Anhui Chaodong Cement, catalyst, David Wong, Dhir India, FBD Holdings, German bunds, intrinsic value, major sale, NAV discount, Ovoca Gold, Polymetal, Prosperity Minerals Holdings, Sirius Real Estate, takeover offers, Tim McCutcheon, Trinity Biotech, wind-down
Continued from here. We were looking at a major sale as another catalyst.
Recently, I confess I’ve been less focused on this (and my next) catalyst. No bad reflection, it simply reflects my ‘bar-bell‘ approach – investing in lower-risk catalyst situations nicely balances out higher risk positions (like emerging & frontier market equities, as most would characterize them). This can mean higher risk catalyst stocks get crowded out of my portfolio… But if I want to shift overall risk lower, as I suspect I’ll continue to do, this catalyst category should make a nice comeback in my riskier portfolio allocation. Let’s illustrate with some examples:
i) I did a Dhir India (DHIR:LN, delisted) writeup last November. An initial catalyst attracted my attention in September – in their Final Results they stated: ‘…The Board has decided to seek to accelerate the process of returning value to shareholders through a review of the investment and realisation strategy and over the next twelve months steps will be taken to try and achieve this aim‘. Not quite definitive, but this obviously offered a wind-down strategy as a catalyst.
The clincher was a GBP 14.6 mio sale of land & buildings, plus plant & machinery, from one of their investment projects (Cygnet). Compare this to a GBP 2.7 mio market cap (a GBP 16p share price) at the time..! Despite potential court interference/delays, this was a major sale catalyst. btw The stock had utterly collapsed at this point, trading on a 0.12 P/B. Considering both catalysts, there was finally a visible/timely path to value realization (not that I expected NAV to be attained!).
One catalyst can lead to another with surprising frequency. This happened here in v short order – one month later, a GBP 42p Cash Offer was announced, so now we had a takeover catalyst! Even then, a fresh investor still had a chance to play – there was plenty of opportunity pick up shares at GBP 36-40p! Ultimately, the takeover went through (on schedule) for a 163% gain vs. my writeup price.
ii) Ovoca Gold (OVG:LN) is an oldie, but goldie..! In Dec-08, they announced the sale of their Goltsovoye silver deposit in NE Russia to Polymetal (POLY:LN) for $41.4 mio. If you can believe it, then current market cap was $14.1 mio (a GBP 10.7p share price)! A fine example of the Efficient Market Hypothesis (EMH)… And no cherry-picking here – at your leisure, you could have built a nice position over the following 3 months at GBP 13p, or better. Two years later, almost to the day, the price topped out at GBP 39.25p per share!
btw Not to suggest I’m still a fan… In April (with the price at GBP 20.4p), I tweeted my disquiet at new related party transactions. Then in May, I lost total interest, tweeting ‘Ovoca Gold (OVG:LN): 1st it was new related party loans, and now Tim McCutcheon, the CEO, is out the door – this is going nowhere good…‘ The price has now collapsed to GBP 10.25p, a full round trip, with the Russians now firmly in the driving seat – what a shame..!
iii) Trinity Biotech (TRIB:US) is a big 7.4% holding for me. In Mar-10, they announced the sale of their Coagulation business to Stago, for total cash proceeds of $94 mio. Market cap at the time was about $118 mio (a $5.61 share price). A little deceptive though, as TRIB enjoyed a strong rally before the announcement – the prior 3 month average price was more like $4.00. So, Trinity actually achieved a sale price well in excess of their recent market cap, while still retaining $72 mio in revenues. Despite this 40% revenue drop, management confidently predicted they’d maintain EPS at 90-100% of prior levels. Wow..?!
I had a decent TRIB stake at that point, after buying it as a cheap (& slightly busted) growth stock at much lower levels. But this new major sale catalyst prompted me to aggressively add shares and, even today at $12.00, it remains a Top 2 position for me. My Intrinsic Fair Value target for TRIB’s now at $13.41 – which appears to offer a modest 12% Upside Potential. What’s intriguing is that TRIB achieved almost a 2.0 P/S price tag for a division operating at minimal profitability, or even a slight loss. Judging by that, and other industry takeout multiples, TRIB could be worth a lot more than my Fair Value target in a takeover situation.
iv) Now, here’s a controversial stock to highlight: Prosperity Minerals Holdings (PMHL:LN). Prosperity has cement, iron-ore trading and property interests in China, and is run by David Wong (Chairman & CEO). In Nov-09, he announced the sale of the bulk of their cement operations for HKD 3.8 bio, or GBP 300 mio. This was remarkable, considering Prosperity’s market cap pre-announcement was only about GBP 77 mio (a GBP 57.3p share price)! Investors had clearly forgotten his reputation as a deal-maker, and creator of long-term intrinsic value.
They were also too focused on the business operating at a slight loss, and ignoring the fact cement plants are primarily valued on their annual cement tonnage output capacity [Electricity generation’s valued in a somewhat similar fashion, i.e. a fairly standard industry value (range) per MW of generating capacity]. After the announcement, the share price closed at GBP 85.3p for a GBP 115 mio market cap – still drastically lower than the sale price. For the next month or so, PMHL shares traded in a GBP 90-115p range, and then took a run up to GBP 150p or better on at least two occasions in the following 6 months.
