NEW YORK & LONDON--(BUSINESS WIRE)--Whitebox Advisors LLC today issued the below letter sent to Samsung C&T Corporation’s (KRX: 028260) Board of Directors.
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21 November 2023
For the attention of the Board of Directors of Samsung C&T Corporation:
Chung, Byung Suk
Cochet, Philippe
Lee, Janice
Yi, Sang Seung
Choi, Joong Kyung
Koh, Jung Suk
Oh, Sechul
Jeong, Hailin
Lee, Joonseo
Dear Members of the Board of Directors,
As you are aware, Whitebox Advisors LLC (together with its affiliates, “Whitebox” or “we”) owns a significant stake in Samsung C&T Corporation (“SCT” or the “Company”), currently holding 0.5% of the Company’s outstanding common shares.
We are a long-term shareholder that has repeatedly sought to engage with SCT’s Board of Directors (the “Board”) and representatives of the management team in a constructive, private manner since 2017. While we appreciate the dialogue, it is disappointing that our feedback and views have been repeatedly dismissed or ignored. Today, we are writing to share our recommendations for addressing the Company’s 68% trading discount to the value of its underlying assets, which is depriving minority shareholders the benefit of SCT’s high-quality businesses.1
Whitebox has invested in holding companies globally for decades and has made recommendations that are tried, tested and proven to be effective at reducing holding company discounts. After many years of being told to be “patient” because strategic actions cannot be taken until the criminal proceedings of Mr. Lee, Jae Yong (SCT’s de-facto Chairman and controller) are resolved, the Company’s recent decision to ignore minority shareholders and invest even more capital to grow its assets have compelled us to take a more engaged stance.
During our last meeting at the Company’s Seoul headquarters, we met with SCT’s shareholder advocate, Mr. Yi, Sang Seung, and Team Head of IR & Finance, Mr. Bae, Young Min. As an expert in finance, Mr. Yi clearly understands the harm caused to minority shareholders by the current discount to net asset value (“NAV”) and remarked that he too was frustrated with the Company’s share price. During our discussion, Mr. Yi commented that he found our analysis and recommendations, including for a share buyback, “compelling” given SCT’s current discount to NAV.
We want to ensure the full Board understands our views and recommendations to address the persistent discount to which SCT’s shares currently trade:
- Increase shareholder returns by re-allocating cash generated from SCT’s operating businesses, as well as passing through income from affiliates, towards dividends and share buybacks.
- Adopt a clear capital allocation framework to ensure that any decision to invest, make acquisitions or buy back shares are benchmarked against the Company’s cost of capital and each alternative.
- Implement a transparent executive compensation structure aligned with minority shareholders that incorporates the removal of the SCT discount as a key performance indicator.
By taking these actions, we believe the Board would demonstrate SCT’s commitment to enhancing value for minority shareholders, which would be widely supported by institutional investors and corporate governance advocates.
Priority #1: Increase Shareholder Returns
SCT’s stock performance has been poor, with the Company delivering -6.7% in total shareholder returns (“TSR”) over the last five years.2 Over the same period, the share prices of Samsung Electronics and Samsung Biologics (accounting for 79% of SCT’s NAV) have risen 34% and 84%, respectively, and SCT’s operating businesses have demonstrated impressive results with operating profit CAGR of 23% between 2018 and 2022. Clearly, SCT shareholders are not participating in SCT’s economic success.
Quantifying the above, we estimate that the value of SCT’s listed and unlisted holdings have grown 70% since 2018, contributing KRW 16.5Trn (KRW 89,000 per share) to the asset value of SCT.3 Despite this, shareholders have only received a cumulative KRW 2.4Trn in dividends (KRW 12,800 per share), while the Company’s share price has steadily decreased, depriving shareholders of over KRW 17.7Trn (KRW 95,000 per share) in returns.
Despite continued engagement from minority shareholders, SCT’s new 3-year Shareholder Return Policy does little to address the glaring and expanding discount between the Company’s assets and its share price. The policy is essentially the same as the two previous shareholder return policies, limited to the redistribution of 60-70% of dividend income from its publicly listed affiliates, primarily dependent on dividends paid by Samsung Electronics. The increasing profits generated by Samsung Biologics, the Company’s biggest growth asset, and SCT’s unlisted holdings, remain excluded from shareholder returns and will instead be deployed into ever-expanding asset growth. Shareholders have missed out, not because of a lack of growth, but rather a lack of shareholder returns.
SCT includes treasury share cancellation as part of its Shareholder Return Policy, but we would not characterise this as a shareholder return. To be clear: we wholeheartedly agree with the decision to cancel treasury shares as it removes a negative overhang, eliminates the potential to issue shares at a 70% discount, and is in line with corporate governance best practices. However, the cancellation of treasury shares, without an accompanying share buyback, does not put capital or income into the hands of shareholders. Treasury shares are not paid dividends and are not used in the calculation of earnings per share.4 Therefore, the cancellation has no impact on returns to shareholders.
