Brook Crompton (AWC.SI) update: majority shareholder shenanigans

I wanted to post an update about Brook Crompton (AWC.SI) which I last wrote about two years ago. Back then the situation seemed pretty attractive: a cash-rich company with relatively steady earnings, trading at a nice discount to book value, and with some buyout potential from the majority shareholder. Enough for me to buy a small position and just see how things develop.

Well, things have not developed well. I have recently sold my shares. In my opinion the majority shareholder, the Chinese company Wolong Group, pulled a dirty trick and left minority shareholders with little hope of improved capital allocation or a future buyout. The company is pretty much uninvestable for me at this point.

The backstory is that minority shareholders were becoming increasingly vocal and a nuisance to Wolong and Brook Crompton’s management. Shareholders were asking them critical questions at the annual meeting about the microscopic dividend, the lack of share buybacks and some other issues.

The first major confrontation then came in June 2022 when minorities actually blocked a proposed acquisition of a small Wolong subsidiary. In my view they were right to do so because the valuation of the acquisition target was at a much higher multiple than Brook Crompton itself was selling for in the market. Shareholders would also probably be able to get a much better return by investing the money themselves if it was returned to them as a special dividend. Since Wolong was a related party to the transaction, they were not allowed to vote on the acquisition and that’s why minority shareholders won that battle. This gave me some hope that management had to come to some sort of an agreement with minority shareholders and return more capital.

Fast forward to April 2023 when shareholders had to vote on a so called “interested person transactions mandate” (IPT mandate). Since Wolong is the majority shareholder and the major supplier of the electric motors that Brook Crompton distributes, minority shareholders had to approve these related party transactions by approving the IPT mandate. If approval was not obtained, I think every individual transaction with Wolong above a certain threshold would have to be approved by shareholders, which would make operating the business pretty much impossible.

Again minority shareholders were successful and voted against the IPT mandate. So it looked like Wolong and Brook Crompton’s management really had their backs against the wall at this point. I thought there was a decent chance they might commit to paying a large special dividend, or even make a buyout proposal.

Unfortunately it proved to be fairly simple to sidestep this whole issue. Brook Crompton’s management called an Extraordinary General Meeting (EGM) for July 19, to put the IPT mandate back on the agenda for another vote. But what’s the point of that? How could they suddenly win the vote now?

Then on Saturday, July 8 this change of ownership filing was released. The Wolong subsidiary (called “ATB Austria Antriebstechnik”) that held the Brook Crompton shares, disposed 1.7m shares at a price of $0.55 per share. These shares constituted a stake of 4.9%, which is right below the threshold of 5% which triggers an ownership disclosure obligation at SGX. So the buyer was able to stay anonymous by staying below 5%. All alarm bells started ringing for me at that point. The sale of such a 4.9% stake, at a bargain price, less than two weeks before the vote and sneaked by shareholders and the SGX on a Saturday? It doesn’t get much fishier than that.

I thought that this sale was done with the purpose of defeating the minority shareholders at the upcoming EGM and I wrote to SGX and asked questions about the identity of the buyer, its relationship to Wolong and if they would be allowed to vote these shares at the EGM. SGX asked the company for clarifications on July 12. In that filing it was revealed that the buyer of the 4.9% stake had a “business relationship” with ATB subsidiaries and that there were also “business and joint investment transactions” with the Wolong Group. The amounts of these transactions were not mentioned. Keep in mind that Brook Crompton is a micro cap with a $19m SGD market cap. It is very possible that the buyer of the shares does business with Wolong entities on a scale that far exceeds the entire market cap of Brook Crompton. For example, Wolong Electric’s market cap is 16.9bn CNY (or $3.2bn SGD).

Obviously, a buyer that accepts a 4.9% stake in Brook Crompton and does business at a much larger scale than the value of this stake (about $1m SGD) can’t really be called disinterested in the outcome of the IPT vote. That would clearly be a case of “you scratch my back, and I’ll scratch yours”. I wrote to SGX again and asked them if there was room under Rule 904, 4(A) to deem the buyer of the 4.9% stake an interested party and block them from voting. The rule says:

The Exchange may deem any person or entity to be an interested person if the person or entity has entered into, or proposes to enter into: (a) a transaction with an entity at risk; and (b) an agreement or arrangement with an interested person in connection with that transaction.

Apparently, the rule does not apply here, because I received this reply from SGX:

We have noted that both ATB and the Company have no shareholding interest in the Purchaser, and the Purchaser is not a counterparty for the IPT transactions for which the Company is seeking to renew the mandate at the upcoming EGM. We also note from the Company’s responses that there is no agreement between the parties in connection with voting on the renewal of its IPT mandate.

It seems that as long as the company says that there is no agreement or understanding between the parties about the IPT mandate vote then everything is fine. Well, that just seems crazy to me. Everything about this transaction screams that there is an understanding between Wolong and the buyer. Why else sell this stake, at this exact moment at this bargain price? In my opinion SGX should examine the relationship between Wolong/ATB and the buyer in much greater detail. What is the name of the buyer and what is the amount of business that is actually taking place between them? Perhaps the rules surrounding IPT votes can be improved in the future, but that doesn’t do Brook Crompton shareholders any good today.

The outcome of the IPT mandate vote this time around? It comfortably passed: ~2.3m votes for and ~738k against. Why even have a IPT vote anymore if SGX allows stuff like this to happen?

Anyway, I feel like I did all I could here. I wrote to the Singapore Exchange to highlight this questionable transaction, I contacted a corporate government expert in Singapore for feedback and posted on a shareholder forum in Singapore, but all this didn’t change the ultimate outcome. I have sold my shares and moved on. I was under no illusion that this was a great investment opportunity so I had sized it very small. Still, it is a disappointing outcome because it also highlights some of the issues that the SGX still has when it comes to protecting minority shareholders’ interests.

My original write-up mentioned some hope for a buyout or a large special dividend. I think that possibility is now very small. Wolong’s shenanigans show that they attach value to keeping Brook Crompton listed in Singapore as a separate company. Why else would they have taken all this trouble to sell a 4.9% stake to the unknown buyer? And that acquisition of the Wolong subsidiary that was voted down by minority shareholders last year? Don’t be surprised to see a new proposal being tabled sometime in the future. Wolong will have no trouble getting approval that time around. That’ll absorb some of the excess cash that’s on the balance sheet at that point…

This stock really is a “value trap” after all, I’m finally convinced.

Disclosure: no position in Brook Crompton or any Wolong related entity.

Posted in Singapore stocks.

One Comment

  1. Thank you for the update. I had purchased shares after being alerted about the company from your prior write-up. I agree with you that it was a very nice investment at the time. I did not understand the recent drop in price but with your insights I see what is the cause. Thank you for your activist efforts with the SGX. Might be able to salvage my investment if they started earning money again. Earnings have hit a wall.

Leave a Reply

Your email address will not be published. Required fields are marked *