GEORGE TOWN, Cayman Islands, July 28, 2020 /PRNewswire/ -- Quarz Capital Management, Ltd. (QCM), an investment manager, today issued a letter urging Teckwah Industrial Corporation Limited to take immediate steps to address the severe undervaluation of its share price and unlock a potentially attractive total return of >30% to all shareholders.
Teckwah's share price continues to trade at a substantial ~25% discount to its worst case 'liquidation value' of ~S$152million. This is despite the firm's 'cash rich' balance sheet with more than ~S$67million of estimated net cash and working capital and newly constructed HQ (Pixel Red) fronting Upper Paya Lebar Road conservatively valued at ~S$73million. QCM believes that the severe undervaluation of Teckwah can potentially be attributed to the perceived investors' lack of information on Teckwah's operations and growth strategy and the potential profound loss of confidence in the firm's ability to sustain and grow profitability. Since its IPO in 1994, the firm's adjusted share price has generated a weak estimated return of 27% over the last 26 years, equivalent to a mere return of ~0.9% per year! Except for a slight one-off increase in dividend in 2016-2017, Teckwah's dividend payout has remained at the same level since 2011.
QCM proposes that Teckwah commits to increase its dividend paid per year to S$0.0315 per share (~6.3% dividend yield). Teckwah will retain more than S$40million of net cash which is estimated to increase by >S$5million per year from free cashflow to continue executing on its strategic growth plans and capitalize on opportunities. The proposed capital return policy will instill a higher level of cash and operational efficiency in the firm.
Given the structural growth trend of MNCs outsourcing to Third Party Logistics players to reduce cost and refocus on core competency, we call on management to bring in the required industry expertise to professionalize and expedite the growth of this business segment. The benefits of economics of scale will enable Teckwah to provide a more competitive offering to customers.
Given the changing dynamics in the logistic industry, Teckwah's board and management can benefit from fresh perspective, particularly in the areas of business development, technological expertise, and operational execution. With the new Code of Corporate Governance introducing the cap in Independent Director's tenure, QCM urges the firm to refresh the board and management with new and relevant expertise who have strong relationship in the industry and potential client base.
QCM believes that its recommendations will provide a clear pathway for the company to achieve its fair value of ~S$0.66 per share and deliver an attractive ~+30% upside to shareholders. QCM has delivered the following letter to Teckwah Industrial Corporation Limited's management team, board of directors and other stakeholders.
QCM and its affiliates are prepared to increase our shareholding on further price weakness of the firm. We have discussed our proposals with other shareholders and intend to propose measures in AGMs and EGMs including mandating a full Strategic Review and the election of board members who can advance strategies to increase shareholder value.
QUARZ CAPITAL MANAGEMENT, LTD. ISSUES OPEN LETTER TO
THE MANAGEMENT AND BOARD OF TECKWAH INDUSTRIAL CORPORATION LIMITED
ALL RECIPIENTS ARE ADVISED TO READ
"IMPORTANT DISCLOSURE INFORMATION"
AT THE END OF THE ATTACHED LETTER
Quarz Capital Management, Ltd.
Clifton House 75 Fort Street
George Town I KY1-1108 I Grand Cayman
Cayman Islands
TO ENGAGE ON THE PROPOSALS TO RETURN EXCESS CAPITAL AND TO EXPEDITE ON GROWTH STRATEGIES
- POTENTIAL TOTAL RETURN IN EXCESS OF 30% OVER THE MID-TERM -
Dear Mr. Chua and Members of the Board,
Quarz Capital owns more than 6% of the total shares of Teckwah Corporation Limited (the "Company", "Firm" or "Teckwah"). We are the 4th biggest shareholder of the firm.
