activist investors, Clearance Capital, DCD Media, EIIB, HBG Holdings, Joe Lewis, Laxey, Leo Fund Managers, Max Property, Minco, Net LTV, Nick Leslau, Principle Capital, Quintain Estates, Sirius, stockbrokers selling sandwiches, Taube Hodson Stonex, Terra Catalyst, Timeweave, Weiss
Continued from here:
In my previous post, I highlighted over a dozen listed activist investor vehicles (some at v interesting discounts) you can invest in. Additionally, you might also want to look at individual company situations – as I commented about activists: ‘Use them wisely (and profitably) to cherry pick and/or endorse your conviction stocks.’ Here are some interesting examples:
Timeweave (TMW:LN): I’ve written here about Timeweave, which has Joe Lewis on board with 29.99%, with another 5% in the hands of Leo Fund Managers. TMW has a steady business, pots of cash, and a whopping 10.4% dividend yield. If you strip out cash, it’s actually on a 4.7 P/E! Despite all this, it can’t seem to get any respect – take a look at the share price. But we all know shares like this, and wonder when we’ll see a decent return…
The difference here is the presence of an activist with a substantial stake (along with other savvy/activist investors). This is a secret weapon for a private investor, as a committed activist is capable of prompting a realization of value within an accelerated timescale. In TMW’s case, value realization could be a return of cash, a sale of the company or business, or a re-investment of their cash. The latter strategy’s debatable. We all know companies who enjoy a windfall…only to have management piss it away on beer, drugs and hookers. I’m sorry, I meant on egotistical, over-priced, empire-building acquisitions… Sorry, I meant, zzzzzz…oops, I nod off thinking about management double speak.
Minco (MIO:LN) investors suffered this fate recently. They waited for God knows how long, at least 10-15 years…to crystallize value from their Pallas Green lead-zinc project. Their reward? A hasty sale at an (apparently) bad price to Xstrata (XTA:LN), their exploration partner, then radio silence, and finally the realization their board were dead set on embarking on another decade long odyssey! C’mon…don’t shareholders know management have houses to buy, and cellars to fill?
When you’ve an activist investor on board, however, this kind of arrogance is often curbed, sometimes simply through management’s own new found self-restraint. If management’s suitably restrained, cash re-investment can be just as good a source of value realization/enhancement. It will obviously improve earnings (vs. the current pathetic returns on cash), possibly enhance scale/existing business, and may be just the spark needed to improve market sentiment.
Since my last post, TMW announced a GBP 3.1 mio acquisition of DCD Media (DCD:LN) convertible loan stock (which would convert, if exercised later this year, to a 29.99% stake). I need to look closer, but I’ve always liked content businesses. Their finances are sometimes a little shaky, and true performance is often obscured, but a history of being taken out at whopping premiums attests to the underlying value creation in this sector. This purchase has been welcomed by the market (prompting a 10% rise in TMW’s share price), and perhaps even by DCD (cautiously!).
Coupled with a small acquisition in 2011 (of SportingWins), this suggests a new acquisition strategy for TMW to enhance existing business and/or broaden its media portfolio. There’s been no comment from Lewis, but he prefers to stay behind the scenes – I’m quite sure he initiated or OK’d this new strategy. I’d still like to see a (partial) return of cash – to highlight the (unchanged) earning power of the business – but, as I’ve said, this deployment of cash can significantly improve returns. TMW’s plenty of firepower left, and more news developments may finally spark a growing interest in the shares and the company’s inherent value.
European Islamic Investment Bank (EIIB:LN): I’ve written in detail about EIIB here and here, and most recently here. HBG Holdings, with a 15.6% stake, promised to be operational activists from day one, and they’ve clearly followed through on this with the CEO, Chairman and another non-executive director all HBG staff/nominees. The recent Rasmala acquisition is another confirmation that HBG have now cemented EIIB’s focus on being a private equity investor/asset manager (don’t be alarmed, ladies and gentlemen, we’re not dealing with a bank here..!).
I like the geographical focus also – when you hear about stockbrokers selling sandwiches, it’s definitely time to buy, no matter how unpalatable at the time! Stocks, I mean, not sandwiches… btw This applies in other markets too! The looming possibility of another oil price spike helps too, in addition to the underlying secular trend in oil demand and prices.
To date, the share price has failed to respond to this new operational focus, but with HBG now firmly in the driving seat I’m confident we’ll see further operational developments and/or shareholder friendly actions. The banking license still presents possibilities, but maybe the best solution would be to sell it, and ideally maintain some kind of most favoured nations status with the bank. Another (larger) tender offer would also be obvious: It enhances NAV, and would be welcome news for the share price, while still leaving plenty of cash on hand for prospective private equity investment. In fact, I think a tender offer would be a decent quid pro quo for shareholders in return for accepting there’s a new strategic plan in place for the company (rather than a liquidation).
