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Quarz Capital Management, Ltd. Sends Letter to Metro Holdings to Engage on the Proposals to Unlock a Total Potential Return of >40% in Metro’s Share Price through the Distribution of an Extraordinary Cash Dividend of SGD 0.21/Share (Dividend Yield of 23%) and to Provide Clearer Communication of Corporate Strategy

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GEORGE TOWN, Cayman Islands /PRNewswire/ — Quarz Capital Management, Ltd. (QCM), an investment manager, today issued a letter urging Metro Holdings to take decisive steps to counter the severe undervaluation of up to 43% which its share price is trading at to its intrinsic book value.

QCM proposes that Metro distributes part of its substantial net cash balance of SGD 393 million which is currently the 2nd largest among SGX-listed companies. A potential distribution of up to SGD 150 – 200 millions of its excess net cash holding will provide shareholders with an attractive dividend yield of up to 23%. The remaining net cash holding and liquid investments of up to SGD 329 million will be more than sufficient for the company to continue executing on its long-term strategy of value creation and pay its annual dividend.

The wider investment community would also appreciate Metro to clearer and more coherently communicate the strategy of its real estate division and its general dividend and share buyback policies. The investment manager also calls on the company to improve on its investor relations work (allow more frequent institutional investors access to management) and the quality and quantity of its reported financial metrics.

QCM believes that its recommendations will have the cumulative impact of enabling investors to better appreciate the intrinsic value and potential of Metro and result in its share price to trade at a higher valuation permanently.

QCM has delivered the following letter to Metro Holdings’ management team, board of directors and other stakeholders.

QUARZ CAPITAL MANAGEMENT, LTD. ISSUES OPEN LETTER TO THE BOARD OF DIRECTORS OF METRO HOLDINGS

ALL RECIPIENTS ARE ADVISED TO READ
“IMPORTANT DISCLOSURE INFORMATION”
AT THE END OF THE ATTACHED LETTER

Quarz Capital Management, Ltd.
Clifton House 75 Fort Street
George Town I KY1-1108 I Grand Cayman
Cayman Islands

4 October 2016

To Engage on the Proposals for an Extraordinary Cash Dividend and Clearer Communication of Corporate Strategy to Unlock a Potential Total Upside of >40% in Metro’s Share Price

Dear Members of the Board,

As a long-term shareholder of Metro Holdings (the “Company”, “Firm”,” “METRO SP” or “Metro”), we congratulate the board on the appointment of Mr. Lawrence Chiang as the acting Group CEO and Executive Director of Metro. Mr. Chiang has been a key part of the team led by the visionary Mr. Jopie Ong who transformed Metro from a reputable domestic retailer to a global property player with a strong real estate portfolio in Singapore, China, and the UK. Despite being a household name in retail, Metro’s current retail operation contributes to less than 0.5%[1] and 5% of its FY16 net profit and net asset valuation respectively.

In spite of being a mid-cap stock, Metro has the 2nd largest net cash holding among listed companies in the SGX, amounting to SGD 393 million[2], more than half its current market capitalization of SGD 758 million[3]. This is in addition to the attractive dividend yield of 7.7% the company paid in FY2016. Together with the loans to its JVs of SGD 133 million[4] and listed equity investments of SGD 111 million, Metro’s net cash, loan receivables and liquid investments total SGD 637 million, amounting to more than 80% of its current market capitalization.

Metro’s property development and investment portfolio is valued in excess of SGD 600 million[5]. It’s Grade A diversified investment properties are located in the prime areas of Shanghai and Guangzhou with anchor tenants including Exxon Mobil, Swatch, Abbott Laboratories, and Roche. This portfolio provides a recurring unlevered net rental income in excess of SGD 30 million[6] per annum. Progressive profit recognition and capital return from the delivery of its Nanchang Fashion Mark (China) mixed-use development project, Sheffield Digital Campus (UK), Manchester Middlewood Locks (UK) and The Crest @ Prince Charles Crescent (Singapore) will further boost Metro’s net profit and cash flow in the next few years. Metro’s retail division which accounts for 4%[7] of Metro’s total gross asset value is right-sizing its Singapore operation to match the new retail landscape.