As a long-term and substantial shareholder of Teckwah, we have consistently engaged with your team. Despite our active engagement, we are disappointed and highly unsatisfied with the company's persistent inaction. Teckwah's share price continues to trade at a substantial ~25% discount1 to its worst case 'liquidation value' of ~S$152million. This is despite the firm's 'cash rich' balance sheet with more than ~S$67million of estimated net cash and working capital and newly constructed HQ (Pixel Red) fronting Upper Paya Lebar Road conservatively valued at ~S$73million2.
Since the company listed in 1994, its adjusted share price3 has generated a weak estimated return of 27% over the last 26 years, equivalent to a mere return of ~0.9% per year! Teckwah's share price has substantially underperformed the FSSTI and the banking sector indices which generated performances of ~48% and ~150% respectively over the similar time period4.
We believe that the severe undervaluation of Teckwah can potentially be attributed to the perceived investors' lack of information on Teckwah's operations and growth strategy and the potential profound loss of confidence in the firm's ability to sustain and grow profitability.
Teckwah's profitability has stagnated at ~S$8-12million p.a. since 2009 and dipped to a 10-year low of S$7.1million in 2018. Except for a slight one-off increase in dividend in 2016-2017, Teckwah's dividend payout has remained at the same level since 2011.
The firm made an untimely acquisition in April 2019, paying S$9.1million for a 70% stake in Profoto at an estimated rich premium of 2.6x its book value5. With the acquired business highly exposed to the events and digital print for shopping malls and retail segments, the acquisition is likely to be loss-making these 2 years due to COVID-19.
Despite the languishing financial results, Teckwah rewarded its directors and key personnel with compensations which increased significantly from S$4.3million in 2009 and peaked at S$6.3million in 2017(+~45%). As Net Income to shareholders fell 40% YoY in 2018, Directors' compensation (S$2.7million) rose to a staggering ~38% as a ratio of Net Profit to shareholders.
We implore Teckwah's board and management to take immediate action to address the persistent undervaluation of its share price. Through the execution of these proposals, we believe that Teckwah can achieve its fair value of ~S$0.666 per share and deliver an attractive ~+30% upside to shareholders.
The structure of our letter is as follows:
Having extensively evaluated Teckwah's business, we and our affiliates are prepared to increase our shareholding on further price weakness of the firm. We have discussed our proposals with other shareholders. We intend to propose measures in AGMs and EGMs including mandating a full Strategic Review and the election of board members who can advance strategies to increase shareholder value. Other value accretive strategies include the sale of all or part of the firm to parties who recognize the intrinsic value of the firm and can unlock value for all shareholders.
VALUE OPPORTUNITY
Overview
Teckwah consists of 2 main business segments; Print and Non-Print. Its Print Segment mainly provides printing and packaging services for blue chip clients such as Alcon, Meiji, Phillips, 3M, Tiger Balm, and Nestle in the ICT, Consumer Electronic, Food and Confectionary and Pharmaceutical industries. The firm owns one of the largest fleets of advanced commercial digital and offset printers in its Singapore hub (such as the HP Indigo 10000, 30000 and KBA Rapidas).
As one of the top 5 commercial printers in an increasingly consolidated Singapore printing market, we are optimistic that if properly executed, Teckwah can continue to grow its market share through its scale and continuing investment in technology.
Teckwah's Non-Print Segment provides Critical Parts Logistics and Return Material Authorization including service centers, refurbishment and remarketing on a Pan-Asian basis for blue chip MNCs such as HP, Dell EMC, IBM, and Philips. The firm's long-term relationships with these clients provide income stability, particularly attributed to the substantial cost and disruption in changing a significant supply chain provider. This segment has delivered a stable ~6% CAGR in operating profit over the last 8 years.
We are optimistic that this segment can benefit from operating leverage if management can grow the customer base.
The firm concluded a major investment phase between 2012 and 2017 where it invested ~S$120million mainly to build and install new equipment in its new 243,000 sqft HQ. The high specs building fronts Upper Paya Lebar road and is in close proximity to Tai Seng MRT Station. Recent industrial real estate transactions of older buildings in the area such as 18 Tai Seng Ave, Citimac, Datapulse Tech and Jackson Design Hub, Luxasia imply a conservative S$300psf and S$73million valuation for Teckwah's HQ.
