CLEMENTINE Investments - a consortium of Teckwah Industrial Corp' s three largest shareholders - has exercised its right to compulsorily acquire all the shares of shareholders who have not accepted its privatisation offer, Teckwah announced in a regulatory filing on Monday evening.

 

This comes after the voluntary cash offer for the packaging, printing and logistics firm closed on Oct 27, with the offeror and its concert parties receiving valid acceptances of about 95.9 per cent of the total number of issued shares.

 

In August this year, Clementine Investments offered to take the company private at 65 Singapore cents per share. Dissenting shareholders will be offered the same terms, Teckwah noted on Monday.

 

Last month, the company also announced that the privatisation bid had turned unconditional with the firm losing its free float.

 

THE independent directors of Teckwah Industrial Corporation are recommending shareholders accept a voluntary conditional cash offer of S$0.65 per share from Clementine Investments, which is looking to take the mainboard-listed packaging, printing and logistics firm private.

 

The offer closes at 5.30pm on Sept 30. The offer price is final and Clementine Investments will not increase the offer price, Teckwah said in a circular issued to shareholders late on Tuesday.

 

Clementine Investments is a consortium of Teckwah' s three largest shareholders, namely Chua Seng Tek Holdings, Lee Kay Huan Holdings and Airjet Investments.

 

In making their recommendation, Teckwah' s independent directors had concurred with an assessment by independent financial adviser (IFA) RHT Capital, included in Tuesday&rsquo s circular, that the financial terms of the offer are fair and reasonable. 

 

RHT said the offer price represents a premium of about 17.8 per cent over the volume-weighted average price (VWAP) of Teckwah shares on Aug 7, which is the last trading day before the release of the offer announcement.

 

The offer price also represents a premium of 32.4 per cent and 38.3 per cent over the VWAP of the shares for the six and 12-month periods up to Aug 7 respectively.

 

RHT said Teckwah' s shares have never closed at or above the offer price since the company' s initial public offering in 1994, and had consistently traded at a discount to the trailing net asset value (NAV) per share over the past two financial years.

 

While the offer price represents a discount of 4.4 per cent to the NAV per share, this is less than the range of discounts at which the shares had consistently traded over the 12-month period up to Aug 7, it added.

 

In its assessment, RHT also compared the weighted average valuation ratios of each of Teckwah' s packaging printing, logistics and lifestyle businesses with broadly comparable Singapore and Malaysia-listed companies, including Tat Seng Packaging Group, Tiong Nam Logistics and Kingsmen Creatives.

 

It found that Teckwah' s price to earnings (P/E) ratio of 15.6 times was within the range, and above the mean and median, of the weighted average P/E ratios for the comparable companies.

 

Meanwhile, Teckwah' s enterprise value to earnings before interest, taxes, depreciation and amortisation ratio of 3.7 times was within the range of the ratios for the comparable companies.

 

RHT also pointed out that Teckwah' s dividend yield of 2.3 per cent over the last 12 months was below the mean and median of the 3.3 per cent dividend yield for the comparable companies and the 4.5 per cent yield for the Straits Times Index exchange traded fund (STI ETF).

 

" This suggests that a shareholder who receives the proceeds from the offer may potentially experience an increase in investment income if he re-invests the proceeds from the offer price in the shares of the comparable companies that paid out dividends in their respective last financial year, or the STI ETF," RHT said.

 

The IFA noted that Teckwah' s financial performance for H1FY20 was weakened by the Covid-19 pandemic, and is being supported by grants from government support schemes in Singapore and China. Without these grants, the group would have recorded a profit of S$1.9 million instead of S$5.3 million, it said, adding there is no assurance such schemes will continue to be provided. It pointed out that Teckwah expects the group' s overall performance for FY20 to weaken if the global situation worsens.

 

Furthermore, given the current market conditions and uncertainties arising from the pandemic, there is no certainty that Teckwah' s properties, plants and machinery can be sold at the market value stated in valuation reports, RHT added.

 

The group may face difficulties finding buyers willing to acquire these assets at the valuation amount, as the assets are specific to Teckwah' s use, the IFA said.

 

In their offer letter in August, Clementine Investments said it is looking to delist Teckwah to enable " more flexibility to manage the business of the company and optimise the use of the company' s management and resources during this time of economic uncertainty" .

