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Metro Holdings Limited Replies To Activist Investor: What Should Investors Know?

Activist investor Quartz Capital Management had recently called on Metro Holdings Limited (SGX: M01) to return excess cash to shareholders.

As a quick recap, Quartz Capital believes that Metro’s shares are undervalued and had written a letter to the company’s management, listing down the potential reasons for the undervaluation along with the necessary remedies.

On Tuesday, Metro had issued an open letter in response to Quartz Capital. Here are some of the highlights.

On the company’s high cash balance:

“The Company’s current net cash position is a recent occurrence due to the recent divestment of properties over the last one to two financial years.

Over the last 12 months, management has deployed capital to accretive investments, such as the investment in Sheffield Digital Campus in Sheffield, the UK; and the InfraRed NF China Real Estate Fund II (A), L.P.. Both of these investments, as well as Middlewood Locks in Manchester, the UK, require further capital which Metro has committed to provide.

As we have sought to communicate at our AGMs and results briefings, the Property Division, which is the largest of Metro’s business units, is capital intensive.

As an illustration of the large capital investments required, Metro’s net cash position was S$429.8 million as at 30 June 2012, when it proportionally consolidated its joint ventures results. By 31 December 2013, the net cash position had fallen to S$35.6 million as at 31 December 2013 as capital was re-deployed into a few projects. Some of these projects have since been divested and realised.

Since then, Metro’s net cash position has risen to S$479.0 million3 as at 30 June 2016, attributable to the inflow of proceeds from projects, such as EC Mall, Beijing which was divested after attaining maturity with full occupancy and stable rental income.”

On the company’s cash deployment:

“There are available opportunities to reinvest capital and Metro continues to carefully evaluate a pipeline of projects, taking into consideration property cycles across different geographies, as it has done in the past.

Metro expects its net cash levels to decline, as it capitalises on property development and investment opportunities, as and when they materalise. Insufficient cash for potential capital deployment into these opportunities would affect Metro’s ability to build future income streams through recycling the cash.”

On the company’s dividend policy:

“Metro does not have a fixed dividend policy as it would reduce the Company’s flexibility to deploy capital in an effective and opportunistic manner to derive value for shareholders.

Nevertheless, Metro has a good track record of consistently paying dividends to shareholders and strives to manage its capital prudently while having a sustainable dividend payout.

Over the past five financial years, Metro has paid out dividends, including ordinary and special dividends, which totalled S$0.29 per share (or approximately S$240.1 million in total) and represents approximately 31.7% of Metro’s share price as at 3 October 2016. The overall dividend payout ratio has largely been around the 50% mark for four out of the past five financial years.

In FY2016, the S$0.02 per share in ordinary final dividend and S$0.05 per share in special dividend represented a collective dividend yield of 7.4%.”

On the company’s communication to shareholders:

“Metro welcomes Quarz as a shareholder and as with all shareholders, many of whom have been with the Group for a considerable number of years, Quarz is welcome to attend Metro’s Annual General Meetings (“AGMs”).

In addition, Metro also organises results briefings to provide a platform for analysts, fund managers and the media to engage effectively with the management team. The AGMs and results briefings have provided platforms where many of the issues raised in the open letter have been raised and considered.”

A Foolish takeaway

The key message in Metro’s response is that the company has plans to utilise its cash in its property development and investment businesses, which are highly capital intensive and long-term in nature.

In other words, Metro has politely turned down Quartz Capital’s request to return excess cash to shareholders. But whether this letter will satisfy Quartz Capital is yet to be seen.

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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 Lawrence Nga doesn’t own shares in any companies mentioned.