Lack of Operational and Cash Discipline
Teckwah's Net Income peaked at S$13.7million in 2016 and has deteriorated, falling substantially to S$7.1million (-50%) in 2018 and S$8.9million in 2019 (-35%).
Despite the significant decline in Net Income, the remuneration of Teckwah's executive directors is estimated to have increased from ~23% to ~35-38% as a ratio of 2018-2019 Net Income.
We are also surprised at the acquisition of 70% of Profoto for S$9.1million in spite of its tangible net asset value of only S$5million (proportional NAV (70%) of S$3.5million). Given the low barriers to entry and the cyclical nature of the business, we believe it would have been much more cost effective if Teckwah's management have potentially grown the segment organically and hired relevant expertise. The acquisition will likely be loss making in these 2 years due to the COVID-19 situation.
Stagnant Dividend Payout and Lack of Clarity on Excess Net Cash Position
The deterioration in profitability has also potentially resulted in Teckwah's dividend payout to remain relatively stagnant with an average Net Income payout rate and amount of ~32% and S$3.9million respectively since 2011.This is despite the firm's estimated net cash holdings of S$40million.
The company cites a challenging environment and has continuously emphasized on the need to invest and retain a strong cash position which potentially results in the low dividend payout to shareholders. Yet while minority shareholders with ~70% shareholding received normalized dividend payout of S$2.5million per year, related family members of and including the largest shareholder paid themselves estimated compensation and dividend of more than ~S$3.5million. This potential sum is ~50% more than what minority shareholders who hold twice as much shareholding interest in the firm received in dividend.
Lack of Clear Growth Strategies and Expertise during Transformational Phase
Teckwah has repeatedly stated the need for the company to adapt to disruptive technologies and to have an open mindset and adaptable disposition. On the contrary, 3 of 4 independent board members have been with the board for more than 25 years. This is significantly beyond the 9-year limit recommended by the Singapore Corporate Governance Council to ensure independence, refresh and increase diversity in boardrooms. Family members related to the majority shareholders with minimal external industry working experience have been promoted to various management positions in the firm.
The immense changes facing Teckwah in its businesses attributed to new technology, market entrants, business models and customer expectations, magnified by the seemingly lack of expertise could potentially be a contributing reason to the firm's continued decline in profitability.
Corporate Governance
Among SGX listed firms, Teckwah potentially has one of the largest family participations (9 family members in total). Despite the significance, the company has consistently elected not to disclose the remuneration of 7 of these family members, citing competition and the need for 'harmonious and effective human resource management'. It was only after repeated SGX queries that in April 2020, the remuneration of a few family members were disclosed. Corporate governance disclosure has potentially contributed to the mediocre mid-tier ranking of Teckwah in the Singapore Corporate Governance and Transparency Index in 2019 where the company scored 53, far below the mean score of 59.3. Its ranking also fell from 292 to 361 in 2019, out of 578 SGX-listed companies in the Index.
We believe that the company's concern is unfounded if the remuneration is fair and commensurate to the family members' responsibilities and capabilities in the firm. MAS' recently adopted Code of Corporate Governance has emphasized on the disclosure of the remuneration of employees who are substantial shareholders or immediate family members of substantial shareholders.
We look forward to greater clarity in the disclosure on these remunerations with the implementation of the new corporate governance code.
VALUE CREATION PROPOSALS
Quarz has engaged and consulted with various consultants and investment bankers with proven expertise in the printing, packaging and logistic sectors to understand Teckwah and the relevant industry in details to develop our proposals.
