Call for Metro to return excess cash to investors

Metro has seen its shares gain 3.4 per cent this year, but it is still the cheapest among South-east Asian retailers with a market value of at least US$500 million (S$685 million), trading at just under 0.6 times asset value.
Metro has seen its shares gain 3.4 per cent this year, but it is still the cheapest among South-east Asian retailers with a market value of at least US$500 million (S$685 million), trading at just under 0.6 times asset value.ST FILE PHOTO

Net cash holdings are high and account for over half market cap, says activist investor

Activist investor Quarz Capital Management has turned its sights on Singapore, calling on retailer and real estate developer Metro Holdings to return excess cash to investors.

Metro's net cash holdings of $393 million are high compared with other companies listed on the Singapore stock exchange, and account for more than half its market capitalisation, Quarz said in a letter to the management and board.

Metro shares ended the day up 8.2 per cent to 99 cents yesterday, after reaching a high of 99.5 cents.

The shares trade about 40 per cent below book value, Quarz said in the letter. The company should pay a 21 cents-a-share one-off dividend to return cash to investors, as well as provide a clearer strategy for its real estate division, strengthen investor relations, and align management pay more with the firm's long-term profitability and share price, according to the letter.

It is "inconceivable that Metro's share price continues to languish... despite the company's strong recurring earnings profile and valuable assets", Quarz, which manages just under US$100 million (S$137 million), said in the letter.

While investor activism is less common in Asia than in Europe and the United States, Quarz, which usually targets small and medium- sized firms, said it plans to approach more Singaporean companies as many are undervalued and a new generation of owners is more open to measures to boost stock prices.

"Singapore is a treasure trove of undervalued small and mid-cap companies," Quarz's Singapore- based head of research Havard Chi said in an interview. "We are seeing a change in the current environment because we have a new generation of majority owners taking over. That generation wants to focus more on the core operations and they want to become better capital allocators."

The fund has a "pipeline of stocks in Singapore" which it intends to target, with one or two firms to be approached within the next 12 months, Mr Chi said. Real estate, electronics and engineering are all attractive sectors, he said.

Metro shares have gained 3.4 per cent this year, compared with a 0.4 per cent decline in Singapore's Straits Times Index. Still, it is the cheapest among South-east Asian retailers with a market value of at least US$500 million, trading at just under 0.6 times asset value.

The region's 18 biggest retailers trade at 6.7 times book value on average, according to data compiled by Bloomberg. Quarz has accumulated a stake of about 2 per cent in Metro since the beginning of the year, Mr Chi said.

Management should "implement a clear dividend return policy" and a programme to buy back stock whenever the shares trade at more than 40 per cent below the net asset value, Quarz said in the letter.

A one-time, 21-cent dividend would translate into Metro deploying $174.5 million of its cash, based on the current number of shares outstanding, according to Bloomberg data. Metro's 12-month dividend yield was about 7.7 per cent.

Quarz, co-founded in 2011 by Mr Jan Moermann, a former investment banker with UBS Group and Credit Suisse Group, has made an annualised return of about 10 per cent since inception with its Quarz Active Value fund, Mr Chi said. The fund manager, which has offices in Zurich and Monaco, currently holds between 15 and 20 positions in companies in Germany, Austria, Switzerland and the US. Quarz is focusing on Singapore because of the reliability and transparency of the country's accounting and regulation, whereas in other parts of Asia there is more room for financial manoeuvring, Mr Chi said. He said Quarz will add more research capabilities in the nation.

Quarz is not the first investor to take an activist approach in Singapore. Fund management firm Dektos Investment, founded by Mr Roland Thng, last year started EVA Capital with US$5 million to take stakes in small and medium-sized construction and engineering companies in order to pressure them to improve performance.

Short-seller Muddy Waters put pressure on Singapore-listed commodity trader Olam International by publicly questioning its finances in 2012, which caused Olam's stock to plummet.

Temasek Holdings bought a controlling stake in Olam in 2014, triggering a rally in the shares.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on October 05, 2016, with the headline 'Call for Metro to return excess cash to investors'. Print Edition | Subscribe