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Pangolin Investment says exit offer for Challenger is too low

It believes the IT retailer hoards too much cash and that it should be valued by cash flow to shareholders

Minority shareholder Pangolin Investment Management is "strongly" advising shareholders to reject Digileap Capital's "derisory" exit offer of S$0.56 a share for Challenger Technologies at an upcoming extraordinary general meeting.


MINORITY shareholder Pangolin Investment Management is "strongly" advising shareholders to reject Digileap Capital's "derisory" exit offer of S$0.56 a share for Challenger Technologies at an upcoming extraordinary general meeting.

It deems the offer price too low and unfair for minority shareholders, and believes that Challenger should be valued by its cash flow to shareholders instead of metrics such as historical trading prices and net tangible asset values.

"We reckon the fair value of the shares to be at least S$1.15, based on its free cash flow every year and excess cash on the balance sheet," Irvan Mondro, director of the Singapore-based fund management company, said in a three-page argument released on Thursday. The company's Pangolin Asia Fund has a 2.94 per cent stake in Challenger.

In essence, Pangolin thinks that Challenger is holding too much cash on its balance sheet. If the retailer pays out more of its earnings as dividends to shareholders, Pangolin thinks the share price should "naturally react" and potentially more than double to S$1.15. The stock lost half a cent to finish at S$0.56 on Friday.

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Pangolin said that for the cash-rich IT retailer which has 38 stores in Singapore and a customer base of half a million Valueclub members, as well as online tech marketplace which serves as an important future growth engine, an offer price of S$0.56 is just low-balling.

Challenger also has a net cash position of S$63 million as at end-2018, which is about a third of its market capitalisation. For its full year ended Dec 31, 2018, the retailer's net profit rose 22 per cent to S$19.5 million, on the back of a 1 per cent dip in revenue to S$320.2 million. It has no debt due this year.

Pangolin said: "In a challenging market and despite a shift to online purchasing, Challenger has managed to maintain strong sales and profitability."

In fact, one of the offeror's stated rationales for privatisation is that Challenger has not carried out any exercise to raise cash funding on the Singapore Exchange since 2007 (it listed in January 2004) and is unlikely to require access to Singapore's capital markets to finance its operations anytime soon.

Pangolin added that Challenger's dividend payout has been around 50 per cent for many years, despite its low capital expenditure requirement.

"All cash that the company doesn't require, i.e., everything in excess of working capital requirement plus an emergency fund, should be paid to shareholders by way of a dividend."

Pangolin estimates that of Challenger's net cash of S$63 million, it can probably set aside S$20 million for a "rainy day fund" and for working capital; the remaining S$43 million or 12.5 cents per share can be paid out as special dividend.

The Pangolin Asia Fund is a long-only, bottom-up, long-term investor in Southeast Asia, that according to its manager, has generated an annualised return of more than 11 per cent over the past 14 years.

A market watcher who declined to be named noted that Challenger's revenue has actually been dipping since 2014, and with the expiry of the government's Productivity and Innovation Credit Scheme after 2018 - a factor which had helped to boost corporate purchases of electronic appliances previously - the company's business could be further affected down the road.

He said that what Pangolin describes sounds like a "blue sky scenario" and "a bit ambitious", when the harsh reality is that the retail business is currently challenging.

He further pointed out that the other inherent unfairness in the offer seems to be the fact that with shareholders collectively owning 78.64 per cent of Challenger having given their irrevocable undertakings to vote all their shares in favour of the delisting resolution and accept the exit offer, this would already have cleared a major hurdle - an approval by at least 75 per cent of the issued shares held by shareholders present and voting - for the deal to pass. The only way that minorities can dissent is by banding together to amass a 10-per-cent block vote, which from past precedence, can be challenging.

When contacted, Keith Tan, one of the co-founders of Dymon Asia, said he cannot comment during the offer period. The offeror, Digileap Capital, is 70-per-cent owned by the Loo family, and 30 per cent by Dymon Asia Private Equity via Dymon Asia Private Equity (Southeast Asia) Fund II (DAPE II).

DAPE II is managed by Dymon Asia Capital (Singapore), a Singapore-based fund manager which manages several alternative investment funds. DAPE II has commitments of US$450 million and invests in small and medium-sized companies across Southeast Asia.

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