Mulpha goes under the spotlight

01 Jul 2017 9:28 AM | Philip (Administrator)

Company officials speak on latest developments

RECENT news allegations in Australia have put Mulpha International Bhd in the spotlight.

Once a darling of investors, Mulpha is now hardly followed by investors although it remains an asset-rich company with its prized assets mostly Down Under.

Among these assets are a few five-star hotels such as the InterContinental Sydney, a resort-styled property development called Sanctuary Cove in northern Gold Coast, and Hayman, a five-star private island destination in Australia’s Great Barrier Reef.

However, it is Mulpha’s 22.6% strategic stake in Aveo Group Ltd – Australia’s largest owner-operator and manager of retirement communities – that has thrust the diversified company onto the radar screen, albeit for the wrong reasons.

What happened early this week was this: ABC News’ Four Corners and Fairfax Media wrote an expose that claimed, among others, that Aveo was prone to exploiting its residents when running its retirement villages.

The report stated that the company was slipping through regulatory loopholes, noting that a series of recommendations and reforms that came out of an inquiry into the sector about 10 years ago were not implemented.

Mulpha’s controlling shareholder Lee Seng Huang, who is also the chairman of Aveo, has denied the allegations.

He says the issue has been blown out of proportion and that “we do not exploit our residents”.

Successively, it has found itself in another spot when a buyback of Aveo shares by Mulpha and an Aveo director ahead of the company’s A$145mil share buyback plan raised eyebrows. The Australian corporate watchdog has been called on to investigate the recent trading of Aveo’s shares, it was reported there.

Aveo shares on the Australian stock exchange plunged 11.5% on Monday following the expose. On Tuesday, Aveo announced a buyback of 9% of its stock after an emergency weekend board meeting, news reports stated.

On a larger scale, there have since been calls for a federal inquiry into the Australian retirement village sector.

Commenting on the share buyback move, Lee tells StarBizWeek that it was done in observation of trading windows and rights.

He retorts that there was no board meeting held on the weekend as alleged by some reports.

“The first that the directors heard about a potential buyback was in the afternoon (after the close of trading) on Monday, when the management suggested putting in place a buyback programme in case the stock should keep falling.

“That was voted on by circular in the evening and announced on Tuesday,” he says, pointing out that the stock continued to fall after the announcement before recovering later in the day.

“So, I am not sure how price-sensitive that news even was.

“It is in the public domain and common knowledge that companies will buy back shares if they become grossly undervalued, and the panic-selling caused by the irresponsible reporting obviously led to the company doing something about it,” the 42-year-old executive chairman of Mulpha says.

Going back to the Aveo model, he says it has been in operation for several decades in both Australia and New Zealand, and that its returns are consistent with the vast majority of listed and unlisted operators across the Australian retirement industry.

“So, Aveo is not unique on this front and Mulpha is surprised to have been singled out as a shareholder in Aveo, where 77% of the shareholders (many of whom are Aveo residents) and the majority of the Aveo board are independent.

“Furthermore, all of Mulpha’s board nominees are non-executives and not actively running the business. So, why pick on Mulpha?”

Mulpha had bought into Aveo and the other assets in Australia between 2002 and 2004.

Aveo’s return on its retirement assets last year was 6.3%. It operates over 11,000 retirement units there.

Aveo Way

He points out that the complaints raised in the expose were related to the old contracts and not the new ones.

“Can Aveo do things better? Of course they can and everyday the management is tasked with trying to improve our service levels as we do at all of Mulpha’s investment properties.

“That is why they have come up with a simpler and better contract under the Aveo Way.”

JP Morgan notes that Aveo has made changes to simplify its contracts and provide a guaranteed outcome for its residents under its Aveo Way contract, which it has been rolling out as its standard contract over the past two years.

“Whilst the fees Aveo is charging under the Aveo Way contract are at the upper end of the market, they are not materially ‘out of whack’ with the market,” the research firm notes in a report released on Tuesday.

It says the complexity of retirement contracts and questions about whether the fees are appropriate is an industry-wide issue, of which Aveo has been singled out.

“If the retirement industry was such a profitable industry, there would be more players pushing into the sector – this is not happening.

“In fact, the returns for ownership of retirement villages are lower than most other property asset classes due to it being a very management-intensive asset class.”

Mulpha’s 22.6% stake in Aveo is valued at A$374.43mil (RM1.23bil), higher than its own RM719.14mil market capitalisation on Bursa Malaysia.

Unlike Mulpha, Aveo appears to have a better following too.

