Activist investor urges 'cash discipline' at CSE Global

Shares of tech firm CSE Global shot up yesterday after an activist investor called for "cash discipline" and higher dividends.

The demands from Quarz Capital Management thrust CSE into the spotlight and ignited investor interest. That sent the stock up 2.5 cents, or 7.25 per cent, to 37 cents.

Quarz said it wants to engage with the CSE board to unlock shareholder value at the firm, a process control and communications network system integrator.

It said it may propose measures at annual general meetings or extraordinary general meetings to "expedite" this process. This could also involve electing new board members or a sale of the firm.

Although Quarz holds less than 5 per cent of CSE Global, it said that combined with its affiliates, it has built up a "substantially larger shareholding than the current management and board of CSE".

Quarz declined to name its affiliates, but CSE's shareholding is split among a few big players.

Mr Tan Mok Koon, a former CSE managing and executive director who led the management buyout of the firm from Singapore Technologies in 1997, owns 12 per cent.

Institutional investors, including Fidelity, Chartered Asset Management and Edgbaston Investment Partners, control about 29 per cent.

Quarz, in an open letter to CSE's management and board, noted that the share price has slumped by over 40 per cent since 2015 and trades near its book value of 34 cents.

It blamed investors' lack of confidence in CSE on its leadership team's inadequate cost and operational discipline.

Quarz wants CSE to immediately distribute $18 million of its $48 million net cash position as a special dividend to shareholders. At CSE's closing price of 34.5 cents last Friday, this would represent a dividend yield of about 10 per cent, up from 8 per cent based on its last dividend announcement.

It also flagged CSE's sharp fall in underlying net income, from $31 million in 2015 to $13.3 million last year, despite spending $28 million of shareholder funds on seven acquisitions since 2015.

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

The question of CSE's misaligned interests was also raised.

Its board and management combined hold roughly 2 per cent of the firm worth about $3.8 million, Quarz noted, but they drew a yearly compensation in excess of $4.4 million in 2016 and more than $7.5 million a year from 2012 to 2015.

Quarz wrote: "Top management and board are projected to pay themselves in excess of $3.5 million with remuneration increasing to more than 25 per cent of 2017 underlying net profit ($13.3 million)."

The ratio is more striking if one-off costs are included - CSE made a net loss of $45.1 million last year.

This is after taking into account a one-off loss of $16.8 million for apparent violations of Iran sanctions by a subsidiary from 2012 to 2013, as well as a write-down of $37.9 million of account receivables and intangibles last year.

Quarz wrote: "Losses have been labelled 'legacy issues' despite most of (the board and management) present during the occurrences."

A version of this article appeared in the print edition of The Straits Times on February 27, 2018, with the headline 'Activist investor urges 'cash discipline' at CSE Global'. Print Edition | Subscribe