August 24, 2018
Aveo Group (“Aveo”, ASX:AOG) is set to announce the advisor for its strategic review on 24th August. Metrica Partners (“Metrica”) urges Aveo to seize this opportunity to address its relationship with major shareholder Mulpha International (“Mulpha”, Bursa Malaysia: 3905).
Metrica agrees that Aveo should not trade at a 41% discount to net tangible assets (NTA) given the company’s growth prospects. However, the factors cited by management – concerns about the residential market and regulatory risks – affect the whole industry and do not explain Aveo’s persistent discount to its peers, which on average trade at NTA or higher. This represents 70% upside for Aveo’s share price.
According to Metrica’s research, Aveo is the only ASX-listed retirement business substantially held by a foreign-listed corporation – namely Malaysia-listed Mulpha International Bhd, which owns 22.7%. Aveo’s chairman, Lee Seng Huang, is also the controlling shareholder of Mulpha.
Aveo’s pattern of ownership is rarely seen on the ASX or other developed markets according to Metrica’s research. It creates, rightly or wrongly, an overhang on the stock in terms of perceptions that Mulpha’s interests are not aligned with other shareholders. Consequently, Mulpha’s stake has crowded out the type of investors Aveo needs – large institutions who would otherwise be attracted by the strong growth prospects for Aveo’s business. This is evidenced by the fact that other retirement sector stocks show far higher institutional ownership. According to Metrica, Aveo's ownership structure explains its depressed valuation relative to its peers.
Aveo’s parent Mulpha is even more undervalued and trades at a 78% discount to NTA, according to Metrica. Its stake in Aveo alone is worth more (RM917 million, A$304 million) than its market capitalization (RM687 million, A$228 million). Mulpha also has RMD2,190 million (A$727 million) in other net assets. Funds managed by Metrica have significant exposure to both Aveo and Mulpha.
Metrica believes that, as part of its strategic review, Aveo must address its relationship with Mulpha and that both parties must consider spinning off Mulpha’s stake in Aveo to its shareholders.
Damian L. Edwards, Chief Investment Officer of Metrica Partners, said: “We are very pleased with Aveo’s achievement of its long-term ROA targets as highlighted in its FY18 results. However, we don’t think that the market will reward Aveo’s efforts until the overhang from the Mulpha stake is addressed. Aveo and Mulpha can create substantial value for their shareholders by restructuring this relationship now.”
Metrica Partners Pte. Ltd. is a Singapore-based fund manager founded in 2016. Investors in Metrica’s funds include foundations, family offices, funds-of-funds, accredited individuals and Metrica employees. Metrica promotes good corporate governance and works with its portfolio companies to enhance shareholder value. More information is available at www.metricapartners.com.
Prices as of 22nd August.