Six research houses covering the stock on the Australian Securities Exchange or ASX have “buy” calls, Bloomberg data shows.

On the other hand, market observers say that Mulpha has not attracted much institutional interest mainly due to a lack of analyst coverage and low corporate visibility, coupled with volatile earnings.

Lee, through the family’s privately held vehicles, controls a 44.96% stake in Mulpha – an investment holding company engaged in the property development and investment, hospitality, retirement and healthcare sectors in Malaysia, Singapore, China, Hong Kong and the United Kingdom, besides Australia.

In Malaysia, the company is the developer of the 1,765-acre Leisure Farm in Iskandar Malaysia, Johor.

Meanwhile, in the United Kingdom, it has a strategic investment in the London Marriott Hotel Grosvenor Square, which is located in London’s Mayfair district.

Elsewhere, Mulpha also has a 19.84% stake in power, infrastructure and construction company Mudajaya Group Bhd.

As at March 31, Mulpha’s net tangible assets stood at RM9.60, while its share price was RM2.19 at the close yesterday.

The company was loss-making in financial year 2012 (FY12) and FY13, before turning around with a net profit of RM124.15mil in FY14.

For FY16 ended Dec 31, the company made a net profit of RM16.8mil as compared to RM165.12mil in the previous year.

Its profits were mainly because of a higher share of associates/joint-venture profits, including a better performance by Aveo.

Total borrowings stood at about RM2.75bil, while its total cash and cash equivalents were at RM355.5mil as at year-end.

Notably, Mulpha is one company which believes in rewarding shareholders through share buybacks rather than dividend payments.

The company’s chief executive officer Gregory David Shaw says that there are no concrete plans to implement a dividend policy or pay any dividends now, as the board is of the view that the share buyback scheme is a more efficient form of returning excess capital to shareholders instead of paying a dividend, given the current undervalued share price.

“Over the last few years, Mulpha has implemented a share buyback scheme, as the market did not fully reflect the value of its shares, and will continue to do so.

“However, the board will continue to assess the payment of dividends as part of its capital management strategy, and will do so when it feels that there are no other more accretive uses of capital across our businesses,” says the Australian head honcho, who was appointed in December last year.

The stock’s depressed valuation has linked it to talk that the company may be privatised.

But this, according to Shaw, is a shareholder matter, which the management and board of Mulpha are not privy to.

To improve its capital structure, the company recently proposed a share consolidation involving the consolidation of every 10 existing shares into one.

The exercise is expected to increase its earnings per share and net asset per share due to a reduction in the number of Mulpha shares, but without affecting the shareholders’ stake in the company.

Prior to this corporate exercise, Mulpha shares were trading in wide-ranging prices from RM0.195 per share to RM0.550 per share over the past three years.

This, according to Shaw, represented a 64.5% change in Mulpha’s transacted price from the highest to the lowest price. Consolidating the shares would lead to a reduction in the number of shares available in the public market and could potentially reduce the volatility of the trading market for Mulpha shares.

Operationally, to deliver profit growth, Shaw says the focus is on three strategic pillars.

One is to optimise value in the group’s strategic assets with a medium to long-term view on value creation. Second is to improve the performance of its resort hotels and operating businesses, and thirdly, to introduce new investments that will benefit from Mulpha’s management expertise.

“With a strong balance sheet and a strategically located and geographically diversified asset portfolio, the group has been able to steer through the current global economic uncertainties.

“The solid performance of our Australian assets in 2016 has compensated for the difficult trading conditions experienced in the Malaysian property sector in the same period,” he says.

While it has sizeable assets overseas, Mulpha will continue to explore investment opportunities in Malaysia and will make an investment if the right opportunity, timing and return targets are met, he adds.

Would the group unlock some of its assets? To this, Shaw says that the group’s investment strategy is built around leveraging on its strengths and making investments where it believes it has a strategic advantage.

“Our strong balance sheet has left us well placed to continue to explore and take advantage of any attractive investment opportunities that may arise.

“On the flip side, once we believe any of our assets has reached its optimum value, we may realise the asset when an appropriate offer is received and we will then recycle our capital and reinvest the sale proceeds into another investment opportunity.”

As for Leisure Farm, he says the focus in 2016 was to reach out to overseas markets via roadshows, notably in China and Indonesia in addition to its ongoing focus on Singapore.

These roadshows have been successful in increasing Leisure Farm’s sales with purchasers from China, and he anticipates that the roadshows will generate further sales in 2017.


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