It is thus inconceivable that Metro’s share price continues to languish at SGD 0.915, trading at a deep discount of 43% to its intrinsic book value of SGD 1.61 per share despite the company’s strong recurring earnings profile and valuable assets. We attribute this severe undervaluation to the following key reasons:

Firstly, the firm holds an excessive net cash balance which has been largely under-utilized and low yielding. Investors are worried about the inefficient allocation and potential mismanagement of this sizeable cash balance.

This is exacerbated by Metro’s insufficient communication with investors with regards to its strategy in its key real estate division beyond the opportunistic acquisition and divestment of property assets and development projects. Lack of management access (reflected by no sell-side coverage and low institutional shareholding level) and hard to decipher financial results add to the complexity of understanding the intrinsic value and strong cash flow profile of Metro. This partly results in lower trading liquidity, reduces the investability, and increases the substantial discount to intrinsic value of Metro’s shares.

Low shareholding level and the lack of share-based compensation as part of management’s remuneration might have also resulted in the de-prioritization of Metro’s share price as a key management KPI.

We are in agreement with Metro’s board and management that the company should retain a proportion of cash to take advantage of strategic opportunities in the asset-heavy fields of property development and investment. However, it is evident that the maintenance of a net cash balance of SGD 393 million which will potentially increase to more than SGD 500 million in the next 2-3 years with minimal usage of debt is excessive.

We believe that now is the time that Metro takes the decisive step to close this substantial valuation gap by distributing SGD 150 – 200 millions of excess cash to shareholders (amounting to SGD 0.21/share or a 23% dividend yield). The remaining net cash balance and liquid investments of more than SGD 329 million will be more than sufficient for Metro to execute on its long term strategy of value creation and to pay its recurring dividend. We urge Metro to implement a clear dividend return policy and a shareholder accretive buyback programme to repurchase shares whenever the share price discount to NAV breaches >40%.

The wider investment community will also appreciate the company in providing a clear and coherent strategy of its real estate division. Deeper insights on the focus countries, type of properties and the profitability criteria which the division uses to evaluate potential investments and projects will support investors in better understanding the strategy and operations of this key division.

We recommend Metro to strengthen its investor relations work by enabling frequent institutional access to management (commonplace among high quality SGX-listed firms) and to provide better quality and quantity of reported financial metrics such as recurring rental income, lease expiry profile (for the next few years), as well as forecasted rental rate trends, development margins and profit.

We also support a transparent link between the remuneration of management with Metro’s long term profitability and share price. In this respect, we recommend their remuneration package to include a sizeable proportion of share-based compensation which will vest upon fulfillment of key KPIs.

For your convenience, we have summarized our thoughts and recommendations in a short presentation: LINK: https://www.quarzcapital.com/en/research/metro-holdings

The foresight and execution ability of the late Mr. Jopie Ong and his team have provided a strong foundation for Metro Holdings. We are confident that the current team has the capability and pedigree to lead the company to greater heights. The return of excess capital, clear corporate strategy, and proactive investor relations can result in Metro’s share price to trade at a higher valuation permanently and provide a significant upside of more than 40% by 2017 to all Metro shareholders.

Sincerely yours,

Mr. Jan F. Moermann
Chief Investment Officer, Quarz Capital Management, Ltd.

Mr. Havard Chi, CFA
Portfolio Manager, Quarz Capital Management, Ltd.

