IN EARLY March, Singapore-listed Great Eastern Holdings : G07 0% (GEH) dismissed a request by a minority shareholder, acting on behalf of a group of minority investors, to table three ordinary resolutions at the insurance provider&rsquo s annual general meeting (AGM), which will be held on Apr 25.

 

The proposed resolutions call for withholding part of board of directors&rsquo fees, changing the executive share option schemes, and appointing an independent financial adviser.

 

Lying behind the actions of the minority shareholder are concerns over GEH&rsquo s depressed share price.

 

The Securities Investors Association (Singapore) also urged GEH&rsquo s board to seriously and objectively consider the true purpose of the requests, instead of avoiding them on legal grounds.

 

On Mar 28, GEH said in an announcement that its board and management understand the concerns expressed by the minority shareholder, and are prepared to discuss these at its upcoming AGM.

 

Maybe it&rsquo s an opportune time to cut to the chase &ndash banking giant OCBC : O39 0%, which owns about 88 per cent of GEH, can resolve concerns over GEH&rsquo s share price by privatising the insurance group.

 

Banking peer UOB : U11 0%, which holds a deemed interest of about 58 per cent in Singapore-listed insurance group United Overseas Insurance : U13 0% (UOI), could likewise create value for UOI&rsquo s shareholders by privatising it.

 

The two Singapore lenders can emulate Tokyo-listed Isetan Mitsukoshi, which this week announced a bid to take its majority owned locally listed Isetan Singapore : I15 0% private at a premium of 154 per cent to the last traded price pre-announcement.

 

Great Eastern

GEH&rsquo s net profit for 2023 rose 27 per cent to S$774.6 million. Including the proposed final dividend, GEH&rsquo s dividend per share (DPS) for 2023 totalled S$0.75, versus S$0.65 for 2022.

 

As at Apr 3, GEH traded at a premium to end-2023 net asset value (NAV) per share of 9.8 per cent.

 

However, the true value of GEH, which was founded in 1908 and is a leading life insurance group in Singapore and Malaysia, may be better captured by its embedded value (EV).

 

EV is a common valuation measure of life insurance companies that among other things includes the current value of projected future profits from in-force policies.

 

GEH traded at about half of its 2023 EV per share of S$36.59 based on the share price as at Apr 3.

 

Possibly, OCBC can offer GEH&rsquo s minority shareholders an exit at a premium to today&rsquo s share price and a discount to EV. 

 

Given GEH&rsquo s small free float, its share price performance is likely hampered by insufficient trading liquidity.

 

If GEH&rsquo s minority shareholders swap their GEH shares for shares in OCBC, they will own shares in a counter that trades better and offers superior dividend yield.

 

As at Apr 3, OCBC traded at a 15.6 per cent premium to its end-2023 NAV per share. Including the proposed final dividend, OCBC&rsquo s DPS for 2023 amounts to S$0.82. 

 

Based on the share price as at Apr 3 and DPS for 2023, OCBC&rsquo s dividend yield of 6 per cent tops GEH&rsquo s 4.1 per cent.

 

United Overseas Insurance

Meanwhile, UOI, whose principal activities are the underwriting of general insurance business and reinsurance, traded at a discount of 17.1 per cent to its end-2023 NAV per share based on its latest share price as at Apr 3. 

 

In contrast, UOB&rsquo s share price as at Apr 3 was at a premium of 13.6 per cent to its end-2023 NAV per share.

 

Based on DPS for 2023 including proposed final and special dividends where applicable and share prices as at Apr 3, the dividend yield for UOB and UOI are 5.8 per cent and 3.5 per cent, respectively.

 

If UOI&rsquo s minority shareholders swap their UOI shares for UOB shares at book value, they will realise value for their shares, and hold shares in a group that trades better as well as has higher dividend yield.

 

Ultimately, there is little need for subsidiaries of major listed groups to be separately listed unless such units command good valuations. After all, considerable costs are incurred in maintaining a listing, such as compliance costs and time spent on investor relations.

 

GEH and UOI are well-regulated businesses with long track records, consistently profitable and dividend paying, even during the Covid-19 pandemic. OCBC and UOB should be happy to own all of the said groups.

 

As privately held entities, GEH and UOI can dispense with listing-related burdens, and instead focus their resources and attention on their businesses, investments and operations.  

 

Meanwhile, OCBC and UOB can exercise greater control and management flexibility over their privatised insurance subsidiaries in order to optimise resources across the insurance entities&rsquo businesses, investments, operations and corporate structure. 

