Commentary: Time to make it listed firms’ business to tackle undervalued shares to revive S’pore’s stock market

Date: April 11, 2024

First published in Straits Times on 11 April 2024

Calls to revive interest in local stocks have been growing in frequency over the past few years, stretching back to 2015, when 1,225 remisiers signed a letter of appeal written by the Society of Remisiers (SOR) to then Finance Minister Tharman Shanmugaratnam for urgent measures to restore confidence in Singapore equities.

Since then, Bloomberg news agency in 2019 described the Singapore market as “incredibly shrinking”, while in 2021, the South China Morning Post said the bourse’s “zombie” condition was undermining the Republic’s reputation as a financial hub, and perhaps more of a worry, added that the condition may be irreversible.

To its credit, the Singapore Exchange (SGX) responded by amending its listing rules to allow the entry of dual-class share companies and special purpose acquisition companies (Spacs). Other initiatives include extending trading hours and the appointment of market makers.

However, the SOR earlier this year revisited its 2015 call for measures to “bring back the market’s glory days”.

Among the recommendations SOR made was to go for a “Big Bang’’, that is, to list large government-linked companies such as PSA International and Changi Airport Group. This is in the hope that the move would spark domestic interest in stocks as did the October 1993 listing of Singtel that not only gave Singaporeans a stake in the stock market but also triggered a “super bull run”.

The Singapore market performed admirably in the decade or so after Singtel went public but after the Straits Times Index reached an all-time high of around 3,907 in 2007, it has since floundered.

Today, it is estimated that of the 600-plus listed companies, less than a third trade above their book values, while, in comparison, more than 90 per cent of the S&P 500 trades above 1 time price/book value (P/BV).

Persistent undervaluation and the absence of meaningful liquidity has seen the delisting of dozens of good-quality companies over the past 10 years, often at sizeable discounts to fair value. This has understandably undermined confidence, prompting investors to look elsewhere for better opportunities.

What can be done? The Securities Investors Association (Singapore), or Sias, a shareholder activist group, believes that the problem has persisted long enough and agrees that it is time for everyone to take the bull by its horns (no pun intended) and to address the issue head-on with Sias’ three-pronged approach.

1. Take immediate steps to restore investor confidence

In conversations with brokers, loss of confidence is often cited as a key reason for the market’s lethargy.

Retail investors are looking elsewhere after repeated blows. It started with the collapse of Clob International in the late 1990s, when Kuala Lumpur action to end trading of Malaysian shares on the Clob platform. This was followed immediately after by the S-Chip debacle between 2000 and 2010, when the entire sector containing China companies crashed because of serious infractions of governance breaches and criminal offences. Then there was 2013’s penny stock crash, when the regulatory authorities here intervened in the trading of three manipulated counters, resulting in a crash which wiped off $8 billion in market capitalisation.

The immediate priority should therefore be to address this issue. A proposal by SOR in 2022 to set up an ombudsman office to help retail investors seek recourse to investments that have failed through fraud or other possibly criminal actions would be a useful first step, as would swifter, sterner disciplinary action against errant directors.

In this connection, it is vital to raise the quality of directors to add confidence in boards. Sias earlier this year recommended that the requirements to be a company director be tightened by requiring all new directors to be accredited by the Singapore Institute of Directors, something which is presently not the case.

Doing so will not guarantee that companies would be better run, but it would mean that boards at the very least possess the minimum qualifications and expertise to serve their shareholders properly.

2. Make listed companies take action if their shares trade below book value

One reason for investor unhappiness is that companies are being delisted at significant discounts to book value. When Sias challenges the initial prices, some companies respond with only a meagre upward revision, even though they could well afford a reasonably acceptable premium.

Take for instance the privatisation offer by Isetan, where the offer price of $7.20 is a very generous 153.5 per cent premium over the counter’s last closing market price of $2.84 on March 28 prior to its announcement. In contrast, most other privatisation offers are at much smaller premiums over market prices, much to the disappointment of the minority shareholders.

The main reason why small shareholders accept lowball offers is the fear of ending up owning shares in an unlisted company. Instead of having this fear, minority shareholders should understand that they have the right to reject lowball offers and demand better prices.

In order to raise the confidence of small investors, one only needs to look to Japan for appropriate measures. In January 2023, the Tokyo Stock Exchange (TSE) issued a report, “Summary of Discussions on Measures to Improve the Effectiveness of the Market Restructuring”, in which it correctly identified listed companies themselves as being primarily responsible for whether their shares are properly priced.

The report stated that at the time, about half of listed companies traded below 1 time P/BV, which then led to a new requirement for all firms whose shares persistently traded for below their book values to disclose measures they would be taking to address this undervaluation and to provide annual updates.

Another country whose authorities are looking to address persistent undervaluation is South Korea, where two-thirds of companies trade for less than 1 time P/BV, a phenomenon known as the “Korea discount”.

In February 2024, South Korea’s Financial Services Commission – obviously taking the cue from Japan – provided details of its “Corporate Value-up Programme”, which aims to prioritise shareholder returns through incentives, including tax benefits, and “encourage listed companies to voluntarily set up and disclose valuation enhancement plans”.

As far as South Korea is concerned, it is still too early to judge the effectiveness of the initiative, but in Japan, the measures have clearly been a spectacular success given the massive recovery in Japanese stocks over the past year.

Clearly, the local market would benefit from similar initiatives.

3. List large GLCs – and study the feasibility of GIC investing locally

Sias recommends the creation of a joint task force, possibly named a market strategy committee, to provide a multi-faceted approach to the issue of how to revive interest in Singapore stocks.

Members of this body should, at a minimum, comprise representatives from the Monetary Authority of Singapore, SGX, SOR, the Securities Association of Singapore and Sias.

Apart from distilling the best of the measures adopted in Japan and South Korea for implementation here, other possible areas for study are the feasibility of not just listing large GLCs but also the sovereign wealth fund GIC investing in local companies, which is currently not the case.

If this were to occur, confidence and liquidity would surely improve, points that were made when the suggestion was first made back in 2016 by the Singapore Business Federation. Although at the time it received widespread support from the business and broking community, nothing further has been heard since.

Sias to ask about firms’ actions over undervalued shares

Sias, on its part, is studying the possibility of introducing a fourth question to its current “Three Questions’’, which are sent to hundreds of listed companies for them to answer before their annual general meetings (AGMs).

The original three questions focused on the recipient’s financials, corporate strategy and governance, the answers to which have proven tremendously useful to all shareholders, not just those who subsequently attended the AGMs.

Sias’ hope that is that the fourth question will target mainly companies whose shares trade below book values and will focus on steps managements and boards are planning to take to address this undervaluation.

Just as in the case of the Three Questions, answers to the Four Questions would be published either on company websites, or on SGX, or both.

If the above suggestions are favourably considered, it is Sias’ view that they will have an impact and should go some distance in reviving interest in the local market.

  • The writer is Mr David Gerald, Founder, President and CEO of the Securities Investors Association (Singapore)