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Companies with S44 Credits

A win-win situation would be a right issue.

 

Examining their both Seksun and SMB financials, both have very low debt, positive cashflow and highly improving P&Ls going forward. EPS healthy and forward ROE in the double digits so optimistic about the payouts. Both have significant CAPEX investment done already looking at their financial statements esp Seksun. Both have significant minority investors so against this backdrop, don't think mgt would want to thousands of antagnostic moniority shareholders.

Only issue I have is how much s44 seksun has cos SMB is known to have $8.5m of s44 credits.

 

If the company has outstanding huge debts or poor cash balances due to capital utilizations to purchase capital-goods and business expansions, the mgmts most probably will not pay-out dividends even they've sufficient tax credit (sect 44) to frank dividends. Or they may need all the resources for future expansions. That the case, the company is justified not to utilize S44, otherwise shareholders have every right to demand that dividends should be distributed. Cheers!

 

That's a possability but will incur the wrath of miniority shareholders esp if they are significant. Look at Isetan. Seksun has almost 40% public spread so that's significant. SMB has almost 45% with no single dominant shareholder so not likely would happen unless the board is fine with selldown of the shareprice too.

 

i was just thinking to myself

some majority family owned business might acutally let the S44 credits expire worthless

why???

cos the directors are already being taxed at the highest tax rate (20%). that means it would not benefit them as they would not recieve any refunds from the tax dept at the end of the day. 

 

hmmm. not sure about that. there was a slight sell down of seksun a couple of weeks ago cos punters were disappointed that seksun did not declare any dividends when they release their results recently.

 

So looks like rights issue at steep discount is the way to go. In anycase, will be good for the counter in the shortrun. HG Metal cheong 20 cents from 30cents to almost 50cents before the record results, bonus dividend and rights issue was annouced, adding another 6 cents after that.

Wonder if Seksun has this much untilised credits too?

 

I'm not too sure about this but i think that there is some rule that says a company cannot finance dividend payments using debt.

Also, dun forget that the company cannot use all this cash balances to payout dividends. It needs the cash for working capital too.

 

yippie!!! if that's the case. However, SMB cash position is about $28m so to give 10 cents plus another 1.5 cents, they would need about $50m so looks like they may go for the rights issue route which HG Metal, Allgreen did unless they use debt to pay out the credits.

 

Yes. Thanks... a very useful thread indeed.

 

giantlow,

Thank you very much for starting this post. I am very interested in dividend stocks for 2007.

 

yup, u are rite, DanielXX. The technical term is they can frank 10 cents worth of dividends with 2 cents credit

 

Well Victorian if SMB has 2 cents in S44 credit that means it should issue dividend of at least 10 cents to fully utilise these credits (tax rate 20%) :-)

 

Seksun is defintely a fundamentally strong counter. Consistent dividend policy in the last 4 years and improving operating cashflow and improving P&L. Yield about 4%, not mouthwatering but given an expected capital appreciation, it's fine. How much S44 do you know they have cos can calculate the bonus expected dividend?

 

thanks for your post victorian,

i am staying out of Isetan cos the parent in Japan seem very stuborn.

what stocks with S44 bal are you looking at for 2007?

i am particularly looking at CSM and Seksun

 

Section 44 tax credits in layman terms is the cummulative corporate taxes that companies would have paid in the years before 2003 that would be available for companies to pay out in tax frank dividend

Here is how it works.

Assuming Coy A paid $2m in taxes annually for 5 years from 1998-2003. Its annual gross profit would have been about $10m for 5 years then. Cummulatively, over 5 years, it would have $10m in taxes hence accumulate $10m worth of S44 tax credits.

Example

If coy A has a share cap of 200million shares, and with $10m worth of S44 credits, it can pay out $10m/200m........2 cents per share. This potential dividend is on top of its dividend policy so if coy A has a proven dividend policy of say 1cent in the last 5 years. Shareholders can then expect 1 cent + 2 cent (tax frank dividend from S44 credits) or 3 cents in total. If the share price is trading at 30cents, the yield then is a mouthwatering 10%.

implications

Hence, looking at large coys and companies that made shitlot of money and paid good taxes are prime targets of one off high dividend.

Casestudies

Isetan is defintely a infamous example as it made a lot of money in the late 90s hence had lots of S44, infact almost $3-$4 worth per share which is why miniority shareholders are taking drastic action. The reason for not wanting to pay is Isetan Japan holding 60% of the coy having to potentially pay huge taxes on the dividend if paid out. In anycase, most coys do pay out esp those with healthy cash balances and cashflow. Those that don't have good cash balances do a rights issue at deep discount.

One example is 2nd Chance Propoerties, it paid out net dividend of 2.4 cents last FY and for the next 2 years, committing to pay out 2.7cents and 3cents. Some of it is due to S44 giving very good yields of 8-9%.  and it has extremely positive operating cashflow to sustain such payouts. Share price has been showing steady appreciation cos of that. Others that paid out handsome dividend include Allgreen, HG Metals, Superbowl and Noel. Such examples showed jumps in their share prices when they announced bonus dividend and rights issue

Another example is SMB United, has $8.5m in S44 left according to its IR hence about 2 cents per share. Has been paying out annually consistently 1cent to 1.4 cents of dividend so this year can expect bumber dividend. Which probably explains why the counter is coming to life right now. If it pays out 1.5+2cents or 3.5 cents, its a whopping 15% yield at its current price of 23cents

Others counters I would expect significant credits would be the banks, brokerages but nothing beats going to the library to look at old annual reports prior to 2003 or a old copy of Share Invement booklet to look for such counters, look for consistency of its dividend payouts and finally how much money they have in the bank or do they have good operating cashflow to support the payout without having to resort to a rights issue which in anycase, is at steep discount so in the short run, share price will run. The small caps would with significant S44 will have mouthwatering yields/payouts as their share issue are much smaller compared to say the bigcaps with big share caps so in absolute terms, the payouts may be big but the yield% small as the price is much higher than some of these small caps.

eg Noel, 13 cents, before annoucing 12cents dividend. Price jumped to high of 26 cents before ex-dividend.

Happy hunting

 

Hi scotty, I am also very alien to the S44 thingie but I had copy and pasted giantlow post. Dunno whether it can answer your question or not, here it goes-

giantlow Member	Posted: 31-Dec-2006 13:10
x 0 x 0	Any tax payable on the company?s normal chargeable income (known as ?tax assessed?) would be credited to the company?s Section 44 account. Tax assessed on a resident company is passed on to its shareholders as a tax credit to the shareholders on payment of dividends. This is known as the Section 44 Account mechanism. Shareholders are taxed on gross dividend and tax credits are given.
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Hi... can someone explain to me what the heck is a S44???!

 

can someone be so kind as to comb though the SGX website for companies annual reports to find out the companies with S44 balances? So far, I know

Seksun and CSM as s44 balances

 

I understand that UOB is sitting on large sum of this tax credits. Can anyone confirm this ? There is also a possiblity of the stock going for a stock split to make it more affordable.