Activist fund Quarz Capital Management sent the share prices of two counters surging yesterday.
Quarz called on HG Metal Manufacturing, Singapore's fourth- largest listed steel player by revenue, to distribute a third of its hefty cash pile to investors.
Quarz - a minority shareholder of HG Metal - also urged the firm to explore the possible sale of its stake in industry peer BRC Asia.
HG Metal shares jumped 10 cents or 28.57 per cent yesterday to close at 45 cents. BRC Asia leapt 13 cents or 18.7 per cent to 82.5 cents.
In an open letter to the HG Metal board released yesterday, Quarz said the firm trades at a "fire sale discount" of 60 per cent to its net asset value of $111 million, and discounts of up to 35 per cent to its listed steel trading and manufacturing peers.
In fact, HG Metal could realise more than $30 million in cash by divesting its 23 per cent stake in BRC Asia, which is valued in excess of $30 million, Quarz has suggested.
Although HG Metal is BRC Asia's second-largest shareholder, its stake "currently provides no tangible value and/or contribution to HG's operations", Quarz wrote.
It has proposed that HG Metal conduct a full strategic review on a potential divestment.
Quarz's letter came a day after BRC Asia said on Monday that some substantial shareholders had received an "unsolicited approach" over a potential acquisition.
In the letter, Quarz also urged the HG Metal board to distribute $10 million of excess cash to shareholders. HG Metal sits on a rich cash pile with net cash of $29 million, or 65 per cent of its market cap, Quarz wrote. It has a less than 5 per cent stake in HG Metal.
Buyout talk fuelled a surge in the shares of HG Metal and BRC. But Mr Justin Tang, director of global special situations at Religare Capital Markets, is doubtful.
"The market might be getting ahead of itself. Low liquidity is also an issue and may explain the outsized move. BRC does not have a whole lot of cash flow for a leveraged buyout. Industry consolidation is also unlikely. For example, Lee Metal has a lower price-to-earnings ratio than BRC, so it would be a dilutive deal for them," he said.
Longer term, Quarz has proposed HG Metal scale down its steel trading arm and shift its focus to growing its manufacturing arm - which accounts for the group's entire profit base - into its core business.
HG Metal did not comment by press time.