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Thursday, September 07, 2006

Patience needed in gamble on illiquid stocks (Business Times Online By LESLIE YEE )

INVESTMENT bankers tout the virtues of having a good free float so there will be sufficient liquidity in a company's shares and it can attract greater interest from institutional investors. In short, there should be a positive link between liquidity and share price performance.
Interestingly, though, there are established and sizeable companies on the Singapore Exchange (SGX) that have small free floats and share prices that are doing well. Look at insurer Great Eastern Holdings (GEH). OCBC Bank failed to take GEH private in a recent takeover offer, but the bank did end up with more GEH shares and the free float of GEH became smaller. OCBC and concert parties together hold around 87.1 per cent in GEH.
OCBC's offer of $16 per GEH share was a 12.7 per cent premium to the last-traded price of GEH prior to the offer. Earlier last month, GEH posted a 7 per cent decline in net profit for the second quarter ended June 30. Yet since OCBC's offer closed in mid-August, GEH's share price has advanced even further. It last closed at $16.50 and has closed as high as $17 in late August.
Did OCBC's offer bring to light value in GEH that was previously ignored by investors? Are some investors thinking that OCBC will try again to take GEH private at a substantially more attractive price? Do minority shareholders see GEH's share price sizzling going forward, as happened with SembCorp Marine's share after parent SembCorp Industries failed to take the marine group private?
A star performer on the Singapore market this year is Asia Pacific Breweries (APB), whose share price is up 72 per cent so far this year. Yet this company has Heineken and Fraser & Neave (F&N) together holding around 82 per cent of its shares. APB's share price rise has been helped by news of both Heineken and F&N raising their stake in the company.
What GEH and APB have in common is that major shareholders are clearly keen to buy more shares in the respective companies. With regard to APB, F&N had stated its intention to maintain the listing status of the company. Perhaps, however, Heineken could be keen to take this company private and get greater control and a bigger share of profit; after all, international brewers have been actively acquiring brewers in Asia.
Another company where the parent has been buying up shares this year is Hotel Plaza, where UOL Group owns around 78 per cent of the shares. At Singapore Land, which is up 36 per cent in the year to date, parent United Industrial Corporation (UIC) has a 72 per cent stake. With Hotel Plaza, talk is of a possible privatisation bid by UOL, while with SingLand, investors are fascinated by the possibility of a tussle between tycoons Wee Cho Yaw and John Gokongwei for control at UIC.
In recent history, minority shareholders have been richly rewarded for their holdings in the stable of thinly traded companies belonging to the late tycoon Khoo Teck Puat. Minority shareholders of Goodwood Park Hotel received an exit offer that was more than 36 per cent higher than the last traded price. And the moves to delist Hotel Malaysia and Central Properties more than doubled the investments of minority shareholders, based on the last-traded prices of the companies.
Be it from unlocking hidden value or from major shareholders trying to get their hands on full ownership of prized assets, there appears money to be made from investing in relatively illiquid companies. Indeed, should it become even more onerous to run a listed company, expect greater urgency from major shareholders to take fairly illiquid listed companies private.
Still, caution is advised when investing in illiquid stocks. As with buying a property with en bloc potential, when one never knows exactly when a collective sale will succeed, investing in illiquid stocks requires patience and holding power. Remember: it is never easy to guess right how the canny big boys may act - be they OCBC or Heineken.

Magnifying Glass @ 6:36 AM

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