It is critical that there are continuous efforts to enhance the appeal of the local stock market in order to attract and retain investor money flows amid increasing competition from other emerging markets. This is particularly true of smaller bourses, which lack the product range and liquidity of larger markets in the region such as China, Hong Kong and Japan. It is the main reason why the Singapore Exchange S68 (SGX) and Stock Exchange of Thailand (SET) recently pushed to strengthen their depository receipts linkage programme to expand cross-exchange listings between the two countries. And Bursa Malaysia has been invited to join as well.
As we highlighted last week, valuations for Bursa and SGX are low compared to the US market. More than half of the companies listed on the two bourses are trading below their book values. Aside from relatively weaker earnings and growth outlook, another reason for the low valuations is likely their comparative illiquidity, due to lower free float of shares. Higher liquidity typically draws more and diverse investors and boost trading volumes that should also lead to improved valuations. Better valuations matter — to existing listed companies seeking to raise fresh capital from the market as well as to attract quality IPOs. Perennially low valuations defeat the purpose of a public listing.
In mature capital markets like the US, there are many prominent and effective activist investors who take a hands-on role in maximising shareholder value. Some of the common strategies include advocating for key management and strategic changes, operational improvements, capital structure management (dividends and share buybacks) and even the outright sale of the company if it is the best course of action to maximise shareholder returns.
The absence of such activist investors in Malaysia and Singapore means there is far less impetus for local companies to actively improve their valuations — especially when it comes to unlocking value for minority shareholders. Under such an environment, we think stock exchange operators and regulators need to take up the slack, to extend greater protection for minority shareholders and ensure that the interests of both controlling and minority shareholders are aligned. And regulators ought to encourage such activist investors, including regulatory reforms and tax considerations.
Case in point, there is a surprisingly large number of companies whose shares are trading at negative enterprise value (EV) — where their market caps are less than net cash. Why? (Note: Net cash is based on the consolidated balance sheet as reported. If the cash is in a company not wholly owned, the cash may not be available to the holding company.) These companies are sitting on net cash, but they are doing little else with it, in terms of generating returns for minority shareholders. In fact, they are destroying shareholder value. For perspective, there is no stock in the S&P 500 index currently trading at negative EV.
Let us be crystal clear, we are not saying these major shareholders or managements are bad or had poor track record of performances in the past. Indeed, many have done well historically and that is one reason for the building up of their current cash piles.
What we do mean is that by not deploying the cash in a rational and reasonable manner for the interests of all shareholders, it is hurting shareholder value by causing stock prices to be way below cash per share. Because surely, at the very least, the company ought to use its cash to buy back shares up to the cash available per share, or where EV is zero, not negative.
Some companies are destroying shareholder value
We did some simple maths to demonstrate this. See Table 1. First, we computed the average net profit for each company over the past five years (Column A). Then, we calculated the hypothetical interest income that could be earned on their cash piles if the money was placed in risk-free bank deposits (Column B). Compare the two, Column C=A-B.
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A negative figure — which is the case for most of the Bursa and SGX companies on the list — denotes that minority shareholders will earn more in interest income on the cash (had it been paid out as dividends) than the companies could generate in profits. In other words, these companies are not using their cash effectively to generate even this minimum threshold returns for shareholders. In fact, many are barely eking out a profit or making losses outright, for years in some instances. They are, in effect, destroying shareholder value.
Take for example, the Star Media Group. Profits have fallen sharply in the past six years to almost negligible levels currently. For the first nine months of 2023, net profit totalled less than RM2 million ($570,000), with a meagre RM56,000 in the latest quarter. Star is sitting on RM351 million in net cash. Assuming a 4% deposit rate, interest income would amount to RM10.5 million (net of tax). That is much more than what the company is making from its businesses — for doing nothing more than simply placing the money in a bank.
To some extent, the company is a casualty of the digital age — the secular shift in ad placements from lucrative print to much cheaper online rates as more and more readers, especially the younger generations, get their news online in real time. Raising the cover price (by a hefty 50% from RM2 to RM3 per copy this year) has had no impact on offsetting the decline in ad revenue, which makes up the bulk of Star’s revenue. No doubt, the digital disruption has been devastating for the print media everywhere, and especially for a general newspaper like The Star.