Recommendation 1: Commit to increase Dividend Paid to S$0.0315 per share (~6.3% dividend yield)
Given the sizable net cash position, conclusion of the heavy investment phase, and substantial cashflow generative business, we urge Teckwah's board and management to immediately consider increasing the dividend paid to S$7.4million or ~80% of Teckwah's Net Income. Teckwah will continue to retain more than S$40million of net cash which is estimated to increase by >S$5million per year from free cashflow to continue executing on its strategic growth plans and capitalize on opportunities. The higher dividend yield of ~6.3% can provide a regular income to shareholders who have extensively funded the firm during its investment phase.
We believe that our proposed capital return policy will also instill a higher level of cash and operational efficiency in the firm.
Recommendation 2: Expedite on growth strategies in the non-print business
The continued trend of MNCs outsourcing to Third Party Logistics players to handle all aspects of Reverse and Service Logistic to reduce cost and refocus on core competency increases the opportunities and can be a structural growth driver for Teckwah's non-print business.
We call on management to bring in required industry expertise to professionalize and expedite the growth of this business segment. The benefits of economics of scale will enable Teckwah to provide a more competitive offering to customers as well as invest more into capabilities, driving a virtuous cycle for the company to become a dominant player in this business.
Recommendation 3: Enhance Expertise and Corporate Governance
Given the changing dynamics and increasingly competitive landscape in the logistic industry, Teckwah's board and management can benefit from fresh perspective, particularly in the areas of business development, current technological expertise, and operational execution. With the new Code of Corporate Governance introducing the cap in Independent Director's tenure, we urge the firm to refresh the board and management with new and relevant expertise who have strong relationship in the industry and potential client base.
Conclusion
Quarz strongly believes that its recommendations can provide a clear pathway for Teckwah to deliver a potential total return of more than 30% for all shareholders in the mid-term. We urge Teckwah's board and management to commit to our proposals without delay. Waiting for the current operating playbook to deliver better outcome will only potentially result in continued underperformance. As long-term shareholders, we look forward to working with Teckwah's board and management to move expeditiously on delivering value to all shareholders.
Sincerely yours,
Mr. Jan F. Moermann
Chief Investment Officer, Quarz Capital Management, Ltd.
Mr. Havard Chi, CFA
Head of Research, Quarz Capital Asia (Singapore)
For further information, please contact:
enquiries@quarzcapital.com
About Quarz Capital Management
Quarz Capital Management, Ltd. is a value oriented and research driven investment advisory firm that seeks to earn above average, long-term returns by identifying value investments across the globe.
www.quarzcapital.com
IMPORTANT DISCLOSURE INFORMATION
SPECIAL NOTE REGARDING THIS LETTER
