Value-unlocking a key market theme in H1 2021

AT the beginning of 2021, this column expressed optimism about the market and suggested that it was time for investors to widen and increase their exposure to stocks.

It was a terribly easy call.

By then, it was clear that Covid-19 vaccines were on their way - in fact, Singapore had received its first shipment of the Pfizer-BioNTech vaccine the previous month - and that global economic activity was recovering.

Looking back now, things pretty much panned out as expected in the local market. During the first six months of 2021, the Straits Times Index (STI) returned 11.8 per cent.

Among the 10 best-performing component stocks of the index were likely beneficiaries of the unfolding economic recovery.

Leading the winners was Yangzijiang Shipbuilding, which returned 52.1 per cent.

The three local banks were also among the 10 best performers during H1 2021. DBS returned 20.5 per cent, OCBC 20.4 per cent and UOB 16 per cent.

Singapore Airlines was in 10th place, with a return of 13.3 per cent.

The market had more than just the winds of recovery in its sails though.

Of the 10 best performers, three were what might be termed value-unlocking plays. Among them was Sembcorp Industries. It returned 27.5 per cent, making it the second best performing STI component stock during H1 2021.

Sembcorp had been rallying since its former subsidiary Sembcorp Marine was recapitalised through a major rights issue and then "demerged" from the group last year.

The other two value-unlocking plays were Jardine Matheson and CapitaLand - returning 16.4 per cent and 16 per cent, respectively. Most of their returns came in the form of one-time, step increases in their share prices following announcements of corporate restructurings.

Jardine Matheson said in March that it would take Jardine Strategic private at US$33 per share. The acquisition price was 20 per cent above Jardine Strategic's market price at the time but more than 43 per cent below its net asset value (NAV) as at end-2020.

CapitaLand said in March that its property development business will be taken private by its controlling shareholder while its real estate management activities and lodging business will remain in the public market under an entity called CapitaLand Investment Management (CLIM).

Under the reorganisation plan, minority shareholders of CapitaLand will exchange their shares for a combination of shares in CLIM, units in CapitaLand Integrated Commercial Trust and some cash. The consideration was estimated to be worth S$4.102 per share.

CapitaLand closed Friday at S$3.76.

Privatisation deals

The value-unlocking theme was evident across the broader market too.

Sprinkled across the 200 best performers during the six-month period were companies that had been subjects of privatisation offers.

These included property company Top Global, which returned 165.5 per cent; safe manufacturer Dutech Holdings, which returned 66.7 per cent; and stainless steel products supplier Sin Ghee Huat, which returned 68.8 per cent.

The seemingly big gains chalked up by these stocks were not an indication that the offers were particularly generous though. Instead, they reflected the pathetically low valuations these stocks garnered in the market.

For instance, Dutech's controlling shareholder offered to pay S$0.40 per share to take the company private. This was 60 per cent more than its market price of S$0.25.

At S$0.25 per share, however, Dutech was valued at less than six times historical earnings, and at a 58 per cent discount to its NAV. It also had net cash holdings equivalent to more than 85 per cent of its market capitalisation.

Most privatisation offers we have seen in recent years do not fully share the inherent value of the target companies with minority investors, in my view.

Staying public

Some companies have pursued value-unlocking initiatives without exiting the public market, enabling minority investors to ride along with them.

For instance, automobile parts supplier Tye Soon delivered a total return of 311.1 per cent in H1 2021 by bringing in a strategic investor.

On March 19, the company said its controlling shareholder, OBG & Sons, had agreed to sell more than 21.8 million of its nearly 45.1 million shares to ASX-listed vehicle parts supplier Bapcor for S$12.5 million.

The purchase consideration for the 21.8 million shares, which represents a 25 per cent stake in Tye Soon, works out to S$0.573 per share. Tye Soon was trading at just S$0.12 per share before the announcement. Its NAV as at end-2020 was S$0.624 per share.

On April 16, Tye Soon said it had entered into a "cooperation agreement" with Bapcor that would see the two parties working together to turn Tye Soon into the leading automotive aftermarket parts provider in the Asia-Pacific region and especially in Australia.

Tye Soon, which is still 26.6 per cent owned by OBG & Sons, closed Friday at S$0.37.

Another company that did well in H1 2021 on the back of corporate action friendly to minority shareholders was The Hour Glass.

The luxury watch retailer delivered a total return of 86.3 per cent during the six-month period. Most of that return was chalked up in May, following the release of its latest financial results.

For its FY2021 ended March 31, The Hour Glass reported a 9 per cent increase in profit after tax to S$84.5 million on a one per cent decline in revenue to S$742.9 million.

Besides demonstrating its resilience in the face of Covid-19, the company raised its dividend significantly. Its total dividend with respect to FY2021 was S$0.06 per share, or three times what it was for FY2020.

The Hour Glass closed Friday at S$1.47.

A 10-bagger stock

To be sure, companies need to have highly profitable and growing businesses in order to really deliver value to their shareholders.

One standout performer in the local market has been wealth management platform iFast Corporation. Its shares have returned 172.5 per cent in H1 2021.

Shares in iFast had been on a tear even before 2021 though. In fact, iFast's share price is now more than 10 times what it was during the Covid-19 market lows of March 2020.

For FY2020 to Dec 31, iFast reported a 122.3 per cent rise in earnings to S$21.2 million on a 31.7 per cent increase in net revenue to S$85.6 million.

The momentum continued into Q1 2021, with the company reporting a 142.5 per cent y-o-y rise in earnings to S$8.8 million. Net revenue was up 51.4 per cent y-o-y to S$28.5 million.

The company attributes its recent growth to investments in its platform, and the positive operating leverage of its business model. It noted that net inflows of client assets hit a record S$1.28 billion in Q1 2021, pushing its assets under administration to a record S$16.11 billion as at March 31, 2021.

Shares in iFast closed Friday at S$8.22, putting its market capitalisation at over S$2.27 billion. That's equivalent to 107.3 times its FY2020 earnings and 64.6 times its annualised Q1 FY2021 earnings.

Those seemingly lofty earnings multiples might mean lower returns in the future, especially if iFast's earnings growth falters. Yet, ironically, it is when companies garner such stiff market valuations that they are most likely to pay heed to their minority investors.