Minority-investor action at Great Eastern, OCBC may spur expectations of value-unlocking initiatives

THIS column said in July last year that analysts and investors must be prepared to engage in the often difficult and disagreeable task of challenging long-held attitudes and ideas at some of Singapore’s most respected companies in order to unlock value and enliven the local market.

On Friday (Mar 1), a group of minority shareholders of Great Eastern kicked off a public campaign to get the board of the insurer to address the steep undervaluation of its shares in the market.

Led by a former remisier named Ong Chin Woo, the minority investors have put forward three resolutions to be tabled at Great Eastern’s upcoming annual general meeting (AGM).

The first resolution is for Great Eastern to withhold 30 per cent of its directors’ fees until its share price recovers to 0.8 times its embedded value.

While Great Eastern’s embedded value has grown substantially over the years, the market price of its shares has lagged far behind. Its shares closed last week at S$17.85 – a more than 51 per cent discount to its embedded value as at end-2023 of S$36.59 per share.

The proposed resolution would incentivise Great Eastern’s board to figure out how to boost the market value of its shares.

The second resolution is for the insurer to reward its executives with its own shares instead of OCBC ones, under its various share-based remuneration schemes.

Bizarre as it may sound, Great Eastern has a longstanding practice of paying its executives with OCBC shares instead of its own shares.

These share-based payments to staff are charged against Great Eastern’s profit-and-loss account. So, Great Eastern foots the cost of the OCBC shares that are handed to its employees.

The proposed resolution would align the interests of Great Eastern’s employees with those of its shareholders, rather than those of OCBC alone.

The third resolution is for Great Eastern to appoint an independent financial adviser to explore its options to enhance shareholder value.

This could include Great Eastern increasing its dividend payouts or paying a special dividend, and looking into listing possibilities in markets that may offer better valuations.

This resolution is aimed at providing minority investors with an appraisal of Great Eastern’s value, and enabling them to make informed decisions on what to do with their shares.

It could also pre-empt OCBC making a lowball offer for Great Eastern, which would almost certainly succeed. With OCBC holding 88.4 per cent of Great Eastern’s 473.3 million shares, the insurance unit barely has the minimum required free float to remain listed.

Challenging OCBC’s narrative

In order for shareholders to propose resolutions at AGMs, they need to hold at least 5 per cent of the company’s shares; or comprise not fewer than 100 shareholders in possession of shares on which there is an average paid-up sum, per shareholder, of S$500.

Ong said over the weekend that he had already obtained the support of more than 100 minority shareholders of Great Eastern.

Even if he succeeds in getting the proposed resolutions tabled at the AGM, however, there is zero chance the resolutions will pass if OCBC votes against them.

OCBC’s board and management have insisted for years that owning Great Eastern provides the group with an important competitive advantage in serving its customers.

Hence, it seems unlikely that OCBC would support any resolution that might hinder its ability to eventually fully acquire Great Eastern as cheaply as possible.

The way I see it, Ong and his supporters have to draw OCBC’s shareholders into the fray in order to get the resolutions passed and achieve their wider aim of unlocking the value of their Great Eastern shares.

OCBC’s shareholders need to be convinced that they stand to gain from any value-unlocking exercise at Great Eastern.

This would necessarily involve challenging the long-held OCBC narrative about the ownership of Great Eastern being crucial to its group strategy, though; and it remains to be seen whether the board and management of OCBC can be made to change their minds.

My own view is that the time has probably come for OCBC to review its strategy.

While it might have made sense for OCBC to bulk itself up by raising its stake in Great Eastern following the spate of bank mergers more than two decades ago, having a large stake in the insurance unit does not seem to distinguish it in the market today.

OCBC chalked up a return on equity (ROE) of 13.7 per cent last year, and its shares currently trade at a pedestrian 1.1 times book value.

This is very similar to UOB – it achieved an ROE of 14.2 per cent last year, and its shares currently also trade at about 1.1 times book value.

On the other hand, DBS clocked a significantly higher ROE of 18 per cent last year, while its shares trade at nearly 1.5 times book value.

Patience is required

What does all this mean for shareholders of Great Eastern? Will the minority-shareholder action make its depressed stock a one-way bet?

The resolutions that Ong and his fellow minority investors have proposed could just be the opening salvo in a long-drawn-out campaign.

Even if the resolutions are not tabled at Great Eastern’s AGM, their widespread circulation could help focus attention on the undervaluation of the insurer’s shares.

This could spark buying interest in Great Eastern and OCBC shares, on the view that it is only a matter of time before some sort of value-unlocking initiative is hatched.

This, in turn, could push the boards of Great Eastern and OCBC to seriously think about how to resolve the deep undervaluation of the insurer’s shares in a manner that benefits all parties concerned.

This isn’t Ong’s first rodeo. Back in 2004 and 2005, he tried and failed to put forward resolutions to unlock value at Overseas Union Enterprise (OUE) – including through the distribution of the company’s holdings of UOB shares.

The following year, however, OUE sold its UOB shares and paid bumper dividends.

With a very narrow free float, it is possible that Great Eastern will just continue to languish for months or even years. But I am betting that patient investors will eventually be rewarded.

Besides trading at a big discount to embedded value, the insurer’s shares offer a dividend yield of 4.2 per cent, based on its total 2023 payout of S$0.75 per share.

The writer owns shares of Great Eastern and OCBC