BRC Asia

[weijian]

Trigger mandatory offer. PR was sent out on Friday night and as usual, its trading earlier in the day made it the "most active counter" - seems like so news leak.

MANDATORY CONDITIONAL CASH OFFER

The Offeror has on 8 September 2017 acquired an aggregate 81,552,151 Shares from Lingco Marine Pte. Ltd., Lingco Holdings Pte. Ltd., Mr. Seah Kiin Peng, Sin Teck Guan (Pte) Ltd. and Mr. Lim Siak Meng at S$0.925 per Share ("Acquisition"), representing 43.77% of the total number of issued Shares.

http://infopub.sgx.com/FileOpen/Offer%20...eID=470139

http://www.straitstimes.com/business/brc...ts-a-share

[Debronic]

I think this takeover could end up being an interesting case study for investors and something that the company and SGX can take a closer look at. 

Coincidentally, I was looking at the unusual spike in BRC’s trading volume right at the close of market yesterday and observed that this was largely due to a big block of 81.6m shares being traded off the market at 4:52pm. This block was eventually revealed to be the shares sold by Lingco, Seah Kiin Peng, Sin Teck Guan and Lim Siak Meng, which subsequently triggered the said GO.

Now, my concern is not so much on possible leakage. The trading data does not seem to indicate this as only about 1m shares were traded in the region of 83cts (takeover is at 92.5ct) for almost the entire day before the large block of off-market shares were recorded with a further 2m+ shares traded in the 13 minutes before the market closed. Instead, it is the timing of the transaction and the fact that the company continued to allow trading after the block trade was recorded that I am concerned with.
Since the sale directly involved 4 out of the 7 directors on BRC’s board, namely Sia Ling Sing (Lingco), Seah Kiin Peng, Lim Siak Meng and Lau Eng Tiong (Sin Teck Guan), it is safe to say the board was fully aware of what was going on. So why were the shares not halted either before the transaction was disclosed or at the very least, immediately after the transaction was disclosed?

Given that the block made up more than 40% of all outstanding shares, the transaction should immediately have triggered a GO. Were the sellers of the 2m+ shares between 4:52pm and market close aware that a GO had been triggered? If not, shouldn’t they feel aggrieved that they at least should have been notified by the company or directors of the GO before they had their transactions executed?

IMO, there is probably a case to be made for all the trades involving the 2m+ shares to be voided as the sellers were likely not aware that a GO had been triggered at 92.5 cts as evidenced by the trades being conducted at between 83 cts and 86 cts. 

Anyway, I am not suggesting that there is breach of rules of any sorts here but clearly there are some intriguing questions that need to be answered here.

[lanoitar]

Given that the block made up more than 40% of all outstanding shares, the transaction should immediately have triggered a GO... IMO, there is probably a case to be made for all the trades involving the 2m+ shares to be voided as the sellers were likely not aware that a GO had been triggered...

Good observations! But at 4:52pm:

1. How do we know that there's a change of beneficiary owner in this transaction? It could be a left-hand to right-hand transfer.

2. There were multiple sellers in this transaction. Can we assume (at 4:52pm) that there's only 1 buyer? If there are multiple buyers, isn't there a chance that they'll each own < 30% trigger for MGO?

[Debronic]

Hi lanoitar, if you click on weijian's links, you will be able to read the GO announcement. Within, it is clearly stated that the offeror acquired 81.6 m shares from the various parties. Since only one such block was transacted on 8 Sep, it is rather conclusive that it is the same one that triggered the MGO. Furthermore, I am pretty sure that a transaction that does not involve a change in beneficial ownership, such as transferring directly-owned shares into a trust account, will not be reflected as an off market trade.

[Debronic]

I think this takeover could end up being an interesting case study for investors and something that the company and SGX can take a closer look at. 

