Activist fund Quarz urges cash discipline, higher dividend from CSE Global

SINGAPORE - Activist fund Quarz Capital Management is back in action, this time targeting mainboard-listed CSE Global, the process control and communications network system integrator.

In an open letter issued to the management and board of CSE Global on Monday morning (Feb 26), Quarz wrote that CSE's share price has slumped by over 40 per cent since 2015 and trades near its book value of S$0.34 share.

Blaming investors' lack of confidence in CSE on its leadership team's inadequate cost and operational discipline, Quarz is suggesting that CSE immediately distribute S$18 million of its S$48 million net cash position as a special dividend to shareholders.

At CSE's closing price of S$0.345 last Friday, this would represent a dividend yield of about 10 per cent, up from 8 per cent based on its last dividend announcement.

Quarz also flagged CSE's sharp fall in underlying net income from S$31 million in 2015 to S$13.3 million last year, despite spending S$28 million of shareholders' funds on seven acquisitions since 2015."The substantial loss of capital has triggered speculations of a reduction in dividend due to the lower net cash balance," Quarz wrote.

It is suggesting that CSE commit to pay at least 80 per cent of net income as dividend with a dividend payout floor of S$12.5 million (roughly, a 7 per cent dividend yield) instead.

CSE is a "cash-rich" but "poorly-managed" technology firm with recurring cash flow from maintenance and upgrade projects, Quarz wrote.

The question of misaligned interests was also thrown up.

CSE's board and management combined hold a small, roughly 2 per cent stake in the firm worth about S$3.8 million, Quarz wrote. But they drew a yearly compensation in excess of S$4.4 million in 2016 and more than S$7.5 million each year from 2012 to 2015, Quarz added.

Quarz wrote: "Top management and board is projected to pay themselves in excess of S$3.5 million with remuneration increasing to more than 25 per cent of 2017 underlying net profit (S$13.3 million)." In fact, CSE made a net loss of S$45.1 million in 2017.

This is after taking into account a one-off loss of S$16.8 million for apparent violations of Iran sanctions by a subsidiary between 2012 to 2013, as well as a write-down of S$37.9 million of account receivables and intangibles last year. "Losses have been labelled 'legacy issues' despite most of them (the board and management) present during the occurrences," Quarz wrote.

Quarz has a less than 5 per cent stake in CSE Global, but said that combined with its affiliates, it has built up a "sizeable position" in the company. "We, together... hold a substantially larger shareholding than the current management and board of CSE combined," Quarz wrote, but declined to name its affiliates.

Quarz said that it wants to engage with the CSE board to unlock shareholder value, and may propose measures in annual general meetings or extraordinary general meetings to "expedite" this process.

This could involve the election of new board members and/or a sale of the firm, Quarz wrote.