News analysis

Prescription for minority IHC investors: Healthy dose of caution

Activist fund managers are becoming more popular in Asia and, in Singapore at least, minority shareholders are hitching a ride.

The new fad could bring a healthy dose of extra corporate governance, plus a focus on the interests of non-controlling stockholders.

But, even if value is being unlocked in the process, small investors need to tread with care.

On Monday, hedge funds and some other wealthy individuals managed, with the assistance of minorities, to remove the entire board of International Healthway, which owns and operates hospitals and nursing facilities.

The push, spearheaded by Quarz Capital Management and Mr Low See Ching, an executive director of Oxley Holdings, garnered support from holders equivalent to 69 per cent of the company's shares.

If Mr Low and Quarz Capital have their way, IHC will sell some of its assets and focus on operations in China and Malaysia. Sale proceeds will probably be used to pay down debt and increase dividends.

Jettisoning some parts of the business would also help shed light on IHC's financials.  PricewaterhouseCoopers added a disclaimer to the company's 2015 annual report and declined to be reappointed as auditor the following year. PwC said it didn't have enough evidence to justify a revaluation of properties by IHC that boosted profits, nor could it resolve discrepancies in the company's stated borrowings.

All that should be good news for shareholders, who have seen stock in IHC tumble 86 per cent since the company's July 2013 trading debut.

But what investors should bear in mind is that activist funds and rich people do have an agenda. Sometimes, deals that involve asset sales and the like might end up benefiting big shareholders more than small ones.

While IHC's track record of mishaps suggests minority investors are better off without the previous board, some of the company's loudest protagonists for change may have had their eyes on another prize.

Mr Fan Kow Hin, a controlling shareholder of IHC, is also the single biggest stakeholder in Healthway Medical, which might help to explain why the two companies tried, unsuccessfully, to merge last year.

While most market watchers agree that Healthway Medical's property is valuable, some question whether it is fully reflected on the company's books.

Healthway Medical said in its annual report that it owns some 60 general practitioner and dental clinics around the island. Most are located in Housing Board buildings, real estate that has gained significantly in value over the past decade and was probably acquired at a much lower cost.

The company had just $5.9 million of property, plant and equipment on its balance sheet at the end of 2015 but some hedge funds reckon it could be worth multiple times that.

Oxley's Mr Low called for Monday's extraordinary general meeting after he and his sister, Dr Audrey Bee Lan Low, amassed more than 11 per cent of IHC's shares.

Oxley is a developer whose portfolio includes residential, commercial and industrial projects that have retail and lifestyle elements in choice areas.

It is hard to imagine a bigger mess than the sort that engulfed IHC, and minority investors should welcome any resolution. But, as with anything involving a lot of money, they need to read the fine print.

BLOOMBERG

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A version of this article appeared in the print edition of The Straits Times on January 26, 2017, with the headline 'Prescription for minority IHC investors: Healthy dose of caution'. Print Edition | Subscribe