Coincidentally, I was looking at the unusual spike in BRC’s trading volume right at the close of market yesterday and observed that this was largely due to a big block of 81.6m shares being traded off the market at 4:52pm. This block was eventually revealed to be the shares sold by Lingco, Seah Kiin Peng, Sin Teck Guan and Lim Siak Meng, which subsequently triggered the said GO.

Now, my concern is not so much on possible leakage. The trading data does not seem to indicate this as only about 1m shares were traded in the region of 83cts (takeover is at 92.5ct) for almost the entire day before the large block of off-market shares were recorded with a further 2m+ shares traded in the 13 minutes before the market closed. Instead, it is the timing of the transaction and the fact that the company continued to allow trading after the block trade was recorded that I am concerned with.
Since the sale directly involved 4 out of the 7 directors on BRC’s board, namely Sia Ling Sing (Lingco), Seah Kiin Peng, Lim Siak Meng and Lau Eng Tiong (Sin Teck Guan), it is safe to say the board was fully aware of what was going on. So why were the shares not halted either before the transaction was disclosed or at the very least, immediately after the transaction was disclosed?

Given that the block made up more than 40% of all outstanding shares, the transaction should immediately have triggered a GO. Were the sellers of the 2m+ shares between 4:52pm and market close aware that a GO had been triggered? If not, shouldn’t they feel aggrieved that they at least should have been notified by the company or directors of the GO before they had their transactions executed?

IMO, there is probably a case to be made for all the trades involving the 2m+ shares to be voided as the sellers were likely not aware that a GO had been triggered at 92.5 cts as evidenced by the trades being conducted at between 83 cts and 86 cts. 

Anyway, I am not suggesting that there is breach of rules of any sorts here but clearly there are some intriguing questions that need to be answered here.

Business Times article by Mak Yuen Teen on 19 Oct 17 basically pointing out, among other cases, the same thing as I have mentioned in this previous post. I still hope SGX takes a closer look at this case in the interest of fairness to those affected shareholders. 

===========================
By MAK YUEN TEEN,CHEW YI HONG

SINGAPORE'S stock exchange operates under a disclosure-based regime premised on the principle that, in general, informed investors can protect themselves. In such a regime, the principal function of the Singapore Exchange (SGX) is to provide a fair, orderly and efficient market for the trading of securities. It is important for existing and would-be investors to be informed on an equal and timely basis.

Consequently, strict rules for continuous disclosure have been put in place for SGX-listed issuers. Rule 702 of the SGX Rulebook states that issuers must release all announcements on SGXNET, unless specified otherwise. Rule 703(1) states that an issuer must announce any information known to the issuer concerning it or any of its subsidiaries or associated companies which is necessary to avoid the establishment of a false market in the issuer's securities or would be likely to materially affect the price or value of its securities. Rule 703(2) exempts information from disclosure if it would be a breach of law to disclose. Rule 703(3) also exempts information from disclosure if a reasonable person would not expect the information to be disclosed and the information is confidential, plus one or more of the following applies: (a) the information concerns an incomplete proposal or negotiation; (b) the information comprises matters of supposition or is insufficiently definite to warrant disclosure; © the information is generated for the internal management purposes of the entity; (d) the information is a trade secret.

Issuers are also required to ensure that their directors and executive officers are familiar with the SGX's disclosure requirements and Corporate Disclosure Policy (discussed below). It is also made clear that the SGX will not waive any requirements under Rule 703.

In addition to Rule 703, Rule 704 requires the immediate disclosure of certain specific information, such as appointment or cessation of directors and certain key officers and the convening of general meetings.

Issuers must also comply with the Corporate Disclosure Policy in Appendix 7.1, which provides additional guidance on the application of the continuous disclosure obligation. It states that the fact that information is generally available is not a reason for failing to disclose under Rule 703. Appendix 7.1 also contains a non-exhaustive list of items that "are likely to require immediate disclosure", including, for example, firm evidence of significant improvement or deterioration in near-term earnings prospects; the acquisition or loss of a significant contract; the purchase or sale of a significant asset; and a change in effective control or a significant change in management.

