Nick Sallnow-Smith is the Chief Executive of Hongkong Land, a position he assumed earlier this year. The company recently launched a tender offer to buy back roughly 10% of Hongkong Land's issued share capital. Sallnow-Smith talks to Nick Lord about the buyback and the thinking behind the move.
Q: How is the tender offer going?
A: The circular to shareholders has been issued and the closing date for investors is the 21st of December. You would expect most shareholders to wait until the last few days before putting in their tenders. If the share price changes markedly in the interim, that may affect the attraction or otherwise of tendering. So you would not expect professional shareholders to decide until close to the date.
Q: Why did you decide to do the tender offer now?
A: It is a result of two events. It is simplistic to look at where the share price has been and say 'well why didn't you do it when the share price was a dollar?' When the share price was a dollar, it was because we had a collapsing market in Central, with rents falling month on month on month. So no one knew what NAV [net asset value] was going to be over the long term.
Two things have changed in the last few months. Firstly we have had a strong recovery in our core market in the first nine months of this year. And the result is that as we see rentals getting back to levels that improve our cash flow over the next few years, the upside on our NAV is much more secure than it would have been a year ago.
The second thing that has changed is that we have an investment in a company called Connaught Investors in which we hold 45% - Jardine Matheson and Jardine Strategic hold the balance. That is being unwound as an investment vehicle with most of the investments being bought by Jardine Strategic for cash. That will produce just over $200 million for Hongkong Land at roughly the same time as the tender offer.
So the other feature of what has changed is that the cash position we will have is going to be even better than we thought it was. That is relevant because we need to strike a balance between keeping enough financial resources to grow the business and keeping sufficient gearing to make returns to shareholders as efficient as they can be.
Q: So is the timing of this move an indication that the company will be getting substantially more earnings next year?
A: No. It is an indication that we are more comfortable with the outlook for capital values over the next few years than we were a year ago. Earnings year on year are driven not only by rental recovery but also by the reversion cycle. Almost all of our leases revert on a three-year pattern. So the recovery in rentals during 2000 will not be fully impact our P&L account for three years.
Q: This move will reduce the free float and increase Jardine control over the company. Does this worry some minority investors?
A: Because Jardine Strategic has decided not to tender, then to the extent to which other investors do tender, Jardine's percentage ownership will rise. But until we see the outcome of the tender offer, we don't know by how much. The question of free float is certainly one of the issues we looked at when deciding whether or not to make the tender offer - because it will reduce the number of shares in the market. We think that even if it is fully successful, the overall effect on liquidity will not be so significant as to mean that we should not have done it in the first place. The benefits in terms of gearing and efficiency more than out weigh the moderate loss in liquidity.
Q: How have the analysts reacted to this? Are they generally positive?
A: It has been a mixture, which we expected, as they have different views on where our NAV is going. Those analysts that are positive on our NAV growing strongly over the coming years have said that investors should hold onto their shares. And then there are those analysts who felt that although our NAV would increase over the coming year, that increase might not hugely outpace the tender offer figure. Those analysts believe there is a case for taking profits early and reinvesting elsewhere. So there is a mixed view on whether investors should tender or not, but overall there has been a very favourable reaction to the concept of making the tender offer in the first place.
Q: Is the premium you are offering enough? Sime Darby is offering premiums in the 40%-50% level?
A: It depends where you think value is. There is no single percentage that is right across a market. If the share price is regarded as massively undervaluing the company and shareholders feel that there is a prospect of that undervaluation being removed, then you have to offer a big premium before anyone will subscribe to it. In our case, because our shares have already risen quite strongly this year, it would not be the case that shareholders think they are massively undervalued. In tendering for those shares, we as a company do not want to overpay for them. While we do think our NAV will rise significantly, so that its worth buying the shares at $2.20, we would not be willing to pay significantly above that figure. So the correct premium to offer is a different judgment for different companies.
Q: Does the buyback signify that there are no good capital investments that Hongkong Land can make in HK at this time in the cycle?
A: No it does not signify that. We were balancing the need for financial resources to grow against wanting to keep our gearing up in the short term to generate efficient returns on equity for shareholders. If the size of the tender offer had prevented us from growing, we would not have done it. So there are investment opportunities out there and we hope we can close some of them over the next few months.
Q: How are you financing this buyback programme? There is the $200 million from the Connaught sale, and then ?
A: The rest is coming from cash reserves. We have well over $1 billion in cash reserves.
Q: Who is managing the buyback?
A: UBS Warburg is our adviser and we have two other brokers involved.
Q: In general, do you think that companies and their share prices are being overly punished by the structure of the global investment market, so that they get undervalued if they are not index plays and not widely covered by investment bank analysts reports?
A: We don't appear to be punished for that. Most property investment companies trade in relation to their NAV. And the sorts of discounts at which we have traded in recent years are not dissimilar to the discounts that other property companies trade at. Property companies in the UK have traded at much higher discounts than we have. The liquidity question does affect very big investors who need to make large-scale investments and large scale disposals if the free float and liquidity are limited. But not every shareholder is like that. Some are relatively small institutions, and value based shareholders tend to take a much longer view and are not in so much of a hurry to get out. There are certainly enough shareholders out there that don't find [lack of index participation and analysts coverage] an impediment to keep the share price to where you would expect it to be in relation to NAV for a property investment company.
Q: Do you have a message for your shareholders who are considering the tender offer?
A: Not really. I would ask them to read the letter from the Chairman and make their own decisions as to where the market is going and where they see value. It is for them to decide on the tender offer. It is for us to run a property company.