The Importance of Insider Ownership

BoardroomI was going through value investor Chris Mayer’s presentation slides (link opens file to a PDF) at the 8th Annual Spring Value Investing Congress held in May 2013 in the USA when a particular slide caught my eye.

It quoted a study by Horizon Kinetics, published on the Wall Street Journal that found “an index composed of companies whose wealthy insiders hold substantial stakes… has beaten the S&P 500 by 2.7% annually on average over the past 20 years.”

This makes the level of insider ownership an interesting area for investors to consider when investing.

Intuitively, it’s not hard to grasp the idea that insiders and management who have high stakes in the companies they run could help to align their interests with that of minority shareholders. In other words, high ownership stakes gives insiders and management significant skin in the game.

Mayer went on to cite several more studies done on Western stock markets on the stock-price returns of companies that have management who hold high ownership stakes and found that in aggregate, “owner-operators win.”

In Singapore, there are quite a number of companies who have high insider ownership stakes that have done very well against the market over the long-term.

Super Group (SGX: S10), Japan Foods Holding (SGX: 5OI), and Kingsmen Creatives (SGX: 5MZ) are three examples of companies that have competent owner-operators who have helped deliver excellent corporate results and in turn, helped drive stellar share price returns.

That puts some weight behind the notion that the results of the studies that Mayer cites aren’t just a Western phenomenon.

Instant beverage manufacturer Super Group’s share price has gone up almost 600% to S$4.79  in the last five years ending 7 August 2013, leaving the Straits Times Index’s (SGX: ^STI) 15% return in the dust.

Teo Kee Bock and his wife Te Lay Hoon are both among the founding members of the company and as of 12 March 2013, together own almost a quarter of Super Group. Teo currently serves as the chairman and managing director of the company while Te is an executive director.

Under Teo’s leadership, Super Group has seen its sales grow by more than 70% from S$300m in 2008 to S$519m in 2012 while profits almost tripled from S$25m to S$79m.

Furthermore, the company has operated very prudently for a good number of years, carrying negligible debt in relation to the level of cash since at least 2004.

Japan Foods Holding, a Japanese ramen-restaurant operator, has been a market-beater since its IPO on Feb 2009 at a split-adjusted price of S$0.167 per share. Today, shares of the company trade at around S$0.80 apiece, representing a gain of 380%. In comparison, the STI has only managed to double since the company’s IPO date.

The company was founded in 1997 by Takashi Kenichi who is still running the show today. He is both the executive chairman and chief executive officer of Japan Foods and owns two-thirds of the company as of 10 June 2013.

Over its last five completed financial years, Japan Foods’ sales have almost doubled from S$33.5m to S$61.3m. Meanwhile, profits have increased by some 140% from S$2.7m to S$6.4m.

Japan Foods has had a very conservative balance sheet since it was first listed on the stock market. Its first annual report since its flotation saw it carry a total debt-load of S$1.5m while having cash of S$4.5m. This has since improved to a situation where the company is debt-free and has a cash hoard of S$16.7m.

Kingsmen Creatives’ founders are still very much involved with its business after the company’s founding 37 years ago. Its co-founders, Benedict Soh and Simon Ong, still hold the title of executive chairman and group managing director respectively.

Both men have substantial stakes in Kingsmen and together, control almost half the company.

Kingsmen’s main interests lie in the design, manufacture and setting up of installations for theme parks, museums, exhibitions, and retail stores etc…

From 2008 to 2012, the company’s top line has increased by more than 50% from S$189m to S$290m while profits have climbed steadily by 19% from S$14m to S$17m.

In a similar trait to Super and Japan Foods, Kingsmen is another company that has a good history of a healthy balance sheet. In its past five completed financial years, the company’s total-debt as a percentage of its cash balance has never exceeded 18%. Its latest financial statements, for the first quarter of 2013, saw it carry S$4.3m worth of debt and S$53.6m of cash.

Over the past 60 months ended 7 August 2013, Kingsmen’s shares have gained 115% to S$0.88, way ahead of the STI’s 15% return.

Foolish Bottom Line

It will never be the case where an investment into a company with high insider ownership would guarantee a winning investment. But finding an owner-operator would in all likelihood, help increase the chances of finding great investments.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing owns shares in Super Group, Kingsmen Creatives, and Japan Foods Holding.