Appendix 7.1 further states that "material information must be disclosed when it arises, even if during trading hours". Issuers are expected to request a trading halt to facilitate the dissemination of the material information during trading hours and as a guide, such a trading halt "will last at least half an hour after the release of the material information, or such other period as the Exchange considers it appropriate".

The continuous disclosure obligation in the SGX Rulebook is given statutory backing through Section 203 of the Securities and Futures Act (SFA). Under the SFA, an issuer (or a trustee for a business trust or responsible person for a collective investment scheme) is required to notify the SGX on specified events or matters as they occur or arise in order for the SGX to make that information available to the market. An issuer will be liable if the failure to notify is intentional, reckless or due to negligence.

Despite the strict rules in place, it seems that it is still relatively common for issuers to not disclose material events on a timely basis on SGX. In a recent commentary, we cited examples such as Sinocloud (formerly Armada), Swiber and YuuZoo (Scrapping quarterly reporting a bad move, BT, August 16). Over the last few months, several other issuers have arguably not disclosed material information on a timely basis.

Chasen

On Mar 23 at 7.36 pm, Chasen announced that it had bought back 200,000 shares at S$0.049 earlier that day. About three minutes later, it announced that it had secured projects worth up to RMB245 million (about S$50 million). At the close of trading earlier that day, it had a market capitalisation of about S$16 million. The company said: "Barring unforeseen circumstances, it is expected that the projects will have a positive contribution to the financial result of the Group for the financial years ending 31 March in 2017 and 2018." Yet, it conducted a share buyback on the same day and prior to the announcement of the new projects. This was its first share buyback since the current mandate was obtained.

The following day, the share price increased to S$0.071 (compared to its buyback price of S$0.049 the previous day) and reached S$0.139 within eight trading days. It is highly improbable that the company would not have been aware of the projects when it bought back those shares, in which case it would have done so while in possession of material price-sensitive information.

BRC Asia

On Sep 8, a block of 81.55 million BRC Asia shares was transacted at 4.52 pm. A further 121 trades amounting to 2.07 million shares were carried out for the rest of the trading day. At 8.16 pm that day, the company announced a mandatory general offer for all the other shares at S$0.925 per share, as an offeror had acquired an aggregate 81.55 million shares, or 43.77 per cent of the issued shares from four of the seven directors of BRC Asia (both directly from the directors, or indirectly from companies that the directors control).

Since four out of the seven directors were the ones who sold a 43.77 per cent stake to the offeror, were they not aware that a mandatory general offer had been triggered? In fact, according to the Corporate Disclosure Policy in Appendix 7.1, information concerning a significant change in ownership of the issuer's securities owned by insiders and a change in effective or voting control of the issuer are explicitly listed as examples of material information that are likely to require timely disclosure. Shouldn't the directors have called for a trading halt, even if it was less than 30 minutes before the close of trading?

For the 2.07 million shares that were transacted at between S$0.83 and S$0.865 after the general offer was triggered, weren't the selling shareholders disadvantaged?

ASTI

On Sep 19 at 4.14 pm, ASTI announced that the company had on Aug 29 entered into a non-binding term sheet to dispose its five wholly-owned subsidiaries for a consideration of between S$105 to S$115 million. The market capitalisation based on the previous close of S$0.052 was S$34 million.

While the company had done a commendable job in preventing leaks to the market (as observed by the stagnant price over the past month), investors must wonder if this should have been announced on Aug 29.

Also, what made the company notify the market on Sep 19 at 4:14 pm without halting the trading of shares? During the next 50 minutes, 580 trades were carried out from S$0.053 to S$0.08. The majority of the trades before the pre-close were bought from sellers while all the trades at settlement (5.04pm) were sold to buyers. This suggests that traders who picked up the news were in it for a quick buck and that for 50 minutes after the announcement, possibly a small group of the day traders were able, through no fault of their own, to take advantage of a market that was arguably not fair, not orderly and not efficient at that time. Surely the purpose of the SGX's trading halt is precisely to prevent such a situation.