To counter the decline in its media business, Star diversified into property development. But as we wrote some months ago, its maiden Star Business Hub project makes no financial sense. If Star’s intention is to monetise its land, it should just dispose of it for cash through an open tender to get the best price. Instead, it is constructing factories-warehouses, only to sell the buildings for less than the development cost. In other words, Star would make more profits by simply selling the land than it would after developing the property. Cash proceeds from the land disposal (valued at RM83.6 million by independent valuers appointed by Star) would earn additional interest income to boot — hypothetically, RM83.6 million x 4% interest = RM3.3 million interest income. For the 9M2023, profits from the property arm totalled RM391,000. One literally has to ask — why?
If management cannot turn a company around after so many years and/or find any investment opportunity that makes better returns than fixed deposit, then they should distribute the cash back to shareholders (either via dividends or share buybacks). Minority shareholders will surely benefit.
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Perhaps an even more pertinent question should be, why would controlling shareholders destroy their own wealth — unless it is self-serving to do so? (We are not making any accusation, merely raising a very logical question here.)
In the case of Star, if The Star is of national strategic importance — providing news and information to the public — with an objective beyond maximising profits, then it should be structured as a public-funded entity. Or if it has a political role, then it should be funded by its controlling shareholder, MCA. Either way, a newspaper that is not financially viable should not continue to operate at the expense of minority shareholders.
An example of good corporate governance is the restructuring at Singapore Press Holdings (SPH) in 2021. As with The Star, readership and ad revenue were on a downtrend. When SPH fell in a loss in FY2020, it was decided that the media unit (deemed strategically important in Singapore) would be taken private into a non-profit company limited by guarantee. The rest of SPH’s assets (mainly real estate) were sold and all proceeds returned to shareholders. The exercise unlocked substantial value for minority shareholders — SPH shares were trading at $1.13 at the start of 2021 while the eventual all-cash consideration was $2.36 per share.
Here is an idea for Bursa/SGX: create a watchlist for companies that have been loss-making for the last three consecutive years and are trading below book value. Give a time limit for them to come up with a viable cure — or face delisting. It does not serve the interest of minority shareholders to keep such companies listed.
Perhaps the watchlist could even be expanded to cover companies that consistently trade at deep discounts to book value, and in particular, those trading below net cash (negative EV), and/or have very small market caps. Oftentimes, this indicates poor investor confidence and trust in management and/or controlling shareholders. For instance, when investors expect the cash would be used in a way that is detrimental to the interests of minority shareholders. Or as we have seen in some cases, investors simply do not believe that the cash is real. (Flashback to our various reports on China Stationery in 2017. The company’s financial statements consistently showed a cash balance exceeding RM1 billion, which ultimately turned out to be fictitious.) Companies with very small market caps are susceptible to manipulation.
For these companies, if a cure cannot be found after, say, a year or two, they should be forced to liquidate all assets — the proceeds plus the net cash will then be distributed pari passu to all shareholders.
Chronic low valuations and poor investor perception hurts confidence and the integrity of the stock market as a whole. Stock exchange operators are the gatekeepers to ensure the listings of only bona fide companies that are in the interest of all shareholders.
Star, of course, is not the only company destroying its shareholder value. In general, companies with negative value in Column C fall into this category. Nine of the companies on Bursa’s list are part of the Fintec Global group, which consistently made losses (on average) in the past five years, despite having net cash. All have tiny market caps — except during the occasional run-ups in their share prices.
DutaLand Bhd shares too are trading well below book value. Its market cap of RM247 million is less than net cash of RM362 million (the remainder of the RM750 million proceeds received from the disposal of its plantation land in Sabah in 2017). Only 11% of the RM750 million cash proceeds or RM85 million were paid out as dividends. Another RM7.4 million was used in share buybacks since then. The bulk of the balance is invested in properties and financial securities, and held in cash. We summarised the utilisation of the RM750 million cash proceeds in Table 2.
Notably, the investment properties — condos, villas and serviced apartments acquired for RM98.7 million — were all related-party transactions. The net rental income return on the investment is a paltry 0.3% based on disclosures in its latest annual report. Meanwhile, the properties have appreciated by a modest 6% over the years (see Table 3).
