CDL shares are a gamble, not an investment
CDL needs to fix governance lapses surrounding the &lsquo coup&rsquo , clarify roles of Kwek family members and associates, and forge a more aggressive business strategy
[SINGAPORE] One of the dumbest calls this column ever made was in early 2021 when it said City Developments Limited (CDL) could prove more enticing to investors than CapitaLand.
Three weeks later, CapitaLand unveiled a big restructuring plan that included its property development arm going private, and its real estate investment management activities and lodging business remaining public under an entity now called CapitaLand Investment (CLI).
The reorganisation unlocked significant value for minority shareholders of CapitaLand, and CLI today trades at a much higher price-to-book valuation than traditional real estate groups such as CDL.
While I couldn&rsquo t have foreseen this restructuring, CapitaLand had a superior track record compared to CDL in adjusting to the changing winds in real estate and financial markets.
Moreover, CDL was coping with far bigger problems than CapitaLand at that point &ndash notably, its soured investment in China&rsquo s Sincere Property Group (SPG).
Here&rsquo s the strange thing, though: If I were given the choice today of investing a small amount of money in either CDL or CapitaLand, I might be inclined to bet on CDL again.
CDL reported a net asset value (NAV) as at Dec 31 of S$10.17 per share, and a revalued NAV (including gains on its investment properties and hotels) of S$19.86 per share. Its shares closed on Friday (Mar 7) at S$5.03.
On the face of it, monetising a portion of CDL&rsquo s assets, or selling the whole company, could realise enormous value for its shareholders. This big potential upside seems all the more achievable given that CDL shares were trading above S$10 just before the Covid-19 pandemic.
The way I see it, CDL shares are something of a lottery ticket &ndash they offer a small probability of a very large return.
Of course, many analysts and money managers will point out that lottery tickets are terrible investments. Accepting a high probability of poor returns for a small chance of a very big return, which is what lottery tickets actually offer, is not the path to financial success.
Indeed, this &ldquo lottery effect&rdquo is what persuades unwary investors to choose risky penny stocks over proven blue chip counters or to be heavily exposed to one or two hot stocks instead of maintaining a well-diversified portfolio.
Is CDL a stock for sober investors or desperate gamblers?
Awaiting the AGM
After simmering tension within CDL&rsquo s board spilled into public view on Feb 26, with executive chairman Kwek Leng Beng accusing his son, chief executive Sherman Kwek, of mounting a boardroom &ldquo coup&rdquo , research houses have slashed their target prices for the company&rsquo s shares.
For instance, RHB cut its price target to S$4.75 from S$7.30 previously, in reaction to what it called &ldquo major lapses in board independence and governance issues&rdquo that have cast a shadow on the group&rsquo s medium-term outlook.
This pall of uncertainty could begin to clear, in my view, when CDL holds its annual general meeting (AGM) on Apr 23.
At the AGM, the two IDs who were appointed last month without going through the nominating committee (NC) &ndash namely, Jennifer Duong Young and Wong Su-Yen &ndash will have to seek election if they intend to stay.
Also, under CDL&rsquo s constitution, one-third of the company&rsquo s board members are required to retire each year and seek re-election. Of the current nine directors (excluding Jennifer Duong Young and Wong Su-Yen), two were last elected in 2022 and will certainly be among three seeking re-election next month &ndash namely, Colin Ong and Wong Ai Ai.
As it happens, these two board members are on opposite sides of the conflict. Colin Ong is aligned with Kwek Leng Beng while Wong Ai Ai is on Sherman Kwek&rsquo s side. In fact, Wong Ai Ai was one of the directors who nominated the two new IDs.
The reception these directors get at the AGM from CDL&rsquo s shareholders &ndash especially the Kwek clan, which holds nearly half of CDL&rsquo s shares &ndash could provide the market with some sense of how the rift between Kwek Leng Beng and Sherman Kwek will eventually be resolved.
Family matters
This alone might not be enough to put CDL back in the good graces of investors, though.
After hearing Kwek Leng Beng blame his son for the SPG &ldquo debacle&rdquo and poor investment decisions in the United Kingdom, and hearing Sherman Kwek attribute the dispute to his father&rsquo s long-time associate Catherine Wu, it seems unlikely that investors will take harmony within the Kwek family for granted, going forward.
CDL&rsquo s chairman and CEO are not the only two senior executives related to each other. CDL&rsquo s chief operating officer (COO) Kwek Eik Sheng is a nephew of Kwek Leng Beng. Vincent Yeo, who heads the managers of CDL Hospitality Trusts, is another of Kwek Leng Beng&rsquo s nephews.
Last week, the Securities Investors Association (Singapore) &ndash or Sias &ndash posed a number of questions to CDL, including a few related to its internal decision-making and its senior management structure.
Sias asked about the current reporting lines for the group&rsquo s CEO and COO, how their performance is being assessed, and how key decisions are being made and approved amid the current turmoil.
Sias also wanted to know what role Wu played while she was on the board of Millennium & Copthorne Hotels (M& C) from June 2022 to January 2024. &ldquo Was her performance assessed by the M& C board, and if so, what were the findings?&rdquo Sias asked.
Sias went on to ask about Wu&rsquo s subsequent appointment as an adviser to the board of M& C as well as her recent resignation, which Kwek Leng Beng announced on Mar 4. &ldquo Was there a rigorous search and nomination process for the role of an independent adviser to the board of M& C, and what were the key deliverables and responsibilities for this role? Is there a replacement for this position? If so, who will oversee the selection process and appointment?&rdquo
CDL&rsquo s board and top management should probably get used to answering such probing questions following the current turmoil.
New direction
Besides addressing matters of corporate governance and the roles of Kwek family members and associates within the group, CDL should probably also come up with a more aggressive strategy to drive shareholder value.
Back in 2021, just a few weeks before suggesting that CDL would be more enticing to investors than CapitaLand, this column questioned the sustainability of property development businesses. It suggested that these businesses were creating negative externalities for society, which would attract persistent government intervention that would depress their profitability.
RHB said in its report last week that CDL&rsquo s shares have underperformed in recent years, because of the group&rsquo s low return on equity and its asset-heavy strategy, which left it susceptible to rising debt costs.
The research house also outlined a few possible value-unlocking catalysts for the group. Among the ideas it floated was the privatisation of a part of the group, followed by a transition to an asset-light business model.
This echoes the strategy that CapitaLand adopted back in 2021, which left my bet on CDL looking foolish.
Perhaps it&rsquo s time CDL&rsquo s board and top management focus their attention on restructuring the whole group in a similar fashion as CapitaLand. If they get it right, CDL&rsquo s shares may come to be regarded once more as a solid investment instead of a gamble.
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