Isetan Singapore

[specuvestor]

Hi ghchua

The idea of franked dividends is so that company can only pay dividends out of profits that they paid tax, unlike currently like you mentioned you can pay dividend out of profit even without paying tax from tax accounting. So yes they made a lot of taxed profits in the past but chose not to pay out to OPMI but subsequently bits of dividends under the non S44 regime. Whether retaining make sense or not will depend on what is your interpretation of a holding company discount.

So if you held it from the S44 days till before the privatisation you probably double your money over ~25 years or 100% MTD depends how you wanna calculate it. I'm not sure about your interest in this but I do remember the frustrated OPMI at the AGM

In any case this privatisation is a close of this chapter and an interesting lesson for me while also highlighting that Japan culture and ethos is really changing in midst of Nikkei hitting all time high.

Hi specuvestor,

My memory of Isetan is one that forfeited one of the most Section 44 Franked credits because paying dividends will incur a lot more tax for the holdco in Japan. Despite all the protests from minorities during AGM and many other companies demonstrating issuing dividends and raising rights to replace the cash outflow.

I think I have replied to you previously on the part about tax credits. Isetan Singapore did paid out some of them eventually via dividend. The fact that it managed to accumulate so much tax credit meant that it is not a bad company. If a company keeps on losing money, how could it had accumulated so much tax credits throughout the years?

And even if they paid out little dividends, profits will be retained in the company, which results in increase in NAV/RNAV. That will all be taken into consideration when IFA determines whether the scheme is "Fair and Reasonable" or not.

But if you look at the actual fact, recent years they have been barely profitable or making losses. That resulted in accumulated losses which meant that they could not pay out dividends unless they are profitable within a financial year. So recent years of low dividends is because of their performance, and not because that they purposely hold back dividends due to any other reasons.

[ghchua]

Hi specuvestor,

Whether retaining make sense or not will depend on what is your interpretation of a holding company discount.

I don't subscribe to the idea of "holding company discount" when investing in Isetan Singapore. It is not as if it is a company holding a series of different businesses and associates everywhere. It has two very clear cut business - i.e. retail and property investments in Singapore. It doesn't mean that when a company is trading below book value, there is always a holding company discount.

So if you held it from the S44 days till before the privatisation you probably double your money over ~25 years or 100% MTD depends how you wanna calculate it.

I normally don't see things this way. If one is interested to invest in long term, he/she should be investing consistently, averaging the cost along the way. It is not buy once during S44 days and forget.

[specuvestor]

Hi ghchua

Just to add for academic purpose that even a pure cash listco has holding company discount. The reason is primarily only the major shareholders decide how to use the cash including paying themselves, directly or indirectly, while OPMI has no access to it. Similarly in subsidiaries / associates that doesn't upstream cash it is also difficult for OPMI to enjoy the benefits, until some raiders or restructuring realise the value or optimise the capital structure, which is again not something OPMI can do

In investing, I am simply concurring with Weijian that we really don't have many 10 years to wait for management to become proactive in governance. There's usually always a catalyst. And I can see Japan starting to move in this direction since the latter years of Shinzu Abe so that's the catalyst

[ghchua]

Hi specuvestor,

Just to add for academic purpose that even a pure cash listco has holding company discount. The reason is primarily only the major shareholders decide how to use the cash including paying themselves, directly or indirectly, while OPMI has no access to it. Similarly in subsidiaries / associates that doesn't upstream cash it is also difficult for OPMI to enjoy the benefits, until some raiders or restructuring realise the value or optimise the capital structure, which is again not something OPMI can do

Isetan Singapore don't have all these stuff like subsidiaries/associates to dividend cash up to them. They previously have an associate in China which had already been liquidated. What I am trying to say here is that when you buy into Isetan Singapore, it is the company Isetan Singapore. There is no consolidated balance sheet. It is a company balance sheet. There is no consolidated accounting at all. The cash and investments are also held in the company. The listco is the company. Since you are buying into the company itself, where is the holding company? That is what I am trying to explain here.

Well, you can say that OPMI don't have control on the company, but that is true for every company that you bought on the exchange as a minority shareholder. Which means, all the companies listed on the exchange should have a "holding company discount"?