The financial assets consist of a mix of equity, debt and unit trusts (local and overseas). We are unsure exactly what these securities are, but based on its annual reports, DutaLand made a capital loss of some RM26 million (realised and unrealised) over the past five years. Meanwhile, the annual dividend yield is 2.1%, on average — lower than even bank deposit rates (see Table 4). For comparative purposes, the Employees Provident Fund paid annual dividends of 5.7% over the same period — with no capital loss.
As a result of the poor returns on investments (including capital gains/losses) as well as drag from the property development arm that has been consistently in the red, the company has swung between net profit and net loss in the past five years (see Table 1). In the latest quarter ended September 2023, DutaLand made a net loss of RM854,000. Incidentally, the remuneration received by its two executive directors totalled over RM3.3 million in the latest FY2023.
Based on the above, minority shareholders have clearly gotten the short end of the stick, so far. Since the RM85 million special dividends in FY2018-2019, the company has only paid dividends of RM8.3 million (1 sen per share) in November 2020 and another RM8.3 million in July 2021. Nothing since then. Little wonder that its shares have fallen sharply from the highs back in 2017 (right after the plantation assets were sold) (see Chart). The current share price of RM0.29 is well below its book value of RM1.46 per share and net cash of RM0.44 per share.
In the cases of SGX-listed stocks with negative EV, these are mostly companies with very small market caps, also consistently making losses (see Table 1). Many are China-related. Since all these companies have negative EV, surely it is better to delist and hand out cash to shareholders. Unless … the application of the cash benefits management and major shareholders?
The SGX does have a watchlist for companies that are loss-making for three straight years and have daily market caps of less than S$40 million, on average, over the last six months. Those failing to rectify their financial performance within the cure period (24 months for those placed on the watchlist before March 2016 and 36 months after) will face delisting. So far, only four companies on our list have been red-flagged (trading in Raffles Infrastructure has been suspended since July 2023).
Unbundling holding companies can unlock value for all shareholders
As we highlighted last week, collapsing investment holding companies is one effective way to unlock value — and benefit minority shareholders. We saw this proven in the restructuring and delisting of SPH.
Insas is a prime candidate. The company’s current market cap is about RM590 million (at the point of writing) — a massive 80% discount to estimated intrinsic value (see Table 5). Simply distributing its shareholdings in listed-Inari would unlock significant value for minority shareholders. It would also improve the free float for Inari. The stake is currently worth RM1.6 billion or equivalent to RM2.43 per share — nearly 2.8 times the price of Insas shares today (of only RM0.87). And with cash of over RM1 billion more, shareholders stand to gain almost five times its current stock price.
Too many companies are content to simply allow their shares to trade below book or intrinsic values, instead of restructuring to increase shareholder returns. Persistent low valuations hurt investor perception and attractiveness of not only these stocks but also the entire stock market. Excess cash should be paid out to shareholders as dividends or used to undertake share buybacks to boost valuations. Yes, we understand there could be limitations such as unfavourable tax implications if the cash sits in foreign operating subsidiaries. So some cases are justifiable. But we do not believe this is an issue for most companies. It certainly does not invalidate the broader argument for more active management focus on improving valuations. As we wrote at the start of this article, in the absence of activist investors, stock exchange operators and regulators need to take up the slack — to extend greater protection for minority shareholders. The actions or inaction of controlling shareholders must not be detrimental to the interests of minority shareholders.
The Malaysian Portfolio gained 2.1% for the week ended Dec 13, outperforming the benchmark FBM KLCI, which gained 0.2%. We acquired 144,000 shares in Redtone Digital Holdings, and the stock was our top gainer last week, up 4.9%. Other notable gainers were Frasers Logistics & Commercial Trust BUOU (+3.4%) and Mapletree Pan Asia Commercial Trust N2IU (+2.0%) while Oversea-Chinese Banking Corporation Ltd was the sole losing stock (-0.1%). Following our latest purchase, the portfolio is now almost fully invested. Total portfolio returns stand at 161% since inception. This portfolio is outperforming the benchmark, which is down 20.9%, by a long, long way.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