Since then, the story’s changed fairly drastically. Wong has executed numerous (mostly related party) deals to bulk up iron ore investment & trading, and property investment & development. This has left investors aghast, and net sellers, with the share price now back to GBP 71.5p (and dangerously close to key technical support). Then again, controlling Asian shareholders aren’t known for observing a clear separation between their private & corporate activities, so this might be an over-reaction! Despite the murkiness of the governance, there’s also no confirmation his related party deals have harmed shareholders to date. Of course, that could possibly come with a kitchen sink write-down at any point..!
What’s intriguing is that Prosperity has retained a 33.1% stake in Anhui Chaodong Cement (600318:CH). At CNY 10.58, this stake’s worth GBP 86 mio – compared to PMHL’s current market cap of GBP 103 mio! For that incremental GBP 17 mio ($25 mio) of market cap, you get over $400 mio worth of net iron ore & property assets/business. And Net Debt’s low, at less than $50 mio. Of course, by buying PMHL you’re investing in a Chinese company, trusting a controlling CEO/shareholder, and making a definite bet on a Chinese soft landing… Not a bet most people want to make right now! However, the (passive) Anhui stake looks increasingly out of place in Prosperity’s portfolio. Sooner or later, I suspect this gets sold and PMHL may offer investors another major sale catalyst opportunity.
v) I’m going to stretch the definition a little now when I take a look at FBD Holdings (FBD:ID, FBH:LN), a 3.0% holding for me. Their major sale was actually a multi-year exercise of write-downs, sales and wholesale portfolio re-allocation. During this time, continued strong operating performance was completely obscured by constant investment write-downs. Investors couldn’t seem to look past this, and FBD traded near book value for 3 years. By 2011, it was clear to me scope for further write-downs (considering cumulative losses & the revised portfolio risk profile) was now v limited…
Then in Aug-2011, FBD announced their remaining property & leisure interests were being spun out into a JV. This eliminated all financial debt. It also signaled a final restructuring of their portfolio, which had been mainly invested in property/leisure, equities & Irish gilts (!) some years back. Essentially, the entire portfolio had been sold (albeit, gradually) at this point, and over 90% re-invested in German bunds and deposits! This presented an utterly transformed (& bullet-proof) balance sheet & risk – a major sale catalyst, which prompted me to hit the buy button a day or two later.
The market took some months to digest the news, but suddenly at year-end the market finally woke up to this transformation, and FBD’s newly transparent 20%+ Return on Equity. With some timely broker cheer-leading, the stock ran up 50% in just over 2 months! We’re now seeing some further digestion at the current EUR 7.79 share price, but this major sale catalyst means FBD remains an easy low risk/high reward stock to own. I think their current RoE will be rewarded with a 2.25 Price/Book ultimately – so my Fair Value target’s at EUR 14.19, an Upside Potential of 82%. Additionally, Ireland’s dire economic contraction is now well embedded in their business, so any eventual green shoots there would be a welcome/extra bonus.
vi) Perhaps I’ve saved the best for last: Sirius Real Estate (SRE:LN). I currently have a 4.0% stake and, Jesus, I’d buy more hand over fist if I didn’t already have large German residential property exposure. Here’s their recent results, which were treated like a damp squib by the market.
First, a 15 mio share issuance (at market) diluted NAV – however, I’d already adjusted for this. What I didn’t expect was a lower property valuation from DTZ. What the hell?! Sirius hinted at their displeasure/disagreement, and I’d concur: Just look at bund yields, the market flight to safety, and stable/rising NAVs elsewhere in the sector… Somehow, DTZ lowered valuation to EUR 421 per sqm, based on average rent of EUR 4.21 per sqm per mth – a gross yield of 12% on rented space. This also wilfully ignores new lettings at an avg. EUR 5.24 per sqm, a full 24% higher than the in-place rent! In fact, post year-end, new lettings were at an even higher EUR 5.95 per sqm. This, and the high (but steadily reducing) vacancy rate of 22%, really highlights the huge embedded potential in SRE’s portfolio.
There’s two catalysts in play here: The first catalyst is the presence of a veritable orgy of activist investors on the register. They haven’t been publicly vocal to date – there’s no need, the 3 principal activists own 50% of SRE and now have 4 board seats! The second’s a potential major sale catalyst. This is an intended disposal programme for non-core and mature assets, and could possibly lead to a sale of a fifth or more of the portfolio. Whether this proves to be a significant step towards a full sale/liquidation remains to be seen.
At the current EUR 0.23 price, I’m mystified at SRE’s colossal 61% discount to its current (average) EUR 0.596 NAV. With listed German property companies mostly rallying across the board, Sirius’ performance has been an outlier. I’d hazard that investors abandoned SRE after getting so burnt on over-leveraged London listed German property companies (v few of which still exist). But SRE’s not over-leveraged! I peg net LTV at 61.0%. Yes, I’d avoid LTVs that exceed 55-65% at a maximum – but this is German property we’re talking about, one of the safest asset classes in Europe (or even globally) as far as I’m concerned. It’s also bang in line with the sector – last I checked, the average net LTV was 61.5%.
Sales to date (admittedly small, at EUR 10 mio odd) have been at book value, or better. If I assume Sirius can do EUR 90 mio of sales in the next year or so (even factoring in a 10% discount to book), this would produce a 52-54% net LTV with just a 0-5% dilution in NAV. This major sale, if completed, is just the catalyst the market needs to really sit up & notice Sirius’ leverage is a non-issue, and that the scale of the NAV discount is completely unwarranted. Couple this with the underlying investment exposure, and I’m happy to peg Fair Value at a 1.0 Price/Book ultimately, which offers a 159% Upside Potential vs. the current market price. And if management are slow to deliver, for any reason, you can be sure the activists will become more impatient/aggressive..!