSD) rate to 35% (the non-remittable component of the 5% remains unchanged) when they purchase and develop residential property.
Redas (Real Estate Developers’ Association of Singapore) had indicated that these additional measures “impose immense additional pressure” on land-banking strategies as developers need to compress their development, sales and project completion periods as well as land replenishment cycles to meet the stringent requirements for ABSD remission.
The circular also points out that Roxy-Pacific has not raised any capital since its IPO in 2008 and is unlikely to access more equity. Moreover, the company will save on listing-related compliance costs and other expenses.
Many of these reasons are also cited in TTJ’s announcement on May 20, including the challenges of operating during Covid.
Privatising REITs
On the other hand, REIT privatisations have been few and far between. Two REITs, Saizen REIT and Soilbuild Business Space REIT (SB REIT), and one business trust, Croesus Retail Trust, brought in investors who were able to buy out minority unitholders.
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REITs and business trusts are less likely to trade at steep discounts to their NAVs because they have a simpler capital structure, which is absent of retained earnings. However, a handful of S-REITs with foreign assets are trading at discounts to NAV because they tend to be viewed with caution. This has increasingly been the case following investors’ experience with Eagle Hospitality Trust.
The reason for REIT privatisation is slightly different from that of a corporation. This was highlighted in 2020 and 2021 when unitholders of SB REIT received an exit offer from the sponsor and a Blackstone fund.
According to SB REIT’s manager at the time, growing SB REIT through DPU accretive acquisitions became challenging because the REIT traded at a high yield. A REIT requires its DPU yield to trade sufficiently low and an ability to effectively raise capital from investors to fund accretive acquisitions. At the time, SB REIT had a relatively low debt headroom and the manager was reluctant to move above the 45% loan-to-value ratio as debt funding costs would rise.
On top of that, during its fundraising initiatives, SB REIT’s unitholders at times did not subscribe for their pro-rata share of equity issuance. Its last round of equity fundraising was only 82% filled, SB REIT’s manager says.
As a small relatively illiquid REIT, it was unlikely that SB REIT could be included in the FTSE EPRA NAREIT Developed Index. Most of the large-cap REITs trade at lower DPU yields partly because they are part of key REIT indices which are likely to confer better trading liquidity, larger institutional following, stronger valuations and hence a lower cost of capital. SB REIT was successfully privatised via a trust scheme.
Past privatisations
While REIT privatisations have been done near or above NAV, this is not the case for developers. Local investors looking for privatisation candidates often scan Bloomberg’s list of stocks trading at heavy discounts to their NAVs (see table 1). While a privatisation offer narrows the spread between price and NAV, some form of discount is likely to be present (see table 2).
Only Pan-Pacific Group Holdings and Roxy-Pacific were privatised at NAVs which were higher than their traded price. However, both companies were privatised at discounts to their revalued NAVs. Revalued NAVs in the case of both companies, which own hotels, include revaluation reserves. Major shareholders often own a large stake, usually in the 75% to 89% range, of the privatisation candidate; hence liquidity is/was low. As a result, the stock trades at a significant discount to NAV.
Interestingly, Great Eastern Holdings, which is 88%-held by Oversea-Chinese Banking Corp (OCBC) is also trading at a significant discount to its embedded value (EV) of $38.57 and it is a lot cheaper than its peers. If the stock was more liquid, it could narrow the discount between its trading price and EV, its investors suggest.
Mandarin Oriental International, which is 79.4% held by the Jardine group, is trading at 0.75x its NAV, and 0.5x its RNAV. Hongkong Land, which has seen its NAV decline to US$15.05 ($21.31) in FY2021 from US$16.43 in FY2018, is trading at just 0.31x NAV, a huge discount. As at Feb 23, Hongkong Land had used up US$272 million of the US$500 million share buyback programme implemented last year.
Holding out for a better price
The advice for Wright and TTJ’s minority shareholders by brokerage Lim & Tan is to hold out for a better offer.
“So, all up — excluding any profit made since Jan 31 — TTJ should have around $43 million in net cash,” Wright calculates. “Finally, we have the two properties from the waste management division. The auditor’s report in the 2021 annual report notes that the property of TTJ Greenfuel was carried at $14.3 million as of July 31, 2021, while the property, plant and equipment of TTJ Green Energy (Thailand) Co was carried at $8.2 million. There were no major movements in the carrying value of these assets in the subsequent half-year report. So, these properties should be worth at least $22.5 million,” he notes.
Wright isn’t asking for the privatisation offer to be at NAV. Based on his estimates, TTJ should be worth around $115.5 million. TTJ has 349.5 million shares outstanding, excluding treasury shares, so this would imply a value of around 33 cents per share. “I have written to Mr Teo and the board today to express my displeasure at the current offer. I said that the minimum offer I would consider would be 30 cents per share,” he says.
Meanwhile, the unnamed analyst is keenly watching which major shareholder of an undervalued stock will decide to throw the towel in and privatise their company.
