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Isetan (Singapore) Ltd: Value Trap or Value Stock?

Benjamin Graham, author of “The Intelligent Investor” and mentor to Warren Buffet prescribed buying shares that trade below their book values. In theory, investors can make a profit when management divests their assets and returns the cash to shareholders.

But what happens when there is a status quo and management is not able to unlock shareholder value? Case in point is Isetan (Singapore) Ltd (SGX: I15). 

The Japanese department store operator has been trading well below its liquidation value for years.

As of the time of writing, it had a market cap of just over S$215 million. In comparison, as of 30 June 2019, it held S$50.2 million in bonds, S$38.1 million in cash, and owned three investment properties that are collectively valued at S$344.5 million. It also had no debt. In total, these three assets alone totalled S$432.8 million, more than double its current market.

In fact, a quick glance at its historical share price shows that the company has been trading close to or even below $200 million, less than half its liquidation value, for years. So what has caused such a wide gap between its net asset value and its share price?

Management with limited control

Shareholders have been upset with Isetan’s inefficient allocation of capital and the inability to unlock shareholder value. 

When questioned by shareholders if its retail arm should be closed down due to years of losses, Mr Yeo, an independent director of Isetan (Singapore), said that it is not up to the board, even if it “might be a good idea”.

This also reveals the predicament that the board is facing now. Japanese holding company Isetan Mitsukoshi owns 52.73% of Isetan (Singapore) and probably has the final say on major decisions about the company.

Value trap or value stock

Unfortunately, Isetan (Singapore) has been a value trap for retail investors for the past five years. Its inability to divest underperforming assets, poor decisions in purchasing bonds that have provided little financial return, and a retail segment that continues to flail, have exacerbated the issue.

The company’s unwillingness or inability to sell its assets have also not helped its cause. Its stake in Wisma, which was valued at S$290.7 million, only generated S$4.45 million in net profit in 2018, a measly 1.5% return on investment.

Supposing nothing changes, investors may be stuck with a stock that continues to trade at a deep discount to its net asset value for years.

Could a price catalyst be on the cards?

That said, a single catalyst may be all that is needed to finally reward patient shareholders. In recent weeks, rumours have swirled that Starhill Global Real Estate Investment Trust (SGX: P40U) is looking to purchase Isetan (Singapore)’s stake in Wisma Atria.

In fact, Starhill has already sent a non-binding letter of intent to Isetan. Although the outcome is uncertain, if the deal does go through, it could be exactly what is needed to reward shareholders of Isetan (Singapore).

Depending on the deal that is struck, the sale could give Isetan a massive injection of cash of up to S$290.7 million. That alone is more than its current market cap. The board could easily distribute the bulk of that back to shareholders, providing them with a massive payday.

It could also easily reinvest the cash into an investment that provides better bang for its buck. As mentioned earlier, its stake in Wisma only generated a measly 1.5% return in 2018.

Either option will definitely be good news for investors. However, it all depends on whether the two parties can agree on a deal.

Whether the stock is a value trap or a value buy remains to be seen. Ultimately, shareholder’s fates are in the hands of the board and its majority shareholder. 

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.