In investing, I am simply concurring with Weijian that we really don't have many 10 years to wait for management to become proactive in governance. There's usually always a catalyst. And I can see Japan starting to move in this direction since the latter years of Shinzu Abe so that's the catalyst

I don't invest only when I see a catalyst appearing. I mean, it can come but it may not or a false alarm. When it becomes obvious as a catalyst, I believe the market will begin to price in those catalysts (or at least some of it) and you will buy in at a slightly or more expensive price. I prefer to diversify my holdings across many companies to minimize my risk of so called "value traps" or growth disappointments and invest consistently throughout market cycles. That to me is a better way to approach equity investing and it had been my approach since day one I started in this journey. I did the same for my fund investing as well, diversifying across geographical countries and also fund managers.

I believe there is no right or wrong answers here as investing is sometimes a personal thingy and one should find one that suites him/her best.

[specuvestor]

Hi ghchua

I see what you mean now. I was saying that Isetan Japan dictated the path of Isetan Singapore, even though Isetan Singapore is a simple company. And they decided the corporate action of Isetan Singapore and whether to benefit OPMI, even in this privatisation. And yes this is not unique to Isetan but to all listed companies with supermajority hence we need to know the Structure of the company and what makes them tick and the historical willingness to take care of OPMI or bring us on a ride together.

And yes it is thus true that this discount exist for every listed company including simple Isetan Singapore, which can be reduced with growth potentials. Hence companies need to show growth when going IPO. There is little benefit to list a cash cow company for IPO that values close to book due to this discount, except maybe for credit purpose for the majority shareholder. Otherwise you need to boost capital structure which is why some companies strip out cash and lever up during IPO to spike up the ROE and hence price to book. Similar logic why Berkshire incentivise the subsidiaries to upstream cash to optimise the subsidiaries' capital structure

Sure it's good to diversify across and hopefully just get 30% lemons. Just that we are talking about an absolute basis here not in the context of a portfolio. Or maybe I'm just realising I don't have many decades left

[dreamybear]

Hence companies need to show growth when going IPO. There is little benefit to list a cash cow company for IPO that values close to book due to this discount, except maybe for credit purpose for the majority shareholder. Otherwise you need to boost capital structure which is why some companies strip out cash and lever up during IPO to spike up the ROE and hence price to book. Similar logic why Berkshire incentivise the subsidiaries to upstream cash to optimise the subsidiaries' capital structure

Sure it's good to diversify across and hopefully just get 30% lemons. Just that we are talking about an absolute basis here not in the context of a portfolio. Or maybe I'm just realising I don't have many decades left 

Sorry for interjecting the vibrant discussion btw ghchua and specuvestor.

Reading some of specuvestor's comments gives me the impression that specuvestor is truly adept in the "Structure"(ABS). 

There have been discussions in this forum around controlling shareholders cashing out prior to IPO. What is the best way to evaluate whether the cashing out is more for transferring risk to new shareholders or to optimize the capital structure for a more successful IPO (e.g. higher IPO price, better IPO response) ? Will it be to monitor (post-listing) how shareholder friendly the Board is ? Or is there a way to sieve out hints from the IPO prospectus (maybe adoption of a dividend policy) ?

On the decades timeline, well, it takes me years to understand a business/company. Coupled with the no. of companies to go thru before I can find a suitable one, I am always running out of time and energy too - I need to find like-minded "investmentbuddies" quickly !  

[specuvestor]

Hi Dreamybear

Just to sidetrack a bit from the main topic:

1) IPO is always about transferring risk to new shareholders. If sure win they would have done it themselves unless they are in the VC stage where it's difficult to get capital. It's the same idea of drilling companies selling part of the project to other oil majors once there are some probability of success to reduce their risk otherwise if 100% sure they wouldn't need to sell. The other purpose is for owner's credit so that banks can give more credit from the multiple expansion of your company from unlisted to listed, or owner can stop giving personal guarantees. You see a lot of examples of shares pledged.

2) Optimal capital structure with high price is to benefit the owner not the OPMI But the other constraints is the amount of loan they can get from the banks will reflect the willingness of the banks on the company's cashflow ie the leverage has a market regulating limit.

3) Yes have to monitor the Board through the years for long term investor to see if they marginalises shareholders or treat them fairly. Buffett ideology is to treat them as partners so he doesn't think of schemes to rip them off if you get my drift

4) Prospectus you can go to the restructuring section to have a glimpse what they were doing before IPO to see what was their purpose and incentive. Structure issues as usual are not so clear cut as numbers but have to read between the lines and purpose to understand the incentive. In short do you TRUST the management to not short change OPMI.

