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Challenger Technologies Exit Offer Is Too Low

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Challenger Technologies, a well-known brand in Singapore is looking to delist with a 56 cents share offer.

Longtime readers and attendees of my previous courses held in conjunction with the Fifth Person will know that I cite Challenger frequently in when introducing students to financial statement analysis for the first time.

It has been incredibly frustrating over the years given the quality of the business and the persistent undervaluation. The offer is quite a low-ball in my books given the substantial amounts of cash on the balance sheet and their earnings quality of the business.

I am pretty disappointed, to say the least.

I no longer own a position in Challenger as we re-deployed the capital to other opportunities during the 2018 sell-down (months before the offer announcement).

Fortunately for minority shareholders, Pangolin Investment Management which owns a 2.94% stake in the company through its Pangolin Asia Fund is leading the charge against the offer price.

Citing two key points from their report which I wholeheartedly agree with – indeed it was these very points combined with the company’s demonstrated earnings power and free cash flow generation that attracted me to it in the first place.

The full report along with their methodology is available on their website and makes for very good reading.

If you are a shareholder, you can contact them as they are co-ordinating the pushback against the current offer.

Extract from Pangolin Investment Management Report on Challenger Technologies

Increase dividend payout

The Dividend payout has been around 50% for many years. Excess cash is not paid out despite low capital expenditure requirement.

Challenger can afford a dividend payout ratio of 100% as not much capital expenditure is needed in the near future. Once earnings are all paid out as dividend, the dividend yield will rise to +10%.

The share price will naturally react to a higher payout as cash will be returned to shareholders on a consistent basis. We estimate that the share price should increase by 83% from current price of S$0.56 to S$1.025 as the dividend yield will normalise to 5.5%.

Too much cash

Challenger holds an excessive amount of net cash which has been largely under-utilized and sits in the bank earning miniscule interest (1-2%). All cash that the company doesn’t require i.e. everything in excess of working capital requirement plus an emergency fund, should be paid to shareholders by way of a dividend.

As of 31 Dec 18, Challenger has net cash of S$63m. The company should set aside S$20m for rainy day fund or working capital and the rest of the cash i.e. S$43m or 12.5 cents/share, to be paid out as special dividend.

As of 8 April, they have received indication from 8.6% of shareholders that they will reject the offer.


Offer price of S$0.56 is way too low.

We reckon the fair value of the shares to be at least S$1.025 based on recurring dividend returns every year plus an additional one-off return of 12.5c if Challenger pays out its excess balance sheet cash via a special dividend. We strongly advise shareholders to reject this derisory offer during the upcoming EGM.

Disclosure: The author has no vested interest in the company.

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