SINGAPORE (THE BUSINESS TIMES) - Packaging printing and logistics firm Teckwah Industrial should return more cash to shareholders as dividends, to address its lack of cash discipline and operational efficiency, activist fund Quarz Capital Management said.
In an open letter addressed to the board and management of Teckwah on Tuesday (July 28), Quarz noted that the group's net profit has been on the decline, reaching a 10-year low of $7.1 million in 2018 and $8.9 million in 2019.
Quarz, the fourth largest shareholder of Teckwah with a more than 6 per cent stake, said in the letter: "The company cites a challenging environment and has continuously emphasised the need to invest and retain a strong cash position, which potentially results in the low dividend payout to shareholders.
"Yet while minority shareholders with about 70 per cent shareholding received a normalised dividend payout of $2.5 million per year, related family members of and including the largest shareholder (Chua Seng Tek Holdings) paid themselves estimated compensation and dividend of more than $3.5 million."
With profits on a downtrend, the remuneration of Teckwah's executive directors is estimated to have risen to 35 to 38 per cent of net income in 2018 to 2019, Quarz said.
Teckwah is led by chairman and managing director Thomas Chua, the eldest son of the late Chua Seng Tek, who founded the company. Seven of the younger Mr Chua's relatives are employees of Teckwah, and his wife is an executive director.
"Among Singapore-listed firms, Teckwah potentially has one of the largest family participations (nine in total)," Quarz wrote. "Despite the significance, the company has consistently elected not to disclose the remuneration of seven of these family members, citing competition and the need for 'harmonious and effective human resource management'. It was only after repeated SGX (Singapore Exchange) queries that in April 2020, the remuneration of a few family members were disclosed."
Meanwhile, Teckwah's acquisition of a 70 per cent stake in Profoto Digital Services for $9.1 million in April last year, at an estimated premium of 2.6 times its net asset value of $5 million, was both "surprising" and "untimely", Quarz charged.
"With the acquired business highly exposed to the events and digital print for shopping malls and retail segments, the acquisition is likely to be loss-making these two years due to Covid-19," Quarz wrote. "Given the low barriers to entry and the cyclical nature of the business, we believe it would have been much more cost effective if Teckwah's management had potentially chosen to work harder and grow the segment organically."
Quarz is urging Teckwah to increase annual dividends to $7.4 million or 80 per cent of net income, which would work out to $0.0315 per share, or a 6.3 per cent dividend yield. Teckwah shares last traded at $0.50 on Monday, down half a cent or 0.99 per cent.
Teckwah paid out $3.5 million or 32 per cent of net profit as dividends in 2019. It does not have a fixed dividend policy, though its newly-constructed headquarters (HQ) at 51 Tai Seng Avenue can be valued at $73 million; the group's net cash holdings are estimated at $40 million, Quarz wrote.
"The firm concluded a major investment phase between 2012 and 2017, when it invested around $120 million, mainly to build and install new equipment in its new 243,000 sq ft HQ. The high-specs building fronts Upper Paya Lebar Road and is near Tai Seng MRT station. Recent industrial real estate transactions of older buildings in the area such as 18 Tai Seng Ave, Citimac, Datapulse Tech and Jackson Design Hub, Luxasia imply a conservative $300 per sq ft and $73 million valuation for Teckwah's HQ," Quarz said.
Quarz also wants Teckwah to bring in the required industry expertise to professionalise and expedite the growth of its non-print business.
"Teckwah's non-print segment provides Critical Parts Logistics and Return Material Authorisation including service centres, refurbishment and remarketing on a Pan-Asian basis for blue-chip multinational corporations such as Dell, EMC and Philips," Quarz noted. "This segment has delivered a stable 6 per cent growth in operating profit over the last eight years. We are optimistic that this segment can benefit from operating leverage if management can grow the customer base."
As for the print segment, Teckwah mainly provides printing and packaging services for blue-chip clients such as Alcon, Meiji and Phillips.
Quarz said: "The firm owns one of the largest fleets of advanced commercial digital and offset printers in its Singapore hub... As one of the top five commercial printers in an increasingly consolidated Singapore printing market, we are optimistic that if properly executed, Teckwah can continue to grow its market share through its scale and continuing investment in technology."
Quarz believes that Teckwah's fair value should be $0.66 per share, based on a 25 per cent discount on the total value of its Tai Seng HQ ($73 million) and estimated $40 million net cash position, and 10 times its 2019 net income.