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18/11/2016

Activist Fund Sees Value in Singapore Stocks

Quarz Capital Management offers 3 cheap stocks that have ample upside and could lift dividend
payouts.

Isabella Zhong
Quarz 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.
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
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http://www.barrons.com/articles/activist-fund-spies-value-in-singapore-stocks-1479428932

18/11/2016

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.
Quarz 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.
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.

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http://www.barrons.com/articles/activist-fund-spies-value-in-singapore-stocks-1479428932

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