Were there early warning signs of Ensogo’s SEA exit?

By Goh Thean Eu June 23, 2016

Substantial shareholder RBC had sold all its shares, at a substantial loss
Non-independent director Thomas Baum resigned just a few days ago

Were there early warning signs of Ensogo’s SEA exit?

DESPITE its ongoing troubles, online marketplace company Ensogo Ltd’s June 21 announcement that it was shuttering all its e-commerce operations in South-East Asia and Hong Kong still came as a surprise to many.

There were early warning signs, despite the fact that many industry observers had figured that its third round of layoffs – involving the retrenchment of over 300 of its 600 employees -- would help the company overcome near- to mid-term hurdles.

“I don’t think the closing down of all its e-commerce markets in South-East Asia and Hong Kong is a sudden decision, so I won’t be surprised if some of the key people in the company knew about this decision, or the increasing possibility of this decision, before it was announced,” one industry observer told Digital News Asia (DNA).

One day before the trading of Ensogo shares were halted on the Australian Securities Exchange (ASX), its non-executive non-independent director Thomas Baum had resigned with immediate effect.

While the resignation of a director is not unusual, it does raise the question as to why.

Also on May 24, less than a month ago, substantial shareholder RBC Global Asset Management Inc had sold all its 2.31 million Ensogo shares for A$1.15 million. [A$1 = US$0.75]

RBC had acquired a 6.17% stake in Ensogo on Nov 26, 2015, when it bought 46.35 million Ensogo shares. After the acquisition, Ensogo went through a share consolidation exercise, merging 20 shares into one.

After this exercise, RBC’s 46.35 million shares were reduced to 2.31 million.

While RBC’s stake in Ensogo remained the same, its value did not. When it became a substantial shareholder, Ensogo shares were trading at the A$1.70 level. Today, they are trading at the sub-A$0.70 level.

“When a significant shareholder exits completely, it will usually ring alarm bells – especially when it is selling at a loss,” said the industry observer, requesting anonymity.

Assuming RBC acquired the stake at A$1.70 per share, it could be exiting at a 40% loss, or higher. Ensogo shares closed at A$1.00 on May 24.

What options now?

From Ensogo’s official statement, it seems that the company plans to preserve its cash for new investment opportunities.

Based on documents filed with ASX, Ensogo has over A$17.6 million as at March 31, 2016 – an A$11-million decline from the A$29 million in cash it had early this year.

“If the company has more or less the same amount it had in Q1 (the first quarter of the year), it should be enough for it to find suitable investments,” said an analyst who declined to be named.

With a cash position of A$17.6 million, it means the company is valued at about A$0.50 a share – just 23% below its current trading price of A$0.65.

Another option for Ensogo would be to sell its listed status to a company looking for a shortcut to go public.

It is common for companies to buy distressed companies’ listed status. The move, known as a backdoor listing, offers advantages over an initial public offering (IPO).

To go public, companies need to meet regulators’ revenue and profit requirements (for example, they may need to be profitable for a few consecutive years before being able to list); conduct roadshows (which can get quite expensive) to market their stocks to investors, and so on.

However, Australian regulators are tightening their rules, making it more difficult for backdoor listings.

For now, the trading of Ensogo shares will be suspended until the company is in a position to satisfy its listing requirements, and minority shareholders have no choice but to hope that something positive can emerge from this unfortunate chapter.

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