This brings us to our recommendation to allocate a portion of free cash flow from all businesses and affiliates to dividends and share buybacks. Announcing and implementing this type of capital management policy in the near-term will signal to the market that SCT is prioritizing shareholder returns.
Priority #2: Adopt a Clear Capital Allocation Framework
We estimate SCT’s NAV, post cancellation of treasury shares, to be KRW 56.1Trn versus a market capitalization of KRW 18.7Trn. While SCT has plenty of assets that have been performing strongly, minority shareholders have not been able to participate.
We recommend the Board focus on narrowing SCT’s steep trading discount, which is currently 68% relative to its NAV. We believe this can be done by adopting a transparent capital allocation policy that prioritizes new investment, benchmarked against cost of capital and share buybacks.
Between 2018 and 2022 the Company has invested an average of KRW 500Bn per annum on capital expenditures. While this investment may have supported the improvement in the performance of SCT’s assets, none of this benefit has been passed to shareholders. And yet, the Company is now proposing to more than double capital expenditures to KRW 1.2Trn per annum, effectively eliminating the potential to return cash to its shareholders through buybacks or dividends.
If history is an indication of the future, shareholders are unlikely to benefit from this step up in investment. Return on Capital Employed at SCT averaged 4.2% between 2018 and 2022, compared to Bloomberg’s estimate of SCT’s Weighted Average Cost of Capital of 12.3%. The Company has destroyed shareholder value, with a track record of decision making that appears to ignore the interests of its minority shareholders.
With SCT’s 68% discount to NAV, every $1 SCT uses for share buybacks yields $3 in assets, a certain and immediate 300% return. Alternatively, every $1 invested directly into assets is worth only 33 cents to shareholders. The contrast in outcomes is so stark that we cannot fathom how an objective and optimal capital allocation policy excludes a share buyback.
Given the extraordinary risk-free return opportunity available through a share buyback versus the uncertainty of investing in new growth assets, we find it difficult to understand the logic behind the decision not to allocate at least a portion of free cash flow to virtually guaranteed returns. In light of this, we request a copy of the Board Minutes and financial reports prepared to support this decision.
Priority #3: Align Executive Compensation to Performance
We believe that SCT’s opaque executive compensation model should be adjusted to align executive incentives with shareholders’ interests. While there is minimal information available regarding the Company’s remuneration policy, we have records of SCT’s executive compensation awarded since 2016. The data does not demonstrate any linkage between compensation and TSR, with the highest compensation being awarded in 2018 and 2022 despite SCT TSR dropping -15% and -3% in those years, respectively.
In fact, there are no details regarding the criteria that determine the level of executive compensation. In 2022, the highest paid executives were Messrs. Choi, Chi Hoon and Lee, Young Ho, both receiving over KRW 7Bn despite being officially retired and presiding over the merger between Cheil Industries and SCT, which severely damaged the reputation of the Company and shareholder value.
We recommend SCT adopt a transparent incentive structure that aligns executive compensation with shareholder returns and includes a key performance indicator linked to the narrowing of the Company’s steep discount to NAV.
In conclusion, we continue to believe that there is significant shareholder value to be realized at SCT. If the Board follows our recommendations and takes the clear steps required to improve shareholder returns, refine capital allocation and enhance corporate governance, we firmly believe the Company’s share price will begin to reflect the true value of its assets. This will be to the clear benefit of SCT, its employees, minority shareholders and all Company stakeholders.
Due to the upcoming Annual Meeting of Shareholders, we request your response to this letter, including the Board Minutes and financial reports requested herein, by 8 December 2023.
If the Board does not meaningfully engage with us on our recommendations to enhance shareholder value at SCT, we intend to share our views with our fellow shareholders in due course. We look forward to your prompt response.
Yours faithfully,
Simon Waxley
Head of Equity, Whitebox Advisors LLC
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About Whitebox
Whitebox Advisors LLC ("Whitebox") is a multi-strategy alternative asset manager that seeks to generate optimal risk-adjusted returns for a diversified base of public institutions, private entities and qualified individuals. Founded in 1999, Whitebox invests across asset classes, geographies, and markets through the hedge fund vehicles and institutional accounts we advise. The firm maintains offices in Minneapolis, Austin, New York, London and Sydney.
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1 NAV is estimated using the market value of listed assets, a multiple of EBIT for unlisted assets, book value for land bank and net debt as of 30 June 2023. Treasury shares are treated as cancelled. All prices as of 31 October 2023.
2 Source: Bloomberg. TSR includes dividends reinvested. Calculated as of SCT’s share price from market close on January 2, 2018, through October 31, 2023.
3 Unlisted value growth estimated by applying a constant EV/EBIT multiple of 8x to operating profit from consolidated businesses ex Biologics.
4 See Samsung C&T Consolidated Financial Statements.