THIS LETTER CONTAINS OUR CURRENT VIEWS ON THE VALUE OF TECKWAH INDUSTRIAL CORPORATION LIMITED'S SECURITIES AND ACTION THAT TECKWAH INDUSTRIAL CORPORATION LIMITED'S BOARD MAY TAKE TO ENHANCE THE VALUE OF ITS SECURITIES. OUR VIEWS ARE BASED ON OUR ANALYSIS OF PUBLICLY AVAILABLE INFORMATION AND ASSUMPTIONS WE BELIEVE TO BE REASONABLE. THERE CAN BE NO ASSURANCE THAT THE INFORMATION WE CONSIDERED IS ACCURATE OR COMPLETE, NOR CAN THERE BE ANY ASSURANCE THAT OUR ASSUMPTIONS ARE CORRECT. TECKWAH INDUSTRIAL CORPORATION LIMITED ACTUAL PERFORMANCE AND RESULTS MAY DIFFER MATERIALLY FROM OUR ASSUMPTIONS AND ANALYSIS. WE HAVE NOT SOUGHT, NOR HAVE WE RECEIVED, PERMISSION FROM ANY THIRD-PARTY TO INCLUDE THEIR INFORMATION IN THIS LETTER. ANY SUCH INFORMATION SHOULD NOT BE VIEWED AS INDICATING THE SUPPORT OF SUCH THIRD PARTY FOR THE VIEWS EXPRESSED HEREIN. WE DO NOT RECOMMEND OR ADVISE, NOR DO WE INTEND TO RECOMMEND OR ADVISE, ANY PERSON TO PURCHASE OR SELL SECURITIES AND NO ONE SHOULD RELY ON THIS LETTER OR ANY ASPECT OF THIS LETTER TO PURCHASE OR SELL SECURITIES OR CONSIDER PURCHASING OR SELLING SECURITIES. ALTHOUGH WE STATE IN THIS LETTER WHAT WE BELIEVE SHOULD BE THE VALUE OF TECKWAH INDUSTRIAL CORPORATION LIMITED'S SECURITIES, THIS LETTER DOES NOT PURPORT TO BE, NOR SHOULD IT BE READ, AS AN EXPRESSION OF ANY OPINION OR PREDICTION AS TO THE PRICE AT WHICH TECKWAH INDUSTRIAL CORPORATION LIMITED'S SECURITIES MAY TRADE AT ANY TIME. AS NOTED, THIS LETTER EXPRESSES OUR CURRENT VIEWS ON TECKWAH INDUSTRIAL CORPORATION LIMITED. IT ALSO DISCLOSES OUR CURRENT HOLDINGS OF TECKWAH INDUSTRIAL CORPORATION LIMITED SECURITIES. OUR VIEWS AND OUR HOLDINGS COULD CHANGE AT ANY TIME. WE MAY SELL ANY OR ALL OF OUR HOLDINGS OR INCREASE OUR HOLDINGS BY PURCHASING ADDITIONAL SECURITIES. WE MAY TAKE ANY OF THESE OR OTHER ACTIONS REGARDING TECKWAH INDUSTRIAL CORPORATION LIMITED WITHOUT UPDATING THIS LETTER OR PROVIDING ANY NOTICE WHATSOEVER OF ANY SUCH CHANGES. INVESTORS SHOULD MAKE THEIR OWN DECISIONS REGARDING TECKWAH INDUSTRIAL CORPORATION LIMITED AND ITS PROSPECTS WITHOUT RELYING ON, OR EVEN CONSIDERING, ANY OF THE INFORMATION CONTAINED IN THIS LETTER.
As of the publication date of this report, Quarz Capital Management Ltd. and its affiliates (collectively "Quarz"), others that contributed research to this report and others that we have shared our research with (collectively, the "Authors") have long positions in and own options on the stock of the company covered herein (TECKWAH INDUSTRIAL CORPORATION LIMITED) and stand to realize gains in the event that the price of the stock increases. Following publication of the report, the Authors may transact in the securities of the company covered herein. All content in this report represent the opinions of Quarz. The Authors have obtained all information herein from sources they believe to be accurate and reliable. However, such information is presented "as is", without warranty of any kind – whether express or implied. The Authors make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. All expressions of opinion are subject to change without notice, and the Authors do not undertake to update or supplement this report or any information contained herein.
This document is for informational purposes only and it is not intended as an official confirmation of any transaction. All market prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice. The information included in this document is based upon selected public market data and reflects prevailing conditions and the Authors' views as of this date, all of which are accordingly subject to change. The Authors' opinions and estimates constitute a best efforts judgment and should be regarded as indicative, preliminary and for illustrative purposes only.
Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This report's estimated fundamental value only represents a best effort estimate of the potential fundamental valuation of a specific security, and is not expressed as, or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor.