For further information, please contact:
Havard Chi, CFA (hch@quarzcapital.com, +65-9433-3898)

Link to the Letter:
https://www.quarzcapital.com/en/research/metro-holdings

[1] Retail operation contributes SGD 0.14m to Metro’s total Net Profit of SGD 113m in FY16
[2] Dividend payment of SGD 58m and liabilities of SGD 28m subtracted from cash holding of SGD 479m reported in Metro’s FY1Q17 Financial Statement
[3] Stock price of SGD 0.915 multiplied by outstanding shares of 828m reported in Metro’s FY1Q17 Financial Statement
[4] Reported in Metro’s FY1Q17 Financial Statement
[5] Valuation of investment portfolio based on Metro’s FY2016 Annual Report. Valuation of development properties based on Top Spring International’s 1H16 Financial Statement and QCM estimates (based on median profitability of property developers in the UK)
[6] Based on annualizing rental income reported in Metro and Top Spring’s FY1Q17 and FY1H16 Financial Statements
[7] We value Metro’s Singapore retail operation at a valuation of 0 in spite of its equity position of SGD 23m due to its loss making profile. Indonesia operations valued at P/E of 20x CY15A, at a discount to more established peers (Matahari P/E 31x CY15, Ramayana P/E 26x CY15)

About Quarz Capital Management

Quarz Capital Management, Ltd. is a value oriented and research driven investment advisory firm that seeks to earn above average, long-term returns by identifying value investments across the globe.
http://www.quarzcapital.com

Important Disclosure Information
SPECIAL NOTE REGARDING THIS LETTER

THIS LETTER CONTAINS OUR CURRENT VIEWS ON THE VALUE OF METRO HOLDINGS LIMITED’S SECURITIES AND ACTION THAT METRO HOLDINGS LIMITED’S BOARD MAY TAKE TO ENHANCE THE VALUE OF ITS SECURITIES. OUR VIEWS ARE BASED ON OUR ANALYSIS OF PUBLICLY AVAILABLE INFORMATION AND ASSUMPTIONS WE BELIEVE TO BE REASONABLE. THERE CAN BE NO ASSURANCE THAT THE INFORMATION WE CONSIDERED IS ACCURATE OR COMPLETE, NOR CAN THERE BE ANY ASSURANCE THAT OUR ASSUMPTIONS ARE CORRECT. METRO HOLDINGS LIMITED ACTUAL PERFORMANCE AND RESULTS MAY DIFFER MATERIALLY FROM OUR ASSUMPTIONS AND ANALYSIS. WE HAVE NOT SOUGHT, NOR HAVE WE RECEIVED, PERMISSION FROM ANY THIRD-PARTY TO INCLUDE THEIR INFORMATION IN THIS LETTER. ANY SUCH INFORMATION SHOULD NOT BE VIEWED AS INDICATING THE SUPPORT OF SUCH THIRD PARTY FOR THE VIEWS EXPRESSED HEREIN. WE DO NOT RECOMMEND OR ADVISE, NOR DO WE INTEND TO RECOMMEND OR ADVISE, ANY PERSON TO PURCHASE OR SELL SECURITIES AND NO ONE SHOULD RELY ON THIS LETTER OR ANY ASPECT OF THIS LETTER TO PURCHASE OR SELL SECURITIES OR CONSIDER PURCHASING OR SELLING SECURITIES. ALTHOUGH WE STATE IN THIS LETTER WHAT WE BELIEVE SHOULD BE THE VALUE OF METRO HOLDINGS LIMITED’S SECURITIES, THIS LETTER DOES NOT PURPORT TO BE, NOR SHOULD IT BE READ, AS AN EXPRESSION OF ANY OPINION OR PREDICTION AS TO THE PRICE AT WHICH METRO HOLDINGS LIMITED’s SECURITIES MAY TRADE AT ANY TIME. AS NOTED, THIS LETTER EXPRESSES OUR CURRENT VIEWS ON METRO HOLDINGS LIMITED. IT ALSO DISCLOSES OUR CURRENT HOLDINGS OF METRO HOLDINGS LIMITED SECURITIES. OUR VIEWS AND OUR HOLDINGS COULD CHANGE AT ANY TIME. WE MAY SELL ANY OR ALL OF OUR HOLDINGS OR INCREASE OUR HOLDINGS BY PURCHASING ADDITIONAL SECURITIES. WE MAY TAKE ANY OF THESE OR OTHER ACTIONS REGARDING METRO HOLDINGS LIMITED WITHOUT UPDATING THIS LETTER OR PROVIDING ANY NOTICE WHATSOEVER OF ANY SUCH CHANGES. INVESTORS SHOULD MAKE THEIR OWN DECISIONS REGARDING METRO HOLDINGS LIMITED AND ITS PROSPECTS WITHOUT RELYING ON, OR EVEN CONSIDERING, ANY OF THE INFORMATION CONTAINED IN THIS LETTER.