 

Sure, any privatisation attempt involves risk. For example, a scheme of arrangement to privatise an entity may need the approval of 75 per cent of minority investors. And failed privatisation exercises waste management time as well as incur costs.

 

Given economic uncertainties and other pressing business issues, tidying corporate holdings through privatising their locally listed insurance entities may not rank high on the board agendas of OCBC and UOB.

 

Nonetheless, privatising GEH and UOI benefits both the insurance groups and their banking parents. Crucially, OCBC and UOB can demonstrate good corporate governance by helping minorities in their listed insurance arms realise value.

 

Should the banking parents make fair offers for their insurance subsidiaries, this will be cheered by shareholders of OCBC, UOB, GEH and UOI.

On March 7, David Gerald, CEO and President of Securities Investors Association Singapore (SIAS) wrote to the the board of Great Eastern Holdings G07 0.05% with some observations and some questions. Among the questions he asked were on the remuneration of GEH senior management with stock options of Oversea-Chinese Banking Corp shares.

 

In GEH&rsquo s 2023 AGM in April 2023, minority shareholders had questioned why GEH top management were remunerated with OCBC shares. OCBC owns 88% of GEH. This remuneration had always felt uncomfortable to market watchers. GEH top management should be incentivised with GEH shares, they have argued for the past 20 years.    

 

&ldquo Is the board actively exploring measures to strengthen the group' s remuneration and incentive practices, particularly regarding the allocation of OCBC shares to the Group CEO, considering his role primarily focuses only on the overall strategic direction and business growth of the Great Eastern Group?&rdquo Gerald had asked.

 

On March 28, GEH replied. &rdquo The GEH Group&rsquo s remuneration and incentive practices are periodically assessed as part of the reviews of the overall remuneration framework by the Board Remuneration Committee. The Group CEO&rsquo s total compensation takes into account both market competitiveness and benchmarks, as well as GCEO&rsquo s performance which include the Group&rsquo s overall operational and financial performance as well as the fulfilment of his other key performance indicators.&rdquo  

 

GEH&rsquo s minority shareholders would have been more reassured if the reply had been that the board would consider rewarding GEH&rsquo s top management with GEH shares. That would be good corporate governance, they argue. 

 

Additionally, on the point about GEH' s share price performance versus OCBC' s, the board said: " Share price is a function of market forces which are affected by multiple factors, many of which are not within the Company&rsquo s control. Management continues to grow the Group&rsquo s businesses and improve their operational and financial performance. Management also takes steps to strengthen capital management, improve dividend payout and its consistency, and increase investor relations activities, with a view to enhance market recognition of the valuation of Great Eastern&rsquo s shares. While the GEH Group is a significant part of the OCBC group, the larger part of the OCBC group&rsquo s business is in banking."

 

Analysts believe that one way to narrow the discount between GEH' s share price and its embedded value per share would be for GEH to have more liquidity than its less than 12% free float currently. 

 

The recent request by a minority shareholder of Great Eastern Holdings (GEH) : G07 +0.55% to table resolutions at its upcoming annual general meeting (AGM) &ldquo does not satisfy all of the requirements&rdquo for a requisition to be moved, the insurer said on Wednesday (Mar 6).

 

The Business Times reported on Mar 1 that a group of minority shareholders of GEH, led by independent investor Ong Chin Woo, had sought to table three resolutions at the upcoming AGM: to withhold directors&rsquo fees, to change the share option schemes of employees, and to appoint an independent financial adviser to explore options to enhance shareholders&rsquo value.

 

In its regulatory filing on Wednesday, GEH said it responded to &ldquo a minority shareholder, acting on behalf of a group of minority shareholders&rdquo after seeking legal advice.

 

It highlighted as well that its share price depends on &ldquo many factors&rdquo , as it addressed the criticisms that the counter had not kept pace with the increase in its net asset value (NAV) and embedded value.

 

GEH said embedded value is an equity valuation measure used in insurance companies, based on estimates of present value of projected future profits plus the company&rsquo s NAV.

 

&ldquo GEH&rsquo s management is aware that while GEH shares currently trade above its NAV, they trade below its estimated (embedded value) as at end-2023,&rdquo said the insurance arm of OCBC.

 

The group of minority shareholders&rsquo concerns revolve around the &ldquo depressed&rdquo share price of the insurer and continued valuation decline over the last decade, despite its &ldquo strong financial position&rdquo .