My 2cents

NB A listco should have a premium cause listing status has value as it gone through all the process and regulation ie why people do backdoor listing. So the fact that a cash listco trades at 10-20% discount means the actual holding company discount is probably closer to 20+%. So when growth falters, intentionally or otherwise, it gives that natural margin for owners to consider privatising.

[dreamybear]

Hi Dreamybear

Just to sidetrack a bit from the main topic:

1) IPO is always about transferring risk to new shareholders. If sure win they would have done it themselves unless they are in the VC stage where it's difficult to get capital. It's the same idea of drilling companies selling part of the project to other oil majors once there are some probability of success to reduce their risk otherwise if 100% sure they wouldn't need to sell. The other purpose is for owner's credit so that banks can give more credit from the multiple expansion of your company from unlisted to listed, or owner can stop giving personal guarantees. You see a lot of examples of shares pledged.

2) Optimal capital structure with high price is to benefit the owner not the OPMI But the other constraints is the amount of loan they can get from the banks will reflect the willingness of the banks on the company's cashflow ie the leverage has a market regulating limit.

3) Yes have to monitor the Board through the years for long term investor to see if they marginalises shareholders or treat them fairly. Buffett ideology is to treat them as partners so he doesn't think of schemes to rip them off if you get my drift

4) Prospectus you can go to the restructuring section to have a glimpse what they were doing before IPO to see what was their purpose and incentive. Structure issues as usual are not so clear cut as numbers but have to read between the lines and purpose to understand the incentive. In short do you TRUST the management to not short change OPMI.

My 2cents

NB A listco should have a premium cause listing status has value as it gone through all the process and regulation ie why people do backdoor listing. So the fact that a cash listco trades at 10-20% discount means the actual holding company discount is probably closer to 20+%. So when growth falters, intentionally or otherwise, it gives that natural margin for owners to consider privatising.

Thanks so much for replying a detailed explanation.

Based on the understanding that IPO is always about transferring risk to new shareholders, then logically, wouldn't OPMI need to understand enough about the business and industry to be able to reasonably assess the risk-reward, before deciding to participate in the IPO ? That would be a tall task for retail investors and the only solution I can think of is working in teams.

I may be mislead but I believe some companies IPO more because they are at a certain growth stage than transferring risk. As public companies, they are more transparent(e.g. financials) and as such, easier to approach business partners like principals. There are also a number of net cash companies in SGX which in my view, also eschew borrowings. In other words, I think there could be multiple reasons for the IPO but the weightage of the reasons might differ.

Back to Isetan. Considering BW and Isetan are undergoing corporate actions, BW has conducted SBB(even after the delisting announcement) while Isetan has not. In fact, scrolling thru' the SGX company announcements, I do not think Isetan has a SBB mandate nor has conducted SBB at least in recent times.

Logically, if Isetan has the intention to delist, it wld be cheaper to pick up shares via SBB through the years or even now.

[ghchua]

Hi dreamybear,

Isetan Singapore is a very simple company to analyze. No SBB mandate, they don't need it since they don't have stock option scheme. No share issue mandate. In fact, the number of shares outstanding had remained the same for a very long time.

Considering that its free float is around 38%, their shares are very thinly traded on the exchange. A lot of strong hands are holding onto this "value trap". No reason for them to sell at all, even if their dividend payout in recent years had been low. If you analyze it hard enough, it is not difficult to see why. Those top minority shareholders are very well capitalized.

Now the question is why Isetan Singapore don't initiate a SBB or they themselves buy some shares from the market and then try to delist after that? Because I think they know most are strong hands. Yes, they might get some shares from those weaker holders but chances are it is not worth the effort to do that. Doesn't even make a big difference in the greater scheme of things.

You can't compare with BW. BW shareholders are mostly growth oriented and their time horizon might be shorter. Doing SBB can make a difference, as you have seen. Free float is getting lower than Isetan Singapore and yet, their trading volume every day is higher. The profile of shareholders are different.

[CY09]

https://links.sgx.com/FileOpen/QAs%20for...eID=797456

Half of the questions were related to its scheme of arrangment. Interestingly, Isetan will be revealing the RNAV of their properties in an upcoming circular.

A classic cigar butt stock but one which holds much value due to Singapore's insistence to juice up property values. Isetan was lucky in taking up the strategy to be the landlord of its shops during Singapore early days