Rentier mentality could see investors and companies miss out on Covid-19 opportunities

 

THE S$0.65-a-share privatisation offer for Teckwah Industrial Corp by its three major shareholders comes at a good premium over Teckwah' s all-time close of S$0.555.

 

But it also underscores the worrying trend of the Singapore market' s fixation on cash returns.

 

The cash offer for Teckwah comes on the heels of an open letter from activist investor Quarz Capital Management to Teckwah' s management and board. Bemoaning Teckwah' s low share price return, Quarz had called on Teckwah to increase its dividend payout ratio to 80 per cent of net income from the historical average of 32 per cent since 2011.

 

It said Teckwah had " continuously emphasised the need to invest and retain a strong cash position" while at the same time paying the largest shareholder and his family members substantial compensation and dividends. Teckwah should also follow the trend among multinational companies to outsource their logistics. And it urged the company to refresh its board and management.

 

Quarz has since said it will accept Teckwah' s offer. Although " at a slight discount to the book and intrinsic value of Teckwah" , Quarz' s chief investment officer Jan Moermann said he welcomed the " decisive move... to substantially close the undervaluation gap" .

 

Is Quarz giving up too easily? After all, one reason Quarz is against a merger of Sabana Shari' ah Compliant Reit and ESR-Reit is because the price being paid for Sabana is below book.

 

Furthermore, the Sabana-ESR deal actually gives Sabana unitholders an opportunity to stay invested in a listed vehicle that could appreciate as its portfolio grows. Teckwah' s offer, on the other hand, would merely give shareholders cash. Shareholders could presumably redeploy this for better returns, but that' s less persuasive for those looking for growth.

 

Emphasis on income

 

Quarz' s complaint about Teckwah' s returns seems to ignore its cumulative dividends. Since its listing in 1994, Teckwah' s shares have returned 404 per cent or 6.3 per cent per annum - mostly from dividends. Excluding the jump in the stock since Quarz' s open letter, Teckwah' s return is still a sizeable 298.2 per cent.

 

And the company has hardly raised money from the market. In 1996, to finance a multi-storey mini print and media park, it issued 33.9 million detachable and convertible warrants. The electronics industry had been in a downturn, but Teckwah had just signed a deal to grow a new software manufacturing division.

 

The warrants eventually expired in 2001 and Teckwah has not raised any money since. While not a high-growth company, it has generated steady positive free cash flow and now has a significant cash balance. In its offer announcement, the company had said it is " unlikely to require access to Singapore equity capital markets to finance its operations in the foreseeable future as the company has various other available funding sources such as bank facilities" .

 

Teckwah is not alone.

 

Singapore Exchange-listed companies generally strive to return money to shareholders in the form of dividends.

 

According to July' s FTSE Asia Monthly Index Performance Report, the FTSE Singapore index had a yield of 5.66 per cent - leading the FTSE developed countries as well as Asia-Pacific indices.

 

Gary Dugan, CEO of investment advisor The Global CIO Office, points to the heavy weighting of financials and real estate investment trusts (Reits), which " typically trade on higher-than-market yields" . And the Singapore market has been depressed by expectations of dividend cuts.

 

But high yields are, in fact, evenly spread across the market, and larger yields tend to come from smaller companies. The FTSE Singapore Large Cap index has a yield of 5.7 per cent, the Mid Cap index 5.46 per cent and the Small Cap index 6.02 per cent.

 

Also, larger index declines did not correspond with lower yields. The Small Cap index was down only 9.42 per cent for the year to July 31, versus a 19.03 per cent decline for the Large Cap index. Meanwhile, the FTSE ST Technology index is up 11.93 per cent and still yields 4.56 per cent.

 

This is quite the opposite from what investors would find in other developed markets. It also runs counter to the expectation that smaller, faster-growing companies need capital to grow while large ones will have the wherewithal to pay out bigger, steadier dividends.

 

Investor preferences

 

Various factors impact a company' s decision on what to do with its spare cash. In the case of Singapore' s largest companies partially owned by state investor Temasek Holdings, their dividends flow into Singapore' s budget, which would be a strong incentive for them to keep their payout ratios relatively high.