Koh Brothers Eco Engineering

On Sep 8, the Land Transport Authority awarded a contract worth S$225.4 million to Koh Brothers Eco Engineering (KBEE). At that time, KBEE's market capitalisation was about S$58 million. The company did not announce on the SGX until after the close of trading on Sep 25. KBEE's share price increased by 13 per cent the following day. Its parent company, Koh Brothers Group (KBG), which owns about 65 per cent of KBEE, has been buying back its own shares, including on Sep 22. Since KBG has been making sporadic buybacks, both before Sep 8 and after Sep 25, we do not see KBG as being opportunistic in its buyback on Sep 22. Nevertheless, we would question why KBEE took more than two weeks to announce the award of such a major contract.

About a week later on Sep 28, KBEE once again announced another contract win of S$520 million from PUB after the market had closed. Following the announcement, the share price of KBEE increased by about 50 per cent the next day, to a high of S$0.128 from the previous close of S$0.084.

While the market reacted to the "news", it was actually old news. PUB had announced and the local media had picked up on the award of the contract on Sep 11, although without mention of the contract value. However, the government's Gebiz website shows the awarded value of S$520 million. The joint venture partner disclosed the figure on their corporate website on Sep 14.

KBG had continued to buy back its own shares on Sep 26, 27 and 28 - a total of 310,100 shares at an average price of S$0.31.

Issuers should be educated about their continuous disclosure obligations. SGX may also need to improve its monitoring of issuers' compliance. Enforcement action should be taken for issuers that continue to flout the rules. Ignorance and negligence have no place in a disclosure-based regime. Otherwise, ordinary investors will not see a level playing field and this will ultimately harm investors' confidence in the integrity of our market.

The writers are, respectively, an associate professor at the NUS Business School specialising in corporate governance, and an active investor and corporate governance researcher

Issuers should be educated about their continuous disclosure obligations ... Ignorance and negligence have no place in a disclosure-based regime. Otherwise, ordinary investors will not see a level playing field and this will ultimately harm investors' confidence in the integrity of our market.

[specuvestor]

Disclosure based regime basically mean "have to complain so it will be looked at"

No point trying to say SGX surveillance didn't work cause frankly they can't look at so many things. They already automated the abnormal share price movement but until they have AI to monitor announcements....

[Debronic]

While the article and the four examples quoted within (a couple of which, incidentally, I had also noted prior to this article) are mainly about companies' failure to make timely disclosures of material information, my opinion is that BRC's case is especially serious as in addition to the SGX rule books, it also involves a possible breach(?) of the takeover code, which is regulated by MAS. 

Section 6 of the takeover code expressly spells out certain responsibilities of directors in an instance of a takeover, one of which governs the sale of shares by directors:

6 DIRECTORS' RESPONSIBILITIES

6.4 Sale of shares by directors: Where directors (and their close relatives, related trusts and companies controlled by such directors, close relatives and related trusts) or shareholders or groups of shareholders acting collectively holding effective control, whether represented on the board or not, sell shares to a purchaser, as a result of which the purchaser is required to make an offer under Rule 14, the vendors must ensure that as a condition of the sale the purchaser undertakes to fulfill his obligations under Rule 14.

Further, rule 14 specifically mentions that:

14.1 When mandatory offers are triggered 

Except with the Council’s consent, where:- 

(a) any person acquires whether by a series of transactions over a period of time or not, shares which (taken together with shares held or acquired by persons acting in concert with him) carry 30% or more of the voting rights of a company; or 

(b) any person who, together with persons acting in concert with him, holds not less than 30% but not more than 50% of the voting rights and such person, or any person acting in concert with him, acquires in any period of 6 months additional shares carrying more than 1% of the voting rights, 

such person must extend offers immediately, on the basis set out in this Rule, to the holders of any class of share capital of the company which carries votes and in which such person, or persons acting in concert with him, hold shares. In addition to such person, each of the principal members of the group of persons acting in concert with him may, according to the circumstances of the case, have the obligation to extend an offer. 

