Concerns of weak prospects at Low Keng Huat belie a history of strong shareholder returns

[SINGAPORE] The offeror for Low Keng Huat (Singapore), or LKHS, stated a number of reasons for shareholders of the property group to consider accepting the S$0.72-per-share deal it put on the table after the market closed on Nov 28.

The most convincing of these might be the assertion that realising profits from the group’s property assets in the future “may be irregular, variable and much more time-consuming”.

Similar to other Singapore-listed real estate groups, LKHS’ revenue and earnings have been volatile over the years. Only a few weeks before the offer was made, the group reported a loss of S$10.2 million for the six months ended Jul 31, versus earnings of S$5.8 million for the same period the previous year, as its revenue sank 85 per cent to S$38.7 million.

The group attributed the weak numbers largely to its Klimt Cairnhill luxury condominium development reaching completion.

Along with its peers, LKHS has also experienced its return on equity (ROE) falling over the years. From FY2011 to FY2015, its ROE averaged 22.3 per cent, compared to a paltry 1 per cent from FY2021 to FY2025.

Yet, LKHS has not let its long-term shareholders down. During the 15-year period to Nov 28, the group delivered a total return of 201.6 per cent, with dividends reinvested.

By comparison, the Straits Times Index (STI) returned 153.4 per cent on the same basis. UOL Group and Hongkong Land returned 167.2 per cent and 59.3 per cent, respectively. City Developments Ltd (CDL) had a negative total return of 19.7 per cent.

Even during the shorter five-year period to Nov 28, when a number of STI constituents made strong gains on the back of big value-unlocking initiatives, LKHS fared reasonably well.

It returned 90.7 per cent, while the STI returned 98.7 per cent. Hongkong Land, UOL Group and CDL returned 95.1 per cent, 27.3 per cent and 5.4 per cent, respectively.

Bold, astute management

How did LKHS manage to achieve such good long-term returns? At least part of the answer may have to do with the astute and bold moves of its management over the years.

Back in 2014, for instance, LKHS made headlines with a deal to acquire a stake in Westgate Tower. In 2021, it sold its interest in Westgate Tower and invested further in Paya Lebar Square, in a shift towards retail property.

LKHS was also part of a consortium that invested in AXA Tower in 2015. In 2020, the consortium divested a portion of its stake in the property to Alibaba, which unlocked a significant gain for LKHS.

In light of the strong track record of LKHS’ management, the warning from the offeror of a weaker outlook for the company seems odd. The offeror is a Singapore-incorporated special-purpose vehicle called Consistent Record, which is ultimately controlled by LKHS’ own managing director Marco Low and his mother, Seah Soh Seng.

While the offeror does not currently hold any shares in LKHS directly, Low has a direct and deemed interest totalling 400.2 million LKHS shares, equivalent to a 54.1 per cent stake in the company.

Where does this leave minority shareholders of LKHS?

The offer price of S$0.72 per share is 17.1 per cent higher than LKHS’ closing price on Nov 28, just before the offer was announced. It is also 46.9 per cent above the volume weighted average price of LKHS’ shares over the 36 months to Nov 28.

Yet, LKHS’ net asset value (NAV) as at Jul 31 was S$0.79 per share – or 9.7 per cent above the offer price. Estimates of LKHS’ revalued NAV are significantly higher.

The announcement on Nov 28 also states that the offer is conditional upon the offeror obtaining 90 per cent of the shares in issue, excluding any shares already held by the offeror, its related corporations or their respective nominees.

Watch the free float

For the moment, the most sensible thing for minority investors to do might be to just wait. LKHS closed at S$0.725 on Dec 3, which is not much higher than the current offer price.

An independent financial adviser will be appointed shortly to evaluate the offer. Its opinion could have some bearing on whether the company might be able to seek a voluntary delisting in conjunction with the current offer.

For investors inclined to hold out, however, the main thing to watch out for is whether the offeror and its concert parties manage to acquire more than 90 per cent of LKHS’ shares. Without a free float of at least 10 per cent, trading is likely to be suspended at the close of the offer.

Low and his mother are not the only big holders of LKHS shares. For instance, the group’s executive chairman, Low Keng Boon, owns 52.8 million shares, or 7.2 per cent of the company.

His wife, Lau Choy Lay, has a further 23 million shares, or a 3.1 per cent stake. The estate of the late Low Keng Hoo holds another 52.9 million shares, 7.2 per cent of the company.

In fact, LKHS’ most recent annual report said only 23.5 per cent of its shares were in the hands of the public as at Apr 21.

On the face of it, acceptances from public investors holding about 100 million shares might be all it will take for the company to lose its free float. At that point, the remaining minorities face the risk of being left in limbo for a long time.