My current Fair Value is basically unchanged at GBP 8.09p per share. It therefore trades at a colossal 60% discount to estimated NAV, with an Upside Potential of 151%, vs. today’s price of GBP 3.22p. I currently have a 5.1% portfolio stake.
Quintain Estates & Development (QED:LN): Haven’t actually mentioned QED before on the blog, let’s take a closer look. QED’s a London-focused urban regeneration developer and fund manager. They rabbit on about the fund management a lot – yeah, it’s a nice little operation, but its stand-alone valuation is fairly immaterial. Another bull market’s needed to really suck in funds here. The development business is the real meat here, focused primarily on two schemes, Wembley City and Greenwich Peninsula.
I’ve always been drawn to developers as the best play on property (in theory!). London’s good in this regard, as it has plenty of listed developers – they’re often sadly lacking in other markets. With a developer, I believe you get the same underlying exposure/returns as with a property investment company/fund (aided by some judicious leverage), but you also enjoy a stream of v attractive development profits – the real icing on the cake! Of course, development attracts the more speculative/optimistic players (and cowboys) – the only way to weed out the field is to have a good sense of long term successes and reputations in the industry. This often boils down to ‘follow the man‘, not the sector, or even the company. For example, I’m a huge fan of Max Property (MAX:LN) for one simple reason (to be fair, there are other good reasons) – Nick Leslau.
I think Quintain’s got a reputation as a smart/successful developer over the years. Oh dear…before somebody blunderbusses me on that statement, let me make an important point! I’m focusing on their property development skills only here. Let’s look at the management of most property companies: What do they eat, sleep, and drink? What do they think is the best asset in the world? What happens if they stop buying property (they get fat…and impotent)? See what I mean? You can hardly blame them for their enthusiasm, their risks, their leverage, their excesses… Your job is to supervise and control all this!
Investing in a developer means being even more careful about monitoring leverage and cashflow. I’d argue you should demand a lower average Loan-to-Value (LTV) ratio for a developer, in light of the additional risk and reward. And you have the luxury at all times to pick when you buy, and sell, a developer. If the market’s getting frothy, projects are getting too ambitious and leverage is being assumed with reckless abandon, don’t rely on management to necessarily bail you out! It’s up to you to figure out when to sell, ‘cos they probably won’t. The best time to sell? When you, and everybody else, are starting to feel invincible, and you’re loath to sell at what seems like such a cheap price..! Incidentally: When I start getting cocky about the market, my wife’s on standing instructions to warn me (and slap me!) – then I know I need to start selling some stuff…
Yes, QED’s NAV collapsed by about 80% – I’m glad I didn’t have to suffer through that… But I don’t think this is necessarily an indictment of their property skills, what really put the boot in was too much confidence, too much leverage and (most of all) a massively dilutive rights issue to set their finances straight. Situations like this (whether it’s property or not) can present an amazing opportunity after the event – financial risk’s been eliminated, asset values and/or goodwill have been slashed, and yet the share price is still cratered because people have grown to hate the stock so much.
Now Quintain management seems suitably chastened, and more risk averse. They’ve set a transparent list of targets, and are actively tracking against them. Balance sheet values have been marked down significantly in the past few years, and QED trades at a massive 66% discount to NAV (averaging the latest NAVs). Recent progress/activity appears to confirm the latent value now embedded in the portfolio. With leverage now under control (and further news flow), there’s no reason decent returns can’t be extracted simply from discount compression alone.
Net LTV is around 51% (up from 41%). This bears monitoring, but appears a natural consequence of their new approach to phased development. If I understand correctly, and they’re consistent in their new approach, we should expect to see Net LTV move within a range. In the past year, it’s cycled up as they progress development – we should then see it drop back down as they realize value from completed phase(s). And repeat. Cash coverage is often ignored with developers, as they’re constantly buying and selling things, but I estimate QED has about 1.3 years of cash on hand to cover annual expenses. Put all this together, and QED certainly appears a cheap (medium risk) property stock.
And now the catalyst: Laxey Partners! I’ve written about them in previous Catalyst posts – they’re a pretty aggressive/successful fund manager, focused mostly on closing asset discounts. They’ve been involved in some pretty high-profile, and acrimonious, shareholder/takeover battles. Property’s a sector they’re fond of, evidenced by their activist property vehicle, Terra Catalyst (TCF:LN). Between TCF and other funds, they now have an (increasing) 13.1% stake in QED (Taube Hodson Stonex (and here), another respected investor, also have a 4.9% stake). QED now appears to be Laxey’s largest listed property investment.