===========

From the above, I can think of a few questions which are of particular interest:

1) Did the selling directors ensure as a condition of their sale that the buyer makes a general offer immediately as required under rule 14 of the code?
2) How immediate is "immediately"? Did announcing the offer only after market close qualify as "immediately" even though the sale took place 13 minutes prior to the end of the trading day and trading was not halted? 
3) If the answer to the second part of 2) is yes, then where do we draw the line when it comes to the delay in announcing an offer? Would a 30 minute delay during which many more millions and in some cases, even billions of shares could have been traded also qualify as immediate?
4) Are there any recourse for selling shareholders who were disadvantaged financially in this instance?

Would be interesting to see how SGX and or MAS handles this, even if I was not personally affected by it.

[weijian]

BRC Asia, or to an extent the entire Spore construction industry has a "lost (half) decade" in the 2nd half of 2010s.

In the lead up to covid, a series of events were triggered - First, 4-5 majority Mgt/shareholders decided to sell out to a new SSH from China in 2017. The continued downturn then accumulated in the 2018 acquisition of Lee Metal (or we can say combination of almost 2 equal companies) to double mfg capacity and hopefully squeeze out efficiencies from bigger scale.

BRC Asia's balance sheet
- Gearing doubled with the move to acquire Lee Metal and assuming its debt. Accounting for Lee Metal's debt, total EV was ~300mil with >75% of the all-cash 200mil offer funded by borrowings. The remaining was funded by equity fund raising.
- With Spore construction industry's cut short by Covid19 and then re-starting after the circuit breakers, inventories shot up with both orderbook and steel prices increasing.

- With the sharp upturn in interest rates, Mgt has taken the prudent stand to reduce the inventories and using some of the FCF to pare down its loans.

- Nonetheless, this business is a very working capital intensive business. Working capital (inventories + receivables - payables) need is ~120% of equity, followed by cash ~40% of equity, PPE at 30% of equity = 190% equity is balanced out by 90% gearing.

BRC Asia's business
- An interesting aspect would be its frequent "recognition of onerous contracts" whenever steel prices exceed contract revenue. The recognition almost seemed to be done on a frequent basis as below:
(a) Recorded 45mil of onerous contract costs in FY21 but reversed 36mil in FY22/23.
(b) In FY18/17, it recognized 19mil but reversed 19mil in FY19/20.

In general, the revision is coming from lower steel prices and is a frequent appearance in the financials. Hence GPMs fluctuate, profits fluctuate and taking on this mismatch between raw material and product seems like part of its business model. Based on 1 of the AGM Q&A, fixed contracts and variable price contracts are 50-50.

- Before Lee Metal acquisition, EPS was avg ~5cents (4 years from FY15-18). Post acquisition, it has jumped to avg ~15cents (3 years from FY19-21). The last FY22/23 had EPS~30cents. Post Covid and the consolidation of the precast steel industry seem to have driven the business to new heights.

BRC Asia's structure
- The top6 Mgt personnel took home ~11mil in salaries in a good year like FY22 (or ~12% of profit) but their ownership stakes are negligible. Mgt's skin in the game is minimal.

- There are 2 SSH - (1) You Zhenhua (take-over in 2017) at 61% and (2) HongLeongAsia (becoming SSH in FY21 through vendor sales/equity fund raising) at 20%. The latter HLA has a pre-cast concrete division and so there looks to be potential synergies for the future. SSH You does some sales to BRC Asia from China. In essence, both SSHs' business dealings with BRC Asia are currently considered minimal wrt to the annual revenue it records. Maybe due to the 2017 take-over, BRC Asia has been declaring pretty decent dividends in the last few years of construction boom. OPMIs are benefiting from it.

