Singapore’s stock market is becoming infamous for its persistently low valuations. The Singapore stock market as a whole trades at a lower price-to-book ratio and price-to-earnings ratio than its regional peers.
On top of that, even local companies such as Razer Inc and Sea Ltd are choosing to list in other markets as they seek higher public valuations and to gain greater awareness for their companies.
Getting to the root of the problem
One of the big reasons some companies are suffering from persistently low valuations is the lack of investor interest. This has resulted in some companies trading well below their book values. From my observations, a company’s market cap tends to be more closely tied to its dividend, rather than its book value.
Another big problem is that many locally-listed companies have great operators at the helm, but they may not be great capital allocators. This means although the managers are running their companies well, they are not able to truly unlock shareholder value with the resources they have.
For instance, many locally-listed companies that are cash-flow positive and have robust net cash positions are trading at unreasonably low valuations. This is because managers are willing to let the cash build up in the company’s bank accounts. Much of this cash becomes excess to requirements, and yet managers are unwilling or unsure of the best way to use it.
This is one of the big reasons some companies, even with so much cash on their books, end up trading below their book values or have an unreasonably low EV-to-EBITDA multiple. Because of this, the Singapore market is becoming a hotbed for privatisation deals as institutional investors seek to unlock companies’ true potential.
What can retail investors do?
Unfortunately, retail investors have little influence over management decisions or unlocking shareholder value. We simply have to wait for a catalyst such as a privatisation offer or management finally deciding to put the capital to use (or sell some of the company’s underperforming assets).
For instance, a company like VICOM Limited (SGX: V01), which has been consistently generating a steady amount of cash each year, has seen a stagnant share price performance for numerous years. Only when the company decided to progressively increase its dividend payout ratio did shareholders finally see a reasonable return on their investment.
Making a difference
This is where activist investors such as institutional investors can make a world of a difference. Activist investors could urge companies to put their capital to more efficient use to unlock shareholder value. Instead of letting its cash accrue minimal interest in the banks, non-operating cash reserves can either be used for expansion, share buybacks, or paying shareholders directly through dividends.
Value investors in Singapore have not been getting the returns you would expect from buying cash-rich, cash-flow-generative companies for single-digit EV-to-EBITDA multiples. Things need to change. Activist investors should see Singapore as the perfect place to unlock value by making the changes to capital decisions and unlocking shareholder value.
This is a plea for help. Singapore desperately needs activist investors to make a change and for managers to finally unlock shareholder value.
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. The Motley Fool Singapore recommends VICOM Ltd.