By Khairie Hisyam
Should S P Setia shareholders be concerned about the group’s Employee Share Grant Plan (ESGP), which basically enables the group to award essentially free shares to its employees — including directors — of up to 15% of outstanding shares?
Under its ESGP approved by shareholders in February, the company may award employees and executive directors of the group free shares “at no consideration over a period of up to four (4) years”.
Notably, the new shares issued as ESGP awards “will not be subject to any retention period or restriction on transfer”.
ESGP is a component of the group’s new Long-Term Incentive Plan (LTIP) which replaced the previous Employee Share Options Scheme (ESOS) that expired on 5 May 2013. LTIP was approved to replace the previous ESOS in an extraordinary general meeting (EGM) held in February this year.
However, LTIP also has an ESOS component alongside the ESGP, raising the question of why ESGP was introduced to grant free shares when there is also the more traditional share options scheme to employees.
While share options for employees as rewards for performance have become the norm in the corporate world, it is not without its share of criticism. Among them is the fact that share prices may be affected by reasons unrelated to the employee’s performance, thus conferring too little or too much in terms of actual value.
Another criticism of share options is the potential dilutive cost to shareholders in the long run, sparking suggestions that profit-sharing schemes are preferable.
In this context, S P Setia’s decision to award free shares alongside share options is puzzling at best — who gets the free shares and who gets just the options?
Shareholders gulp severe dilution for staff retention?
Alarmingly, the circular states that the maximum number of new shares available under the LTIP can go up to 15% in aggregate of all the group’s issued and paid-up share capital, excluding treasury shares if any, at the point when the LTIP awards are made.
For the shareholders, it means they may see their holdings diluted by 15% over time with the issuance of not only share options, which employees still need to pay for to exercise, but also of entirely free new shares, whose dilutive effect is even greater than options.
By any means this is not a trivial dilution. The rationale of LTIP as stated in the circular centres around promoting staff loyalty, with the plan designed to “motivate and encourage … employees towards a greater level of commitment, dedication, loyalty and to enhance productivity”.
Liew Kee Sin
That shareholders approved the plan in February despite the potential dilutive impact is telling. Does the approval reflect overriding worries over a possible brain drain over the expected departure of group president and chief executive office Liew Kee Sin?
“I cannot answer for my shareholders,” said Liew when contacted by KiniBiz. “S P Setia have always had a scheme to reward staff.”
“Before this it was the ESOS scheme which has expired. The new LTIP is a continuation of our total staff package,” added Liew who said he is currently in London with most of his senior staff for the Battersea ground breaking ceremony by the British and Malaysian prime ministers.
Liew is expected to leave S P Setia by the first quarter of 2015 when his contract expires, with some speculating that he may be leaving earlier.
Notably, the shareholders’ approval came despite a private placement exercise of 15% of outstanding shares or 320.7 million new shares also in February this year. The new shares were priced at RM2.94 per share, a 6.87% discount to the five-day volume weighted average market price at the time.
However, the price is a stark contrast to the general offer of RM3.90 per share made by Permodalan Nasional Berhad (PNB) in September 2011 for S P Setia. The board rejected the offer, noting that it “fundamentally undervalues the Company”.
PNB holds 51.41% of the group according to its 2012 annual report while PNB-linked Amanahraya Trustees Bhd hold another 18.45%. Therefore it is reasonable to infer that PNB approved the LTIP despite the adverse impact on its holdings.
It also raises the question of whether minority shareholders actually supported the idea as PNB appears capable of pushing through the resolutions single-handedly.
PNB has not responded to KiniBiz queries over its position on the potential dilutive impact of the LTIP scheme at publication time.
LTIP costs “only an accounting treatment”?
The actual impact of LTIP awards on S P Setia shareholders’ EPS remains to be seen, yet in its circular to shareholders, the group stressed that the potential cost of LTIP awards does not represent cash outflows and instead is only “an accounting treatment”.
However, in its circular the group projected that as much as 368 million new shares may be issued under the LTIP, assuming the private placement in February raised the total outstanding shares to 2.45 billion shares. At the current market price of RM3.25 per share, it translates to nearly RM1.2 billion in value — although it is not clear what portion of that amount will be from the ESGP portion compared to the ESOS component.
What is clear is that shareholders can expect their holdings and EPS to be diluted as the ESGP component of the LTIP raises the prospect of more mouths sharing the S P Setia pie without adding to the size of the pie. The underlying question is how minority shareholders will be impacted in the long run as a consequence of up to 15% in free shares awarded over four years.
On the other hand, an analyst commented that S P Setia is unlikely to award substantial amounts of new shares for free in any single ESGP award. “That’s huge,” opined the analyst when contacted by KiniBiz.
An important point is that the allocation of new shares under the LTIP will be determined by the committee authorised by the board “at any time, at its discretion”.
However, it is also noted that allocations of new shares to anyone already holding 20% or more of S P Setia shares will be limited to a maximum of 10% of outstanding shares.
Additionally, LTIP awards would still require shareholders’ approval at a general meeting if made to “an executive director or employee (who is the chief executive or a major shareholder of our Company or our holding Company, where applicable) and persons connected with him”.
LTIP award recipients may not vote on resolutions concerning their own LTIP awards nor participate in related discussions. The LTIP will be in force for five years and the board can extend it for up to another five years at most.
S P Setia passing staff retention costs to shareholders?
One implication of the scheme is that shareholders may be bearing the costs of retaining key staff members at the expense of their earnings per share (EPS).
In the circular to shareholders, the group noted that LTIP will “provide a valuable incentive to our employees without adversely affecting the cash flow of our company”, suggesting that the lengths necessary to retain key staff members may come with a higher price tag than what the company’s balance sheet can afford.
S P Setia also has yet to respond to KiniBiz queries about LTIP at publication time.
However, executive vice president and chief financial officer Teow Leong Seng admitted last month that staff retention is the main challenge post-Liew, which led to the LTIP’s implementation.
“The key concern is whether the people will follow him or leave to join other real estate companies, I am hoping not,” Teow was quoted as saying on the sidelines of the recent Invest Malaysia 2013 event.
Analysts last month noted that more than 200 staff members have left S P Setia since Liew confirmed his imminent departure by March 2015 at the latest.
Among that number is S. Rajoo and Chang Kim Wah, S P Setia’s general managers for the northern region and southern region respectively. Their exit has been linked to Liew’s departure as the group is known to be generously rewarding to performers, having won Aon Hewitt’s Best of the Best Employer Award Malaysia twice.
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