[weijian]

BCA has released their construction demand for 2023 and beyond. With the heightened safety measures that ended on 31st May2023, it seems like 2023 has blown past the estimates at the start of the year, and recovered to precovid-19 levels of 2019. 2019 was also the year where construction recovered in Spore and blown past its then estimates.

BCA's earlier forecast for 2023 was 27-32bil and preliminary estimate came in at 33.8bil instead For context, actual demand for previous years: 2022: 29.8bil, 2021: 29.9bil, 2020: 21.3bil, 2019: 33.5bil. Since these are values, 2023 actual activity probably did not return to 2019 as inflation helped.

In the coming few years, BCA have also revised their forecast by ~+25% compared to last year's.

Jan2023: Over the medium-term, BCA expects the total construction demand to reach between $25 billion and $32 billion per year from 2024 to 2027.
Jan2024: BCA expects a steady improvement in construction demand over the medium term. It is projected to reach between S$31 billion and S$38 billion per year from 2025 to 2028.

BCA media release for 2024: https://www1.bca.gov.sg/about-us/news-an...d-for-2024

BRC Asia Chairman Teo (looking good and getting away from politics must have done wonders) also gave a very optimistic forecast as below:

Heading into the new year, we are optimistic about the growth trajectory of the Group based on favourable circumstances both internally and externally.

From an industry perspective, we are similarly upbeat with tailwinds seemingly outweighing headwinds at the time of writing. As operational bottlenecks are being resolved, coupled with the fact that more construction projects are expected to be rolled out in 2024, particularly by the government, we are well poised to capitalise on the recovery trajectory to build on our already substantial order book.

BRC Asia AR24: https://links.sgx.com/FileOpen/BRC_Annua...eID=782802

With all these favorable forecasts, would the "lost half decade" of the 2010s could be turning into a "hope decade" in the coming 2020s for all the construction companies in Spore?

[weijian]

The capital cycle is real. It can be a tailwind or headwind and OPMIs might be better off positioning themselves accordingly. Personally, I am the buy-and-hold kind but years of experience has informed me multiple times that it is probably better to be underweight the company when capex is a headwind (you are investing for the future). And it is better to overweight the company when capex is a tailwind (investment has been completed in prior years and a conservative Mgt tends to over depreciate).

BRC Asia looks to have more tailwinds in the next few years with regards to its CAPEX spending.

My notes on CAPEX vs depreciation over last 9 years:
- CAPEX+lease payment (FY23-15): 9.4mil (FY23), 8.5mil, 7.4mil, 7.9mil, 5.4mil, 29.3mil (FY18), 22mil, 11.7mil, 12mil (FY15)
- Depreciation PPE (FY23-15): 18.4mil (FY23), 17.7mil, 17.9mil, 18.9mil, 15.9mil, 10.8mil (FY18), 7.6mil, 6.6mil, 5.9mil (FY15)

Question For the past few years, the amount spent on new purchase PPE has been much less than the depreciation on PPE. Is it because the nature of the industry is such that the company only requires minimal CAPEX to maintain our competitiveness?

Ans: To stay ahead of competition, the Company operates using state-of-the art machinery and equipment. With a good maintenance program, such machinery and equipment are built to last for at least 10 to 15 years. Prior to the acquisition of Lee Metal Group Ltd (“Lee Metal”), the Company embarked on a major overhaul of its machinery and equipment from 2010 to 2015. With the acquisition and merger of Lee Metal into the Group in 2018/19, a substantial number of relatively new machinery and equipment was added. Be that as it may, the Group has always endeavoured to stay at the forefront of this industry by adopting the latest technological and automation advances.

https://links.sgx.com/FileOpen/Response%...eID=783589