Metro Holdings’ Reply to Quarz Capital Management

I was really honored when the guys at NextInsight contacted me a week or so ago, asking if they can republish my post (Metro Holdings – Why I think Management Will Not Accede To Activist Shareholder Quarz Capital Management’s Demands) on their site.

They also asked if they can republish my Dutech post as well, although that’s written quite some time ago:

It is an honor because IMO, NextInsight is kinda like the Channel NewsAsia for the investing community. I visit the site daily for the latest news updates/opinions/reports. Serious stuff for the serious investor., which is another site I visit religiously, is kinda like the Facebook for serious investors. I go there to have a feel of the general sentiment, and there are some contributors there with good views and opinions.

45) metrologo 01062016

Anyway, last week, Metro released a public statement in reply to Quarz Capital’s open letter a few days earlier. (I found that out from NextInsight. See what I mean?)

Basically, it’s an almost point-by-point exact replica of the points that I’ve mentioned in my post. Here, judge it yourself:


Metro Holdings – Why I think Management Will Not Accede To Activist Shareholder Quarz Capital Management’s Demands

The only difference is that I have the luxury of word space to give specific details referencing the data and my past experience and in depth knowledge of the workings of the company.

To quickly summarize the points Metro’s management made:

  1. UK investments need further capital injections that Metro has committed to
  2. Metro’s business model is capital intensive, and previous experience showed how their cash can get depleted very rapidly
  3. Management is continuing to evaluate opportunities, and they are in the “reinvesting phase” currently

These are all points that I’ve mentioned in my earlier post, complete with data to substantiate each point.

I still view the management and the business model of the company favorably, again, I’d repeat as I have several times, my divestment is simply because they’re going to face a rough year or 2, as they are in the midst of reinvesting capital. As an investor, I can relate to that phase, just on a much smaller scale. In the  meantime, I think I can find opportunities to generate a higher ROI.

On top of that, very unfortunately, their new growth area is focused on the UK. And we all know what Brexit did for the pound. That really doesn’t help things.

I concluded my analysis on a company a few weeks ago, and was contemplating allocating capital in the company. But similarly, their operations in the UK made me hold back and monitor further.

Like it or not, if your revenue is in pounds, and you’re reporting in SGD, there’s no denying how much of a dent Brexit has made into your projected earnings.

The chart explains it all:

258) GBP-SGD 16102016.jpg

A year ago, every pound you earn gives you say, maybe SG$2.15. Now it gives you SG$1.69. (-21% decline)

So you’d need to grow revenues 21%, just to stay still. Ouch.

To top it off, the Brexit process hasn’t really started. When it does, there’s no telling how much more volatility it’d bring to the GBP-SGD, and there’s no telling where the exchange rate settles at when everything’s done and dusted in 2+ years time.

Fortunately, my existing holdings do not have much exposure to Brexit. Boustead had some, but FF Wong and team cleverly hedged it just before Brexit. Amazing how they can predict that, or more likely, they couldn’t but thought it wise to convert anyway.

I will be keeping the pound’s issues at the back of my mind when evaluating any companies.

So what’s next for Quarz Capital Management and shareholders who have just jumped on the bandwagon hoping for a 23% dividend?

I have no idea. I don’t feel any particular pride in being right this time. Because I’m not vested, being right, or wrong, doesn’t add one iota to my dollar returns. I much rather prefer to be wrong and have a fantastic ROI, than to be right and not have any returns.

The share price has risen rapidly to above $1 after the letter came out, and has since dropped below $1 after management’s reply.

As I mentioned earlier though, I think investors thinking they can piggyback on a large fund pushing management, are playing a dangerous game. At least in the short term.

Logically, because they’re behind the information curve. These investors would’ve entered after the short term rapid rally, and they’d be exiting after the big boys have exited. Quarz Capital could’ve already made use of the rally to exit and nobody would know.

They own 2% of Metro Holdings, not enough to be a substantial shareholder and hence, do not need to report if they divest.

This episode also reinforces my belief regarding deep value investing: Being focused on a few companies, putting substantial eggs into a few baskets, but having in depth knowledge that goes beyond just figures on a financial statement.

Quality over quantity. That’s essentially what deep value investing is about. Not too many baskets, but watch the baskets like a hawk.

Let me share 1 more of my personal experience regarding Metro Holdings, and what information I’ve gleaned from attending AGMs.