 

Ong previously told BT that he had brought up these issues to GEH&rsquo s board several times, and wanted to align the interests of the board, the executives and the shareholders.

 

It is well known that Great Eastern Holdings G07 0.00% has an excess of risk-based capital (the equivalent of banks&rsquo capital adequacy ratios). And it is clear from its share price that it is trading at a steep discount to its embedded value, which comprises a combination of shareholders funds and the value of the in-force business. The latter is calculated using a form of discounted cash flow (DCF).

 

According to Ronnie Tan, GEH&rsquo s CFO, discount rates in both Malaysia and SIngapore were raised by 25 bps each. This, coupled with assumptions of higher medical claims in 2023 versus previous years impacting cash flow assumptions, caused the value of the in-force business to dip by 4.2% y-o-y in FY2023.

 

Against this background, embedded value fell by 3.2% y-o-y in FY2023 to $17.3 billion, or $36.59 per share. Shareholders funds dipped marginally to $6.74 billion. However, total equity rose by 10% y-o-y, translating in net asset value of $16.66 per share.    

 

Despite trading at one-year lows, AIA&rsquo s share price is still above its Dec 31, 2022 embedded value of US$57.38 per share. Why is AIA trading closer to its embedded value, at a premium, compared to GEH&rsquo s sharp discount?

 

Ong Chin Woo, a shareholder of GEH who has sent a letter to GEH&rsquo s board requesting that three resolutions be tabled at its AGM, believes it is because of the lack of liquidity. Oversea-Chinese Banking Corp holds 88% of GEH.

 

The three resolutions tabled by Ong are: To withhold 30% of Board of Directors&rsquo fees until GEH&rsquo s share price recovers to 0.8 times of its Embedded Value to replace OCBC shares in the current Executive Share Option Schemes (OCBC Share Option Scheme, OCBC Deferred Share Plan and OCBC Employee Share Purchase Plan) with GEH shares and to appoint an independent financial advisor to explore options to enhance GEH shareholders&rsquo value.

 

Moreover, Ong calculates that GEH has an excess of around $1.45 billion in risk-based capital, or around $3 per share. 

 

Enhancing GEH shareholders&rsquo value could be pretty straightforward. In GEH&rsquo s FY2023 AGM, the minority shareholders suggested giving GEH shares as a dividend-in-specie to OCBC shareholders. This would immediately create liquidity. OCBC shareholders unhappy with GEH shares could sell them in the market.

 

And, unlike CapitaLand Ascott Trust HMN 0.56% , CDL Hospitality Trust and Keppel REIT, where an overhang was created via the distributions-in-specie, this is unlikely to be the case for GEH. There could even be a clamouring for a more liquid GEH from institutions, providing the insurer with the potential to get into indices such as the MSCI and Straits Times Index. OCBC&rsquo s shares would also be traded higher as the value of GEH shares rises as a result of just floating higher naturally.

 

GEH&rsquo s share price may have found a floor at current levels. But its minority shareholders, OCBC and the Singapore market would be better served with a more liquid GEH which in turn would encourage other insurers to list here. FWD has aspirations to list but in Hong Kong. Singapore' s hub status could be enhanced if it is also an insurance hub. Would FWD view Singapore as an attractive listing venue?  

OCBC&rsquo s long-held narrative that ownership of Great Eastern is crucial to its strategy is likely to be challenged

 

THIS column said in July last year that analysts and investors must be prepared to engage in the often difficult and disagreeable task of challenging long-held attitudes and ideas at some of Singapore&rsquo s most respected companies in order to unlock value and enliven the local market.

 

On Friday (Mar 1), a group of minority shareholders of Great Eastern kicked off a public campaign to get the board of the insurer to address the steep undervaluation of its shares in the market.

 

Led by a former remisier named Ong Chin Woo, the minority investors have put forward three resolutions to be tabled at Great Eastern&rsquo s upcoming annual general meeting (AGM).

 

The first resolution is for Great Eastern to withhold 30 per cent of its directors&rsquo fees until its share price recovers to 0.8 times its embedded value.

 

While Great Eastern&rsquo s embedded value has grown substantially over the years, the market price of its shares has lagged far behind. Its shares closed last week at S$17.85 &ndash a more than 51 per cent discount to its embedded value as at end-2023 of S$36.59 per share.

 

The proposed resolution would incentivise Great Eastern&rsquo s board to figure out how to boost the market value of its shares.

 

The second resolution is for the insurer to reward its executives with its own shares instead of OCBC ones, under its various share-based remuneration schemes.

