Deep, liquid capital market needed to narrow discounts to NAV

Asurprisingly large number of local stocks trade at hefty discounts to their net asset values ( NAV), in particular property- related stocks. In many cases, liquidity is low. A prime example is Frasers Property ( FPL). On April 6, FPL announced that an extremely dilutive rights issue that was meant to raise $ 1.28 billion was only 90% subscribed and raised only $ 1.15 billion. Since both Thai Beverage and TCC Assets took up their share of the rights shares, the Sirivadhanabhakdi family now control 88.89% of FPL, leaving a free float of just 11.1%. As at April 12, FPL was trading at a 55% discount to its pro forma postrights NAV of $ 2.25. However, it managed to eke out a gain compared to its theoretical ex- price or $ 1.224.

Elsewhere, Guoco Group privatised GL with a final offer of 80 cents, up from an initial offer of 70 cents. This was still at a discount to its last reported NAV of 72.3 US cents. The rationale for privatising was because of challenging business conditions. GL’s trading was suspended on April 5 as its free float fell below 10% in March.

According to Eng- Kwok Seat Moey, group head of capital markets at DBS Bank, companies explore privatisations for mainly two reasons. The first is to unlock greater flexibility when undertaking a major restructuring exercise to streamline and re- focus resources on new strategic objectives or core operations. A private company would provide management greater autonomy and flexibility in implementing changes and using its management and capital resources.

“The second is when the listed company is faced with long bouts of low liquidity and valuation vis- àvis industry peers. This results in limited opportunities for the company to tap capital markets for funds, and yet still having to contend with compliance and administrative regulations and costs listed companies are subject to,” Eng- Kwok observes.

Jardine Matheson Holdings’ rationale for privatising Jardine Strategic Holdings ( JSH), for instance, was to simplify its corporate structure and remove cross- holdings. Coincidentally, JSH consistently traded at a hefty discount to its NAV partly because of low liquidity and partly because JSH is a holding company. JSH was delisted on April 15.

More recently, market observers are wondering if stocks are trading at these hefty discounts because of a lack of liquidity in the local market. Indeed, the Singapore Exchange, which itself is listed, is focused increasingly on derivatives rather than real assets and fast- growing companies. While this may increase its ROE and earnings, and keep shareholders happy, the broader local capital market suffers from being shallow and illiquid. On the contrary, a deep and liquid capital market could narrow these discounts to NAV up to a point.

UOL Group has traded at a discount to NAV for more than a decade ( see chart 2). In an earnings update in March, CGS- CIMB calculated UOL’s revalued NAV to be $ 13.18 compared to its end 2020 NAV of $ 9.61. In fact, CGS- CIMB’s valuation for UOL is a 40% discount to RNAV.

UOL is taking steps to unlock value by redeveloping its properties in areas where land intensification and higher plot ratios are permitted such as Faber House on Orchard Road and Odeon Towers on North Bridge Road. Whether UOL’s attempts to unlock value help to narrow its trading price discount to NAV remains to be seen.

An interesting company is Singapore Press Holdings ( SPH). Its share price is up 63% since the start of the year. The only announcement SPH has made is that Credit Suisse is undertaking a strategic review to unlock value. The company has not announced any actual plans to unlock value. Sometimes, stocks can attract liquidity even in a stock market as shallow as Singapore’s.

In Asia, undoubtedly, the deepest, most liquid market is the Hong Kong Exchange. No surprise then that the largest listings are in Hong Kong, which benefits from its geographical proximity to China. In a recent media briefing, John Lim, as chairman of the Asia Pacific Real Estate Association and deputy chairman of ARA Asset Management, said both Singapore and Hong Kong play important roles.

“Hong Kong is the gateway to China and the Hong Kong Exchange is the largest in Asia- Pacific. Asia is not homogenous. Singapore has its own strength, well regulated with a stable government and attracting different types of financial institutions,” he observes. “I don’t see real significant movement from north to south or south to north,” says Lim.