METRO HOLDINGS: Gets open letter from Quarz Capital Management

Quarz Capital Management, Ltd. today sent the following open letter to Metro Holdings to engage on proposals to unlock a total potential return of >40% in Metro’s share price through the distribution of an extraordinary cash dividend of SGD 0.21/share (dividend yield of 23%) and to provide clearer communication of corporate strategy.

Photo: Company
Dear Members of the Board, 

As a long-term shareholder of Metro Holdings (the “ Company ” , “ Firm ”,” “ METRO SP ”   or “ Metro ”), we congratulate the board on the appointment of Mr. Lawrence Chiang as the acting Group CEO and Executive Director of Metro. Mr. Chiang has been a key part of the team led by the visionary Mr. Jopie Ong who transformed Metro from a reputable domestic retailer to a global property player with a strong real estate portfolio in Singapore, China, and the UK. Despite being a household name in retail, Metro’s current retail operation contributes to less than 0.5% and 5% of its FY16 net profit and net asset valuation respectively.

Together with the loans to its JVs of SGD 133 million and listed equity investments of SGD 111 million, Metro’s net cash, loan receivables and liquid investments total SGD 637 million, amounting to more than 80% of its current market capitalization.

In spite of being a mid-cap stock, Metro has the 2^nd largest net cash holding among listed companies in the SGX, amounting to SGD 393 million, more than half its current market capitalization of SGD 758 million. This is in addition to the attractive dividend yield of 7.7% the company paid in FY2016. Together with the loans to its JVs of SGD 133 million and listed equity investments of SGD 111 million, Metro’s net cash, loan receivables and liquid investments total SGD 637 million, amounting to more than 80% of its current market capitalization.

Metro’s property development and investment portfolio is valued in excess of SGD 600 million. Its Grade A diversified investment properties are located in the prime areas of Shanghai and Guangzhou with anchor tenants including Exxon Mobil, Swatch, Abbott Laboratories, and Roche. This portfolio provides a recurring unlevered net rental income in excess of SGD 30 million per annum. Progressive profit recognition and capital return from the delivery of its Nanchang Fashion Mark (China) mixed-use development project, Sheffield Digital Campus (UK), Manchester Middlewood Locks (UK) and The Crest@ Prince Charles Crescent (Singapore) will further boost Metro’s net profit and cash flow in the next few years. Metro’s retail division which accounts for 4% of Metro’s total gross asset value is right-sizing its Singapore operation to match the new retail landscape. 

It is thus inconceivable that Metro’s share price continues to languish at SGD 0.915, trading at a deep discount of 43% to its intrinsic book value of SGD 1.61 per share despite the company’s strong recurring earnings profile and valuable assets. We attribute this severe undervaluation to the following key reasons: 

Firstly, the firm holds an excessive net cash balance which has been largely under-utilized and low yielding. Investors are worried about the inefficient allocation and potential mismanagement of this sizeable cash balance. 

This is exacerbated by Metro’s insufficient communication with investors with regards to its strategy in its key real estate division beyond the opportunistic acquisition and divestment of property assets and development projects. Lack of management access (reflected by no sell-side coverage and low institutional shareholding level) and hard to decipher financial results add to the complexity of understanding the intrinsic value and strong cash flow profile of Metro. This partly results in lower trading liquidity, reduces the investability, and increases the substantial discount to intrinsic value of Metro’s shares.

Low shareholding level and the lack of share-based compensation as part of management’s remuneration might have also resulted in the de-prioritization of Metro’s share price as a key management KPI.

It is evident that the maintenance of a net cash balance of SGD 393 million which will potentially increase to more than SGD 500 million in the next 2-3 years with minimal usage of debt is excessive. We believe that now is the time that Metro takes the decisive step to close this substantial valuation gap by distributing SGD 150 – 200 millions of excess cash to shareholders (amounting to SGD 0.21/share or a 23% dividend yield).

We are in agreement with Metro’s board and management that the company should retain a proportion of cash to take advantage of strategic opportunities in the asset-heavy fields of property development and investment. However, it is evident that the maintenance of a net cash balance of SGD 393 million which will potentially increase to more than SGD 500 million in the next 2-3 years with minimal usage of debt is excessive. We believe that now is the time that Metro takes the decisive step to close this substantial valuation gap by distributing SGD 150 – 200 millions of excess cash to shareholders (amounting to SGD 0.21/share or a 23% dividend yield). The remaining net cash balance and liquid investments of more than SGD 329 million will be more than sufficient for Metro to execute on its long term strategy of value creation and to pay its recurring dividend. We urge Metro to implement a clear dividend return policy and a shareholder accretive buyback programme to repurchase shares whenever the share price discount to NAV breaches >40%.

The wider investment community will also appreciate the company in providing a clear and coherent strategy of its real estate division. Deeper insights on the focus countries, type of properties and the profitability criteria which the division uses to evaluate potential investments and projects will support investors in better understanding the strategy and operations of this key division.

We recommend Metro to strengthen its investor relations work by enabling frequent institutional access to management (commonplace among high quality SGX-listed firms) and to provide better quality and quantity of reported financial metrics such as recurring rental income, lease expiry profile (for the next few years), as well as forecasted rental rate trends, development margins and profit.

We also support a transparent link between the remuneration of management with Metro’s long term profitability and share price. In this respect, we recommend their remuneration package to include a sizeable proportion of share-based compensation which will vest upon fulfillment of key KPIs. 

For your convenience, we have summarized our thoughts and recommendations in a short presentation: https://www.quarzcapital.com/en/research/metro-holdings

The foresight and execution ability of the late Mr. Jopie Ong and his team have provided a strong foundation for Metro Holdings. We are confident that the current team has the capability and pedigree to lead the company to greater heights. The return of excess capital, clear corporate strategy, and proactive investor relations can result in Metro’s share price to trade at a higher valuation permanently and provide a significant upside of more than 40% by 2017 to all Metro shareholders.

Sincerely yours, 

Mr. Jan F. Moermann, Chief Investment Officer, Quarz Capital Management, Ltd. 
Mr. Havard Chi, CFA, Portfolio Manager, Quarz Capital Management, Ltd

Full letter here. 

Editor's note: Metro management issued a reply to Quarz on 11 Oct. Click here.