 

Bizarre as it may sound, Great Eastern has a longstanding practice of paying its executives with OCBC shares instead of its own shares.

 

These share-based payments to staff are charged against Great Eastern&rsquo s profit-and-loss account. So, Great Eastern foots the cost of the OCBC shares that are handed to its employees.

 

The proposed resolution would align the interests of Great Eastern&rsquo s employees with those of its shareholders, rather than those of OCBC alone.

 

The third resolution is for Great Eastern to appoint an independent financial adviser to explore its options to enhance shareholder value.

 

This could include Great Eastern increasing its dividend payouts or paying a special dividend, and looking into listing possibilities in markets that may offer better valuations.

 

This resolution is aimed at providing minority investors with an appraisal of Great Eastern&rsquo s value, and enabling them to make informed decisions on what to do with their shares.

 

It could also pre-empt OCBC making a lowball offer for Great Eastern, which would almost certainly succeed. With OCBC holding 88.4 per cent of Great Eastern&rsquo s 473.3 million shares, the insurance unit barely has the minimum required free float to remain listed.

 

Challenging OCBC&rsquo s narrative

In order for shareholders to propose resolutions at AGMs, they need to hold at least 5 per cent of the company&rsquo s shares or comprise not fewer than 100 shareholders in possession of shares on which there is an average paid-up sum, per shareholder, of S$500.

 

Ong said over the weekend that he had already obtained the support of more than 100 minority shareholders of Great Eastern.

 

Even if he succeeds in getting the proposed resolutions tabled at the AGM, however, there is zero chance the resolutions will pass if OCBC votes against them.

 

OCBC&rsquo s board and management have insisted for years that owning Great Eastern provides the group with an important competitive advantage in serving its customers.

 

Hence, it seems unlikely that OCBC would support any resolution that might hinder its ability to eventually fully acquire Great Eastern as cheaply as possible.

 

The way I see it, Ong and his supporters have to draw OCBC&rsquo s shareholders into the fray in order to get the resolutions passed and achieve their wider aim of unlocking the value of their Great Eastern shares.

 

OCBC&rsquo s shareholders need to be convinced that they stand to gain from any value-unlocking exercise at Great Eastern.

 

This would necessarily involve challenging the long-held OCBC narrative about the ownership of Great Eastern being crucial to its group strategy, though and it remains to be seen whether the board and management of OCBC can be made to change their minds.

 

My own view is that the time has probably come for OCBC to review its strategy.

 

While it might have made sense for OCBC to bulk itself up by raising its stake in Great Eastern following the spate of bank mergers more than two decades ago, having a large stake in the insurance unit does not seem to distinguish it in the market today.

 

OCBC chalked up a return on equity (ROE) of 13.7 per cent last year, and its shares currently trade at a pedestrian 1.1 times book value.

 

This is very similar to UOB &ndash it achieved an ROE of 14.2 per cent last year, and its shares currently also trade at about 1.1 times book value.

 

On the other hand, DBS clocked a significantly higher ROE of 18 per cent last year, while its shares trade at nearly 1.5 times book value.

 

Patience is required

What does all this mean for shareholders of Great Eastern? Will the minority-shareholder action make its depressed stock a one-way bet?

 

The resolutions that Ong and his fellow minority investors have proposed could just be the opening salvo in a long-drawn-out campaign.

 

Even if the resolutions are not tabled at Great Eastern&rsquo s AGM, their widespread circulation could help focus attention on the undervaluation of the insurer&rsquo s shares.

 

This could spark buying interest in Great Eastern and OCBC shares, on the view that it is only a matter of time before some sort of value-unlocking initiative is hatched.

 

This, in turn, could push the boards of Great Eastern and OCBC to seriously think about how to resolve the deep undervaluation of the insurer&rsquo s shares in a manner that benefits all parties concerned.

 

This isn&rsquo t Ong&rsquo s first rodeo. Back in 2004 and 2005, he tried and failed to put forward resolutions to unlock value at Overseas Union Enterprise (OUE) &ndash including through the distribution of the company&rsquo s holdings of UOB shares.

 

The following year, however, OUE sold its UOB shares and paid bumper dividends.

 

With a very narrow free float, it is possible that Great Eastern will just continue to languish for months or even years. But I am betting that patient investors will eventually be rewarded.

 

Besides trading at a big discount to embedded value, the insurer&rsquo s shares offer a dividend yield of 4.2 per cent, based on its total 2023 payout of S$0.75 per share.