 

Many of the mid-sized to small companies listed here are tightly held by their founders' families and represent an important source of family income - as has been the case for Teckwah.

 

Two other reasons could explain the propensity to distribute cash instead of reinvesting it for growth. The Singapore economy' s limited size and the risks that come with overseas expansion are one. The second may be related to investors' preferences.

 

In a study of the global financial crisis, Binay Adhikari, David Cicero and Johan Sulaeman found a correlation between the survival rates of companies and their ability to raise capital. In markets with a high concentration of wealthy and risk-averse investors, companies were better able to raise money in debt capital markets. Investors' preferences, they surmised, contribute to the " heterogeneity and persistence of public firms' capital structures" .

 

A tendency among local investors to favour income investments could explain why Reits tend to perform well here, and why Singapore has been able to build a reputation as a haven for Reit listings. Such a reputation is not necessarily a bad thing.

 

Kristy Fong, senior investment director for Asian Equities at Aberdeen Standard Investments, pointed out that Singapore has been " considered a place to invest for yield" . Her colleague Yoojeong Oh, investment director for Asian equities, said that although many companies have prudently cut dividends this year amid the pandemic, there is " good recovery potential as growth returns in the coming years" . The Singapore market, in other words, could be a beneficiary of fund inflows once dividend payouts return.

 

And yet, as the S& P 500 index hits new highs on the back of investors piling into high-tech growth stocks, it seems a shame that so many companies here see good dividend payouts as their priority.

 

As companies struggle through the Covid-19 crisis, they should consider raising funds instead for growth by seizing bargain assets or expanding operations.

A CONSORTIUM formed by the three largest shareholders of Teckwah Industrial Corporation has announced a voluntary conditional cash offer of S$0.65 per share to take the company private, in a bourse filing late Wednesday.

 

The offeror has already secured irrevocable undertakings amounting to a 58.04 per cent stake, with the offer conditional on receiving valid acceptances of 90 per cent or more.

 

Clementine Investments, which is the bid vehicle formed by Chua Seng Tek Holdings, Lee Kay Huan Holdings and Airjet Investments, intends to delist Teckway from the Singapore Exchange to enable " more flexibility to manage the business of the company and optimise the use of the company' s management and resources during this time of economic uncertainty" .

 

Teckwah, a packaging, printing and logistics firm, is led by chairman and managing director Thomas Chua, the eldest son of the late Chua Seng Tek, who founded the company.

 

The offer price represents premiums of approximately 30 per cent over the closing price on July 27 and 42.5 per cent over the 12-month volume-weighted average price. The offer price exceeds the highest ever closing price of S$0.555 on Aug 4 and Aug 7.

 

The offeror will not deduct the interim dividend of 0.5 Singapore cent per share from the offer price. As such, shareholders will still be entitled to the interim dividend if they accept the offer.

 

The offer price is said to be final and will not be revised.

 

The offeror said that this is an " attractive opportunity" for shareholders to exit their entire investment in cash with price certainty and without incurring brokerage costs.

 

It added that this may otherwise be difficult due to the low trading liquidity of the shares and the challenging macro and operating environment on the back of the Covid-19 pandemic and the unresolved trade negotiations between China and the United States.

 

The announcement came out after Teckwah reported a net profit of S$5.29 million for the half-year ended June 30, up 16.2 per cent from a year earlier. This was attributed to an increase in other income received from government support schemes to deal with Covid-19.

 

Revenue fell 2.5 per cent to S$76.69 million, dragged down by a decline in its packaging printing-related business, which makes up about half of its revenue.

 

Teckwah was recently in the crosshairs of activist shareholder Quarz, which wrote in a letter on July 28 that the firm should return more cash to shareholders as dividends, to address what Quarz sees as a lack of cash discipline and operational efficiency.

 

Quarz is the fourth-largest shareholder of Teckwah, with a stake of more than 6 per cent.

 

In response, Teckwah had stressed the need for a sound cash management policy but Quarz was not convinced.

 

" We are working on a list of proposals to unlock shareholder value at Teckwah, and will be sharing them with the public and fellow shareholders in due course," Quarz had said.

 

Teckwah requested a trading halt on Tuesday. Its shares last traded at 55 Singapore cents.