Renowned corporate figure Koh Boon Hwee is better known as the former chairman of a slew of Singapore’s largest government-linked companies, such as Singtel, DBS Group Holdings and Singapore Airlines.
In addition, he is the long-time chairman of the Securities Industry Council, which administers the Take Over Code. The code ensures that M&A deals here are conducted in accordance with good business practice for the fair and equal treatment of all shareholders.
Yet, in recent months, Koh finds himself in an unfamiliar situation, facing grouses that his privatisation offer for the middling precision plastic engineering company, Sunningdale Tech, which he chairs, is a lowball. The offer was made via an entity called Sunrise Technology, jointly held by Koh and private equity firm Novo Tellus. And with Novo Tellus chairman Loke Wai San being an independent director (ID) of Sunningdale since 2018, that is additional fuel for the dissatisfied investors.
The initial offer was tabled back on Nov 9, at $1.55 cash per share, or 1,550 shares in privatelyheld Sunrise. In an open letter on Jan 14, Quarz Capital, which holds 8.28% of Sunningdale, said the value of the offer was “too low” and “significantly undervalues” the company. This price, after all, is at a significant discount of more than 22% to Sunningdale’s book value of close to $2 per share.
Another point of contention was Loke’s role and potential conflict of interests. As an ID, he was supposed to safeguard the interests of all Sunningdale shareholders, especially the minority shareholders. Yet, it was only three days after the offer was tabled, that Loke was redesignated as a non-independent, non-executive director on Nov 12.
As an ID, Loke presumably has access to first-hand information and insights into the workings of Sunningdale not privy to external parties, unless it is a potential bidder making a firm commitment.
In an interview with The Edge Singapore, Koh says he can “fully appreciate” the sentiment — and is aware of how the optics look. He explains that he was the one who invited Loke to join Sunningdale’s board back in 2018, after seeing how Loke, via Novo Tellus, was able to turn AEM Holdings around and put it on a solid growth trajectory.
And of course, Koh needs help in terms of financial muscle to launch the privatisation offer. “So I asked him [Loke] whether Novo Tellus would consider doing this with me, because they have the experience of having done it before,” he says.
“AEM is very successful today,” says Koh. “But people forget the history, that it took four to five years, that it was unprofitable for three years, that the dividend was eliminated in 2014 ... what he [Loke] demonstrated was the ability to have a vision, and then to execute it even over an extended period of time.” He adds: “I thought his experience would be helpful for Sunningdale.”
Furthermore, Koh points out that this privatisation offer, assuming it goes through, is not without risk down the road. In order to maximise the chances, he needs to work with someone with the industry experience and not someone with just the money. If not, “almost all of the burden of the restructuring will be just on me”, he says.
The privatisation offer for Sunningdale comes amid growing investors’ interest in the wider technology space. Within Singapore, where there is a hefty tech manufacturing ecosystem, there has been a whole string of investments and privatisation offers in the past few months. Besides Sunningdale, Hi-P International’s chairman Yao Hsiao Tung is also in the midst of trying to take his company private. Novo Tellus and AEM, meanwhile, are trying to take, or have taken, significant stakes in companies including ISDN, CEI and Grand Venture Technology.
Sombre tone
Koh is careful not to give an upbeat view of this sector. Rather, he strikes a sombre tone for Sunningdale. “Our reasons for proposing the transaction are simple: The world and the industry in which Sunningdale operates are in the midst of a significant transformation due to Covid-19 and escalating global trade tensions, and the company must pivot now and pivot fast,” he wrote in a Feb 4 press release to Sunningdale’s shareholders.
Koh describes Sunningdale as being at an “inflection point” now, where additional, “significant” capital expenditure, especially in highcost locations, is needed. This would build up diversified operations that can better withstand the trade tensions that persist even with a new man in the White House.
For example, last November, Sunningdale invested in a US-based plastic components manufacturer, Moldworx. Koh expects more of such commitments to be made. “This will likely require substantial upfront cash outlays with little near-term payoff, and as a private entity, Sunningdale will have greater flexibility to navigate the shifting landscape market,” he adds.
On Jan 19, Sunrise Technology revised the offer to $1.65 per share or 1,650 shares, and stated that this offer was final and the only one on the table for Sunningdale. Koh points out that the revised price is at a 42% premium over the volume-weighted average price (VWAP) of Sunningdale shares from Sept 9, 2019, to Sept 9, 2020. It is also at a premium that is higher than any closing price of shares in Sunningdale over the same period.
Koh understands investors’ sentiment that the offer price, when seen against Sunningdale’s book value of close to $2, is not attractive. However, that should not be the only metric to look at, he says. Others such as price-earnings ratio, as well as enterprise value to earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) ratio, should be seen “holistically” too, he adds.
“The truth of the matter is that Sunningdale is a manufacturing entity,” says Koh in the interview. “If I buy a factory building for $20 million. A few years later, it is worth $30 million. The book value has gone up. But I can’t really sell it because I’m not a real estate person. I still need the manufacturing capacity.”
Sunningdale traded at an average of just 0.6 times book value over the last 10 years, and with a slightly improved level of 0.64 times over the last two years. “So a manufacturing business is not something where you can actually realise the book value, especially if the book value has appreciated. And when so much of the book value is in things like machinery, if you try to sell those, the chances of achieving book value [without affecting operations] is going to be difficult,” he argues.
At $1.65, the offer is at 5.77 times EV/Ebitda, which falls within the range of previous comparable offers. The takeover of Anchorage Singapore Holdings back in 2014 was at 4.7 times. However, that for Memtech International, which was more recent in May 2019, was at 6.8 times.
Shareholders of Sunningdale will vote on the proposed scheme on Feb 19 and if the privatisation is successful, the company is expected to be delisted on April 20. If blocked, Sunrise will be unable to make another offer in the 12 months following the vote.