This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein or of any of the affiliates of the Authors. Also, this document does not in any way constitute an offer or solicitation of an offer to buy or sell any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction. To the best of the Authors' abilities and beliefs, all information contained herein is accurate and reliable. The Authors reserve the rights for their affiliates, officers, and employees to hold cash or derivative positions in any company discussed in this document at any time. As of the original publication date of this document, investors should assume that the Authors are long shares of TECKWAH INDUSTRIAL CORPORATION LIMITED and have positions in financial derivatives that reference this security and stand to potentially realize gains in the event that the market valuation of the company's common equity is higher than prior to the original publication date. These affiliates, officers, and individuals shall have no obligation to inform any investor about their historical, current, and future trading activities. In addition, the Authors may benefit from any change in the valuation of any other companies, securities, or commodities discussed in this document. Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of the Authors' operations and their affiliates. The compensation structure for the Authors' analysts is generally a derivative of their effectiveness in generating and communicating new investment ideas and the performance of recommended strategies for the Authors. This could represent a potential conflict of interest in the statements and opinions in the Authors' documents.
The information contained in this document may include, or incorporate by reference, forward- looking statements, which would include any statements that are not statements of historical fact. Any or all of the Authors' forward-looking assumptions, expectations, projections, intentions or beliefs about future events may turn out to be wrong. These forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors, most of which are beyond the Authors' control. Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on all securities, companies, and commodities discussed in this document and develop a stand-alone judgment of the relevant markets prior to making any investment decision.
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED IN THIS LETTER ARE FORWARD-LOOKING STATEMENTS INCLUDING, BUT NOT LIMITED TO, STATEMENTS THAT ARE PREDICATIONS OF OR INDICATE FUTURE EVENTS, TRENDS, PLANS OR OBJECTIVES. UNDUE RELIANCE SHOULD NOT BE PLACED ON SUCH STATEMENTS BECAUSE, BY THEIR NATURE, THEY ARE SUBJECT TO KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES. FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE OR ACTIVITIES AND ARE SUBJECT TO MANY RISKS AND UNCERTAINTIES. DUE TO SUCH RISKS AND UNCERTAINTIES, ACTUAL EVENTS OR RESULTS OR ACTUAL PERFORMANCE MAY DIFFER MATERIALLY FROM THOSE REFLECTED OR CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF THE FUTURE TENSE OR OTHER FORWARD-LOOKING WORDS SUCH AS "VIEW," "BELIEVE," "CONVINCED," "EXPECT," "ANTICIPATE," "INTEND," "PLAN," "ESTIMATE," "SHOULD," "MAY," "WILL," "OBJECTIVE," "PROJECT," "FORECAST," "MANAGEMENT BELIEVES," "CONTINUE," "STRATEGY," "PROMISING," "POTENTIAL," "POSITION" OR THE NEGATIVE OF THOSE TERMS OR OTHER VARIATIONS OF THEM OR BY COMPARABLE TERMINOLOGY.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE EXPECTATIONS SET FORTH IN THIS LETTER INCLUDE, AMONG OTHER THINGS, THE FACTORS IDENTIFIED IN THE RISK SECTIONS IN TECKWAH INDUSTRIAL CORPORATION LIMITED ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31ST, 2019 AND PROSPECTUS. SUCH FORWARD-LOOKING STATEMENTS SHOULD THEREFORE BE CONSTRUCTED IN LIGHT OF SUCH FACTORS, AND QUARZ CAPITAL MANAGEMENT IS UNDER NO OBLIGATION, AND EXPRESSLY DISCLAIMS ANY INTENTION OR OBLIGATION, TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE, EXCEPT AS REQUIRED BY LAW.
1 Share price of S$0.50
2 ~240,000 sqft facility completed in 2014 with 30+30-year lease and valued at S$300 psf. Luxasia building adjacent to Teckwah's HQ was transacted at ~S$310psf in Dec 2019 with remaining lease of 48 years
3 Data from Bloomberg. Share price post adjustment for rights and share splits (if any)
4 Comparison of performance excluding dividend paid. Dividend yield of listed banking sector and FSSTI is comparable to Teckwah
5 From Teckwah's SGX Filing dated 1 April 2019, "the unaudited net asset value of the Profoto Group of approximately S$5,000,000 as at 30September 2018"
6 25% discount on the total value of HQ in Tai Seng (S$73million), Net Cash (S$40million) and 10x 2019 Net Income