As of the publication date of this report, Quarz Capital Management Ltd. and its affiliates (collectively “Quarz”), others that contributed research to this report and others that we have shared our research with (collectively, the “Authors”) have long positions in and own options on the stock of the company covered herein (Metro Holdings) and stand to realize gains in the event that the price of the stock increases. Following publication of the report, the Authors may transact in the securities of the company covered herein. All content in this report represent the opinions of Quarz. The Authors have obtained all information herein from sources they believe to be accurate and reliable. However, such information is presented “as is”, without warranty of any kind — whether express or implied. The Authors make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. All expressions of opinion are subject to change without notice, and the Authors do not undertake to update or supplement this report or any information contained herein.

This document is for informational purposes only and it is not intended as an official confirmation of any transaction. All market prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice. The information included in this document is based upon selected public market data and reflects prevailing conditions and the Authors’ views as of this date, all of which are accordingly subject to change. The Authors’ opinions and estimates constitute a best efforts judgment and should be regarded as indicative, preliminary and for illustrative purposes only.

Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This report’s estimated fundamental value only represents a best efforts estimate of the potential fundamental valuation of a specific security, and is not expressed as, or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor.

This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein or of any of the affiliates of the Authors. Also, this document does not in any way constitute an offer or solicitation of an offer to buy or sell any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction. To the best of the Authors’ abilities and beliefs, all information contained herein is accurate and reliable. The Authors reserve the rights for their affiliates, officers, and employees to hold cash or derivative positions in any company discussed in this document at any time. As of the original publication date of this document, investors should assume that the Authors are long shares of Metro and have positions in financial derivatives that reference this security and stand to potentially realize gains in the event that the market valuation of the company’s common equity is higher than prior to the original publication date. These affiliates, officers, and individuals shall have no obligation to inform any investor about their historical, current, and future trading activities. In addition, the Authors may benefit from any change in the valuation of any other companies, securities, or commodities discussed in this document. Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of the Authors’ operations and their affiliates. The compensation structure for the Authors’ analysts is generally a derivative of their effectiveness in generating and communicating new investment ideas and the performance of recommended strategies for the Authors. This could represent a potential conflict of interest in the statements and opinions in the Authors’ documents.

The information contained in this document may include, or incorporate by reference, forward- looking statements, which would include any statements that are not statements of historical fact. Any or all of the Authors’ forward-looking assumptions, expectations, projections, intentions or beliefs about future events may turn out to be wrong. These forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors, most of which are beyond the Authors’ control. Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on all securities, companies, and commodities discussed in this document and develop a stand-alone judgment of the relevant markets prior to making any investment decision.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this letter are forward-looking statements including, but not limited to, statements that are predications of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Forward-looking statements are not guarantees of future performance or activities and are subject to many risks and uncertainties. Due to such risks and uncertainties, actual events or results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Forward-looking statements can be identified by the use of the future tense or other forward-looking words such as “view,” “believe,” “convinced,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “should,” “may,” “will,” “objective,” “project,” “forecast,” “management believes,” “continue,” “strategy,” “promising,” “potential,” “position” or the negative of those terms or other variations of them or by comparable terminology.

Important factors that could cause actual results to differ materially from the expectations set forth in this letter include, among other things, the factors identified in the risk sections in METRO HOLDINGS LIMITED Annual Report for the year ended March 31, 2016 and prospectus. Such forward-looking statements should therefore be constructed in light of such factors, and Quarz Capital Management is under no obligation, and expressly disclaims any intention or obligation, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Source: Quarz Capital Management, Ltd.
Related Links:
http://www.quarzcapital.com

Written by asiafreshnews

October 17, 2016 at 4:19 pm

Posted in Uncategorized

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