In one of the AGMs, as usual, after the AGM, the crowd was rushing to the buffet. I, along with some other shareholders, stayed back and we were talking to Winston Choo (ex-Chief Defence Force & Metro Holdings’ Chairman).

Winston Choo, and the other guys on the management team, are the ones interacting with shareholders. Again, Jopie Ong, well, I’ve actually never ever heard him speak a single word before. Not once. Not even DURING the AGM.

Anyway, Winston Choo was replying to a question by another shareholder (while the rest are all rushing for the buffet!!!). The question was why Metro had not looked at property investments in Myanmar.

To put some context, at that time, Myanmar was in the news every day. The junta was making peace with the opposition, and the country was opening up to foreign investments.

Winston Choo’s reply was basically that they do look at everything, but Myanmar would probably require a prolonged investment cycle. (He also mentioned, somewhat casually, that come on, he knows the junta guys personally, so for sure, Metro would consider investments in Myanmar.)

And Metro’s management does consider the duration it takes to achieve the required ROI, and whether shareholders are patient enough to accept the investment.

What does this reply tell you about future investments? You can form your own conclusions.

Personally, it tells me A LOT of information when I subsequently evaluated Metro’s property investments AND divestments.

I’ve hinted at this in an earlier post. (keyword: Mispricings) This is what I wrote:

Metro Holdings is not a pure property developer, and certainly no retailer. They are truely, in my view……  capital allocators, aka investors.

This is a unique opinion, but one that I have formed after analyzing and studying their activities for several years. They behave like a hedge fund, without the fees. Their modulus operandi involves allocating capital to take advantage of mispricings. Property just happens to be their circle of competence. Retail just happens to be their legacy.”

Mr Winston Choo’s reply is something that one cannot get by peering over all the financial statements and the ARs. Yet, it tells me a lot.

The last 2 weeks of October will likely be a “lull” period for me, as I seek to refresh my thoughts about my existing holdings. I’m probably going to use the time to research on a new company.

Early to mid Nov is when the next earnings report is out, and there’d be a flurry of activity then. For most of the companies I have, I think I have a fair idea of how the results would approximately look like. For some, it’s anyone’s guess. I hope they don’t let me down.

As always, happy hunting.



  1. Thanks for the Metro post. Always enjoyed them as usual.

    I’ve always wondered as well if they should be considered a property or a retailer. I’ve never thought of them as a hybrid of the two, an allocator investor like you said. That’s an interesting aspects there.

    On the brexit front, i think if there is one thing i learnt from my hobee divestment a few months ago is that this can be seen from both angles good and bad. The pounds are surely getting battered and company will have to book in translation losses in the fs. Having said that, if we do consider the overall impact, for the most part of their debt and assets are booked in pounds so they can simply kept it at the UK set up company incorporated and not having to “bring home” technically that money to the Singapore entity level. In that sense, I do see that they are not technically “losing” anything. Plus, the weaken pounds can be an advantage for companies who wants to go in and allocate into UK.


    1. Hi Bhalimking,
      Thanks for your comment.
      Yup, you’re right, the fx impact will only show up in the “Statement of comprehensive income” and not affect the earnings directly if the company does not translate pounds back to SGD. In any case, many companies incorporate subsidiaries or JVs, so the pounds are kept in the subsidiary company.
      Also, if the company has committed to the UK but has yet to contribute pounds, the weaker pound now would be an advantage instead.
      On the other hand, Brexit is a big structural change so the pound is likely going to stay weak/get weaker over a long long period of time. Even if it is kept on the books as pound, it still means that the “value” of these holdings in SGD terms, is no longer as high as before.
      Specifically for Metro, the UK projects are meant to have a turnaround time of a couple of years. The effects of Brexit and the pound would last much longer than a couple of years. The earlier project (Milliners Wharf The Hat Box) has already sold out in fact, which is why the devaluation is not good for Metro. This means that the JV currently holds or will get paid in pounds, which is now considerably weaker. When Metro invested in the project, it was in pounds that was stronger.
      They are still investing in Middlewood Locks and the Sheffield Digital Campus projects and the weaker pound would help in this aspect.
      So in short, there are pluses and minuses depending on the specific company and the point it is at in the investing cycle.
      Similarly, Metro would be affected by RMB-SGD from it’s chinese operations, so in that sense we do have to know how all these Fx affects the specific company.


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