The 2 sen conundrum for SMG shareholders

Potential gains: The circular to SMG shareholders on the Matang deal.

PETALING JAYA: Star Media Group Bhd (SMG) could have potentially made a substantial profit had the deal with Matang Bhd succeeded.

In the EGM on Wednesday, doubts were sown ahead of the voting process, which meant SMG would miss the opportunity for a potential incremental profit of RM15.6mil or two sen per share, and shareholders would lose the potential for higher dividend.

The resolution in question pertained to the sale of properties to Matang Bhd, which would have seen SMG emerge with a 13% stake in the plantation company.

However, the proposal for the media company to sell two out of five double-storey factories at its newly launched property development project in Shah Alam to Matang for RM33mil did not pass a shareholder vote at the EGM.

This means SMG had temporarily missed an opportunity to profit from a sale from this property project.

During the meeting, the board of Star Media Group Bhd (SMG) answered several questions by shareholder Tan Sri Tong Kooi Ong on the justification to sell the factory units in its main property development project to plantation group Matang.

Tong, who is also owner of media group The Edge Communications Sdn Bhd, began by asking SMG why it agreed for the sale of the properties to be paid primarily in Matang shares.

According to the terms of the deal, the purchase would be satisfied by RM4.1mil in cash while the remainder of the payment worth RM28.9mil would be satisfied in Matang shares.

Labelling the arrangement as “complicated”, Tong said the payment would lead to SMG, an MCA-controlled company, holding 13% equity interest in Matang, which is also controlled by the MCA.

SMG group chief executive officer Alex Yeow, alongside chairman Tan Sri Chor Chee Heung, audit committee chairman Chan Seng Fatt and financial controller Lim Sui Yuan responded to about 40 questions, including those from other shareholders.

According to Yeow, the proposal was a commercial transaction on a “willing buyer, willing seller” basis between two public-listed companies looking to diversify their business streams.

“The payment of all-cash upfront was not an option during negotiations with Matang, which has taken several months to complete. As SMG's intention is to sell factories developed in its project, this transaction would have allowed SMG to simultaneously diversify its income streams, as it enters the plantation industry through investment in an established listed company.

“This transaction via the sale of the two units would help us to achieve our project sale ahead of schedule, and realise the value of our property development business eventually,” Yeow added.

He added that the terms of the transaction allowed for a substantial portion of the payment to be made by Matang upfront, and this was more favourable to SMG compared to a sale to another property buyer, where payments were to be made progressively over the construction of the project.

To Tong’s projection that the only future income stream from the deal would be dividends, to be declared at Matang’s discretion, which would likely earn less than if the disposal consideration was to be all cash and placed in fixed deposits, Yeow noted that the share price of Matang secured for this proposed transaction is 8.09 sen, which is lower than the volume weighted average market price of the last 12 months, six months and three months, and 26% below Matang's net tangible asset per share of 11 sen before any land revaluation.

Incidentally, Tong recently invested in a substantial stake directly and indirectly in SMG shares based on dividend yield less than cash placed in fixed deposit, and at a high price-earnings ratio.

Tong said in a public statement that he saw value in SMG's assets and cash position, as he had bought the shares on a good discount to SMG's net tangible assets.

Yeow, during the Q&A session, noted that the transaction would have seen SMG taking up a substantial stake in Matang at a discounted price, which is viewed as equally attractive as cash proceeds.

He added that the group had strong cash holdings in excess of RM300mil and could undertake a share buyback exercise suggested by Tong if such an appropriate need were to arise in the future.

To Tong’s query on whether the proposal was a veiled financial assistance to Matang, since SMG would have had to finance the construction of these factories, Yeow clarified that this was not financial assistance offered to the plantation group, adding that the payment in the form of shares had been considered of good value by the independent advisors, Alliance Islamic Bank Malaysia Bhd.

“There are no incremental net cash outflows arising from the transaction with Matang, compared to retaining the two units of property. The full cash option therefore is a hypothetical one as there were no immediate buyers for these two factories.

"In fact, there will be a cash inflow of RM4.1mil after the property is delivered to Matang,” he noted.

Through his analysis article and the questions he posted, Tong queried if SMG had considered disposing the raw land that the properties would be built on, as he interpreted that the land sale would have been more profitable than developing the project.

Clarifying the misinterpretation of selling a raw piece of land as being more profitable than monetisation through a planned development, Yeow and his team demonstrated the computation of a projected RM24mil profit from the development of this project, on top of realising the estimated RM33mil mark-to-market gain from the land.

Drawing from his own experience, Yeow shared that any experienced developer would have agreed with this simple computation.

“The group’s intention is to diversify into property development, so executing this maiden project will enhance our capabilities and experience for future projects,” he pointed out.

During the meeting, clarification was also made by financial controller Lim Sui Yuan to Tong’s claim on the high construction cost of the StarHub project versus normal construction cost.

It was pointed out that Tong made a mistake by comparing StarHub's “total development cost” (which comprises construction cost, land cost, marketing cost, consultant cost and other statutory fees) with just “construction cost” from the benchmark he picked up.

By correcting the figure and using Tong’s same reference, the construction cost of StarHub was consistent with the industry norm.

Tong had previously publicly stated his intention, through his direct or indirect holding of about 39 million SMG shares, to reject the Matang deal.

"I intend to vote against the resolution on the proposed disposal," he wrote in a May 29, 2023, article published in The Edge Malaysia.

Given the total voting shares presence, the total minority shares were only slightly more than 20 million shares.

“Essentially, this means Tong alone determined the outcome of the meeting regardless of how others voted,” said one source.

Chee Sai Mun, a shareholder who regularly attends SMG's AGMs, said: “Thanks for Star’s clarifications. I like to point out that if Star had given more information to support the acquisition, there would probably be less controversy from shareholders, especially Tong Kooi Ong as the deal is beneficial to the shareholders.”

The source opined that Tong's article on rejecting the resolution may well have cost SMG shareholders the opportunity to enjoy additional two sen per share of profit, and potentially more dividends.

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