A Bird In The Hand Is Worth Two In The Bush
Sanjuro’s offer is “fair and reasonable”, according to Provenance. The revised offer of
S$0.40/share is above the mean and close to the median P/RNAV ratios of eight fair
precedent privatisation transactions. The downside risk should be considered if the
offer fails with no competing bid. Based on Provenance’s RNAV, the offer price
represents only a discount of 21% vs SGX-listed developers trading at a discount of
40% to book value. Offer closing date is 28 Jun 22.
• Voluntary conditional offer by substantial shareholders. In May 22, substantial
shareholders of Hwa Hong Corporation (Hwa Hong) made a voluntary conditional cash offer
of S$0.37/sh to take the company private. This was later revised to S$0.40/sh in Jun 22. The
offeror, Sanjuro United (Sanjuro), is the bid vehicle of a consortium formed by shareholders
of Hwa Hong that collectively hold around 20% of its shares. The offer is conditional upon
the acceptance of which, together with the existing shares of the offeror or parties acting in
concert holding more than 50% of the total number of shares as at the close of offer. The
offeror, Sanjuro has also indicated that it does not intend to revise the offer price, but
reserves the right to do so in a competitive situation.
• IFA concluded that the offer is fair and reasonable, advised to accept the offer. The
IFA for the independent directors of Hwa Hong, Provenance Capital (Provenance) has
released its report on the cash offer by Sanjuro. According to Provenance, the offer from
Sanjuro is fair and reasonable based on: a) the P/Adjusted RNAV ratio of 0.79 times for Hwa
Hong is above the mean and close to the median P/RNAV ratios of eight fair precedent
privatisation transactions of 0.73x and 0.80x respectively, b) the price of S$0.40/sh is 8.1%
higher than the initial offer price of S$0.37/sh, and is at a 32.0% premium above the
historical volume-weighted average trading price of the shares in the three months prior to
the offer announcement.
• Putting things in perspective. Minority shareholders should note that the offer is
conditional, and in the event the cash offer from Sanjuro fails, there is a potential that the
share price of Hwa Hong could trade down significantly in the event there is no competing
offer. As an indication, the revised offer price of S$0.40/sh exceeds all previous closing
prices of Hwa Hong in the last nine years prior to 12 May 22, which is the last full trading day
of the “undisturbed” share price. Based on Bloomberg’s data, the share price of Hwa Hong
averaged S$0.318/sh over the past decade and could indicate the potential downside in the
event of a failed cash offer. Investors should also note the closing date of the offer is
28 Jun 22.
• Not all are happy endings. Our analysis indicates that there are a number of instances that
conditional offers not meeting the acceptance criteria saw sharp declines in the share price
of between 0-29% three months after the offers lapsed. We highlight instances of failed
conditional general offers and their impact on the share price.
• Massive changes in the boardroom. Prior to the recent turmoil in the boardroom, Hwa
Hong had a good compliance track record for decades. Since its annual general meeting on
18 Apr 22, there has been a departure of several Directors, including its Chairman and NonExecutive Independent Director, Mr Mak Lye Mun, due to disagreement with certain Board
members on the selection and appointment process of two new Independent Directors. In
view of this, Hwa Hong has been served a Notice of Compliance by SGX on 6 May 22 and is
required to appoint independent reviewers to check the process and practices relating to the
selection and appointment of Independent Directors.
• All things considered, a bird in the hand is worth two in the bush. Minority shareholders
will have to decide whether to accept Sanjuro’s offer that appears to be “fair and reasonable”
according to Provenance. In terms of valuation, the revised offer of S$0.40/share is at a
small discount of 21% to the RNAV estimate of S$0.5052/sh by Provenance and at a 40%
premium to Hwa Hong’s net asset value of S$0.285/sh. Comparatively, the IFA report
highlights that the comparable developers in Singapore are trading at a median 0.42x
Price/NAV. On the flipside, the current board of Hwa Hong announced that they have
appointed an exclusive financial advisor, Evercore Asia (Singapore), to assist the company
in maximising shareholder value, which could include soliciting other potential offers or
assessing other offers that may emerge against Sanjuro. While the appointment is promising
and could see the emergence of a competing bid, shareholders will need to also assess the
downside risk if the Sanjuro offer fails and there is no competing bid. Based on the IFA’s
RNAV of S$0.5052/sh, the offer price of S$0.40/sh represents only a small 21% discount
compared to other SGX listed developers in Singapore that are trading at a significantly
higher discount range of around 40% to book value and may offer better value, on a riskadjusted basis for minority shareholders. Investors could consider accepting the offer and
switch to other developers below that offer a deep discount to book. Our top picks in the
property sector are Propnex, Capitaland Investments Ltd and City Dev.