1/6/2017

This Singaporean Stock Could be More than

60% Undervalued
Singaporean steel maker HG Metal Manufacturing (BTG.SG) has been urged by activist fund Quarz Capital
Management to take immediate steps to address the severe undervaluation of its shares.

HG Metal Manufacturing shares trade at just 0.4 times of what Quarz dubs a highly liquid and easily valued
book value. While Quarz commends HG Metals management team for its efforts in steering the company
through one of the toughest slumps in steel prices, the activist fund argues the company could do more to
address the undervaluation of its shares. In a letter to HG Metal, Quarz writes:

Quarz Capital Management proposes (QCM) that HG Metal conducts a full strategic review on the potential
divestment of its non-core but substantial 22.6% stake in BRC Asia with a market value in excess of SGD 30
million (67% of Mkt Cap). Quarz believes that multiple buyers are interested in building up substantial stakes in
BRC Asia as evident by the unsolicited bid announced by the company recently. Any of the buyers could
establish a near majority control of BRC with the purchase of HGs stake and a proportion of additional market
and selective purchases from other less substantial shareholders. Quarz proposes that part of this capital
released can be returned to shareholders upon the completion of the sale through dividends or share buyback.
Quarz also urges the company to immediately distribute up to SGD 10 million (22% dividend yield) of the excess
net cash of SGD 29 million which is currently held by the firm.

Due to the structural headwinds faced by the Trading Division, QCM recommends the firm to scale back on its
Trading Division and to redeploy the capital and human resources released to its Manufacturing Division whose
profitability is leveraged to the structural trend of increasing construction productivity and the improving
construction sector in Singapore. QCM has delivered the following letter to HG Metal Manufacturing Limiteds
management team, board of directors and other stakeholders.

Its not the first time that Quarz has pointed out a Singaporean company that could potentially boost its valuation
with some management fixes. The fund has been prolifically scouring the Lion City for activist investing cases
given its wealth of extremely high quality companies that are partially family-owned, have low levels of debt
and often undervalued. For more, please see Activist Fund Sees Value in Singapore Funds.

Isabella Zhong

Activist Fund Sees Value in Singapore Stocks

(18th Nov 2016)
Quarz Capital Management offers 3 cheap stocks that have ample upside and could lift dividend
payouts.

Capital Managements Jan Moermann isnt shy about giving advice to CEOs of the companies hes invested in.

Last November, Quarzs chief investment officer penned a letter to Apples Tim Cook imploring the tech titan to
segregate the operating results of its software and services segment from the rest of the business, arguing it
was critical to valuing Apple in its entirety. Its that sort of activism that Quarz, a value oriented fund, hopes
will deliver big returns in Singapore where three quarters of its Asia portfolio is invested. Moermann, who
previously worked for UBS and Credit Suisse, says the Lion City stands out thanks to its wealth of extremely
high quality companies that are partially family-owned, cash rich, have low levels of debt, and often
undervalued.

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Not surprisingly for a value investor, a lot of work goes into finding stocks that are selling below what theyre
judged to be worth and offer Quarz a margin of safety. You can have the nicest company with the nicest
business and a very good shareholder structure but if it does not have a margin of safety - of at least 30% in
our view - then weve got a problem, Moermann says. Quarz usually takes a 1% to 2% stake in targets as
Moermann says its critical to have a certain amount of skin in the game to gain support from management for
proposals to enhance shareholder value. Moermann says the success rate of campaigns has been higher than
70%, while Quarz has averaged a return of more than 10% annually net of fees.

The funds activist approach is being applied to Metro Holdings

(M01.SG), best known for its retail and department store
business in Singapore and Indonesia. Quarz upped the pressure
on Metros board with an open letter in early October outlining
the steps needed to drive a 40% rise in the share price.
Moermann says Metro is a well-managed company that has
consistently traded at a sharp discount to intrinsic value.
Currently fetching SGD1 a share, the stock trades at a lowly 0.6
times book value. He argues a key reason for Metros depressed
valuation is its excessive cash holdings: the company has about
SGD400 million of cash, equal to almost 50% of its market cap
and the second highest among Singapore-listed companies. Octobers open letter urged Metro to distribute
some of the cash - which is largely underutilized and low yielding - as a special dividend to soothe investor
worries about poor capital allocation.

Metros hefty property and investments portfolio could easily be deployed as collateral for debt financing to fund
new projects. The company also needs to improve its investor relations to give shareholders greater visibility
on strategic plans, including its dividend policy, argues Moermann. Metro pays a juicy 7% dividend yield. While
the stock has gained around 13% since Quarz bought a stake, Moermann sees another 20% to 30% upside if
Metro implements changes to help narrow the discount to what the stock is worth.

http://www.barrons.com/articles/this-singaporean-stock-could-
be-more-than-60-undervalued-1496290774Quarz has also turned
its focus to Far East Hospitality Trust (Q5T.SG), which it started
accumulating last quarter. The REIT generates around 80% of
revenues from hotels and serviced apartments and the rest from
retail and offices. FEHT shares are down 29% since the start of
2015 as Singapores growing supply of hotel rooms squeezed
revenue per available room (RevPAR). Office revenues have also
been pressured by Singapores slowing economy. While
Moermann expects FEHTs RevPar to drop to 2007 levels, he
argues the fall has been priced into the stock and earnings could improve in 2018 on recovering growth in Asia,
an easing of the supply of new hotel rooms, and the opening of new tourist attractions in Singapore.

Yield hungry investors could be handsomely rewarded in coming years. Moermann also expects the REIT to
increase dividends per share by 20% from 2018 onwards - the stock enjoys a 7.6% yield - and says its low
levels of debt give it ample room to take on new projects to boost earnings. FEHT is expected to take 30% of
an 800 room hotel development on Sentosa Island thats scheduled for completion in 2018. Moermann is yet to
propose any changes to management but is taking a wait and see approach. Currently fetching around
SGD0.60 a share, FEHT trades at five-year low of 0.6 times book value.

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Not all Quarzs investments are focused on using activism to

encourage management to make changes to strategy,
operations or capital allocation: some portfolio holdings are
there because theyre cheap. Its not always that we think the
company is doing something wrong, says Moermann. One
stock is M1 (B2F.SG), the smallest of Singapores three telcos.
Shares have dropped 25% in the past three months to trade
below its five year average price-to-earnings multiple on
concerns about a possible fourth telco operator. However,
Moermann argues Singaporean authorities may cancel or push
back the award of a fourth telco license due to a lack of bidders
with a strong track record of operating a local network. Additionally, a fourth operator would add very little value
to Singapores telco sector right now. In the event that a fourth license is awarded, Moermann argues the price
competition wouldnt be as intense as expected. He expects the new arrival would only have enough firepower
to underprice incumbents by an average 7%. The recent drop in M1s share price - as well as a juicy 7.6%
dividend yield - provides downside support, says Moermann. If a fourth telco doesnt materialize, he expects
M1 to quickly rebound to its recent average level of SGD2.50 a share, which implies 24% upside on its current
level.

Isabella Zhong

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