Despite appearances, Laxey are relatively conservative, so we can be sure they’ll be actively monitoring QED’s leverage. Early last summer, it looked like the market was ready to recognize QED’s fundamentals, Laxey’s significant presence, and rumours of a possible takeover bid. The share price rallied sharply from the mid-30s to the mid-60s, and was then overwhelmed by the EU Winter of Our Discontent. Now, it looks like we could see the same trajectory again – if not, expect Laxey to become impatient before too long and push for a sale, or wind-down strategy. In fact, Laxey could scare enough capital/support to launch a bid itself, as it’s done a number of times before. These bids included a successful bid for Spazio, which had almost EUR 800 mio in property assets at the time (and is making excellent progress with a wind-down strategy since).
Sirius Real Estate (SRE:LN): I’ve written a detailed piece about Sirius here, with some follow up here. Since then, they’ve completed an internalization of their property/asset manager, via the acquisition of Sirius Facilities GmbH from Kevin & Frank Oppenheim and the Principle Capital Group. I’m bemused at this constant cycle of internalization and externalization in the industry. It’s like Coke & Pepsi buying and selling their bottlers every decade, among other examples! The lengths management will stoop to simply to generate some heat and light (and investment bankers, to earn some fees) no longer surprises… Oh well, they claim the purchase price will be made back v quickly in savings.
I’ve v mixed feelings that the majority of this EUR 5.1 mio purchase was funded by a 15 million treasury share issuance. Since the current price was used to value the shares, this is a dilution. Shame on management! Net assets (attrib. to shareholders) increase by EUR 3.2 mio to EUR 189.2 mio, while net shares outstanding increases to 317.2 mio, reducing NAV by about 3% to EUR 59.6 cts. EPRA NAV drops in a similar fashion to EUR 64.5 cts. This purchase will be recorded mostly as goodwill, but it’s a tiny % of assets and represents future savings, so I don’t see fit to remove this asset from my calculations. Net LTV remains stable, at just under 61%. At the current share price, SRE trades on an equally stupendous 61% discount to average NAV.
On the other hand, the Oppenheims and Principle Capital have increased their SRE shareholdings, as a result – this I like! And definitely an interesting share register development! We have 3 classes of shareholders here – let’s summarize: i) The smart/non-activist money: Alpine Woods at 4.0%, and Taube Hodson Stonex (again) with 3.4%, ii) The in-betweeners: The Oppenheims (9.6%), with no activist history but obviously with a v personal/vested interest in SRE’s strategy and market value, and iii) The activists: Good Lord, the register’s a veritable orgy of activists..! Yes, that’s the collective noun, just look it up (and I believe the noun for a gathering of senior corporate management is a ‘bloat of hippopotami’). Karoo/Clearance Capital has 25.0% and a board seat, Weiss/Brookdale has 15.2% and 2 board seats, Principle Capital has 11.1%, and Laxey has 9.6% and a board seat. If this witches’ brew of capital, egos and naked aggression can’t produce some real value, I don’t know what will..!
It looks like this process has now started, albeit still somewhat politely. Sirius made a recent announcement – bizarrely buried at the bottom of the ‘Management Internalisation‘ RNS they released. I swear a lot of people may never have actually noticed or heard about this..!? It stated they appointed another Principle Capital/Oppenheims vehicle (PCSREAM) to act as advisers in relation to the sale of a EUR 100 mio portfolio of non-core properties. This is quite a development, and an incredibly low-key way to announce it..!
Whether this is the beginning of a wind-down strategy, or simply a transaction to highlight/catalyze the intrinsic value of SRE, I don’t know – and I don’t really care! I think shareholders win either way. This isn’t a fire-sale (the contract lasts ’til a sale is completed, or Jan-2014), and at an overall average EUR 427 per sq mtr valuation I see no reason they can’t shift the portfolio out the door at book value, or better. While I’m comfortable with SRE’s current 61% Net LTV (due to the unique characteristics of German property I’ve commented on before), a lower LTV would be v welcome. And a great news and value realization event to grab the market’s attention..! I estimate a sale would bring SRE’s Net LTV down to 52%, or lower, with only a minor NAV impact.
Hell, let’s be pessimistic and look at an alternative scenario: Assume they sell the portfolio for EUR 84.5 mio (3% in fees, and a 12.5% loss on book value). Net LTV would drop to about 55%, but NAV would be diluted by almost 8%. Not so hot? Well, I don’t see a problem! Sure, NAV would be a little lower, but I think the odds of the share price closing in on NAV would increase dramatically upon a sale.
I see no reason to shift my Fair Value away from 1.0 Price/Book, which is a equivalent to a current EUR 62.1 cts. This offers an Upside Potential of 159% vs. current EUR 0.24 market price. Prompted by this development, and an increase in Weiss’ stake, I increased my own stake earlier this week from 3.7% to 4.4%.
Two more catalysts to come, folks!