Activist backer Quarz urges Singapore's Metro to return cash

[SINGAPORE] Activist investor Quarz Capital Management Ltd has turned its sights on Singapore, calling on retailer and real-estate developer Metro Holdings Ltd to return excess cash to investors.

Metro's net cash holdings of S$393 million is high compared with other companies listed on the Singapore stock exchange, and accounts for more than half its market capitalisation, Quarz said in a letter to the management and board obtained by Bloomberg News. Metro shares rose 2.2 per cent at 10.13am in Singapore.

The shares, which closed Monday at 91.5 cents, trade about 40 per cent below book value, Quarz said in the letter.

The company should pay a 21 cents-a-share one-off dividend to return cash to investors, as well as provide a clearer strategy for its real estate division, strengthen investor relations and align management pay more with the firm's long-term profitability and share price, according to the letter.

It's "inconceivable that Metro's share price continues to languish ... despite the company's strong recurring earnings profile and valuable assets," Quarz, which manages just under US$100 million, said in the letter.

While investor activism is less common in Asia than in Europe and the US, Quarz, which usually targets small and medium-sized firms, said it plans to approach more Singaporean companies as many are undervalued and a new generation of owners is more open to measures to boost stock prices.

"Singapore is a treasure trove of undervalued small and mid-cap companies," Havard Chi, Singapore-based head of research at Quarz said in a Sept 29 interview.

"We are seeing a change in the current environment because we have a new generation of majority owners taking over. That generation wants to focus more on the core operations and they want to become better capital allocators."

The fund has a "pipeline of stocks in Singapore" which it intends to target, with one or two firms to be approached within the next 12 months, Mr Chi said.

Real estate, electronics and engineering are all attractive sectors, he said.

Metro shares have gained 3.4 per cent this year, compared with a 0.4 per cent decline in Singapore's Straits Times Index.

Still, it is the cheapest among South-east Asian retailers with a market value of at least US$500 million, trading at just under 0.6 times asset value.

The region's 18 biggest retailers trade at 6.7 times book value on average, according to data compiled by Bloomberg.

Quarz has accumulated a stake of about two per cent in Metro since the beginning of the year, Chi said.

Management should "implement a clear dividend return policy" and a program to buy back stock whenever the shares trade at more than 40 per cent below the net asset value, Quarz said in the letter.

A one-time 21-cent dividend would translate into Metro deploying S$174.5 million of its cash, based on the current number of shares outstanding, according to Bloomberg data. Metro's 12-month dividend yield was about 7.7 per cent.

Quarz, co-founded in 2011 by Jan Moermann, a former investment banker with UBS Group AG and Credit Suisse Group AG, has made an annualised return of about 10 per cent since inception with its Quarz Active Value fund, Chi said.

The fund manager, which has offices in Zurich and Monaco, currently holds between 15 and 20 positions in companies in Germany, Austria, Switzerland and the US.

While the fund generally prefers to approach target firms behind closed doors, it has engaged in a public campaign once before, Mr Chi said.

Quarz in November published a letter urging iPhone maker Apple Inc to split the operating numbers in its software and services segment from the rest of the hardware business.

"The interesting thing we find in Singapore is that a lot of firms have extremely undervalued assets," Mr Chi said.

These include developers where property assets are still valued at the cost of acquisition or construction, or where an unprofitable non-core division could be sold.

"There is quite a number of companies with net cash of about 30 per cent of their market capitalisation. This is quite different from Germany or Switzerland," he said.

Quarz is focusing on Singapore because of the reliability and transparency of the country's accounting and regulation, whereas in other parts of Asia there is more room for financial maneuvering, Mr Chi said.

Quarz isn't the first investor to take an activist approach in Singapore.

Fund management firm Dektos Investment Corp, founded by Roland Thng, last year started EVA Capital SP with US$5 million to take stakes in small and medium sized construction and engineering companies in order to pressure them to improve performance.

Short seller Muddy Waters LLC put pressure on Singapore-listed commodity trader Olam International Ltd by publicly questioning its finances in 2012, which caused Olam's stock to plummet.

Singapore's state-owned investment firm Temasek Holdings Pte bought a controlling stake in Olam in 2014, triggering a rally in the shares.

BLOOMBERG