Backing value and operational expertise not always recognised by the mainstream market can be lucrative
Shares may hold hidden upside
IM’s cover feature this month suggests the JSE is poised for a rush of corporate buyouts — bandying about more than a handful of pending transactions as supportive evidence.
Indeed, awareness of buyouts will be heightened by private education group Curro’s (hostile?) bid for reluctant smaller rival AdvTech — which certainly reinforces the notion that there are always opportunists on the prowl and willing to fork out a premium for deals that can markedly enhance earnings and cash flows (See editorial, page 8).
But buying into an obvious growth story is one thing. It’s quite another matter to contemplate possible buyouts aimed at snagging value that might be deeply buried by mediocre performance, iffy management or strategic stuff-ups. And often this is where the real money can be made — considering that it’s usually not a great strain on the advancing party to put an attractive cash premium on what the rest of the market has deemed a deadbeat share.
Yes, there are audited and tangible net asset values that should offer a comforting upside underpin. In truth, though, NAV is merely a guide — remembering that successive poor operating performances or strategic stagnation because of stubborn management can whittle this tangible underpin down rather rapidly.
So the difficulty in the “buyout story” is that retail investors — already more than a little rattled by volatile market conditions and rightly perturbed by the brittle economic prospects — might not believe the corporate environment is conducive for swoops on undervalued businesses.
Would corporate predators rather not simply wait for the economy to shake out the mining and industrial sector, and then pick up the pieces?
Watching shares in gold and platinum counters shrinking on the back of a further folding in commodity prices certainly reinforced notions that potential buyers in these sectors were happier not to rush in. The fact that Anglo Platinum is contemplating a separate listing of certain of its assets underlines the fact that buyers are not lining up for well-established assets — even with indicative prices skidding along at historic lows.
With steel maker Evraz Highveld Steel — once a formidable presence on the commodity landscape — forced into business rescue, the rumour mill is already churning about the next “big” commodity player to shut up shop in SA.
Though there could be a strong argument for watching and waiting (especially now interest rates are ticking up) it was quite fortuitous that building supplies conglomerate Iliad issued a cautionary as IM went to press.
Iliad, once a market darling in the broader infrastructure sector during the run-up to soccer World Cup in 2010, has endured some tough years of late.
Recent results have confirmed there is life in the business, but sustaining a compelling profit performance in a competitive environment that undercuts efforts to build trading margin will be tough.
In a slightly surprising move Steinhoff International — which owns the Pennypinchers building supplies chain, the Tile House and Timber City (as well as wood specialist PG Bison) — has confirmed it is circling Iliad. One might well presume Steinhoff — with its sprawling offshore furniture empire — has got bigger fish to fry. But Steinhoff might be keen to bulk up its building supplies segment –perhaps with a longer term view of having a separate listing on the JSE?
Steinhoff can take considerable comfort in Illiad’s year to end December earnings of 72c/share, a tangible net asset value of 424c tangible (a serious underpin for what is essentially a retail business) and operating cash flows equivalent to over 90c/share.
Small cap share expert Anthony Clark of Vunani Securities suggests Steinhoff is snagging considerable bulk and upside — pointing out that Iliad not only brings R4bn of revenue to the table but also a substantially “cleaned up business”.
“Adding Iliad’s revenue into another (building supplies) business would surely bring the scale needed for volume rebates and better product negotiations.”
Aside from some concerns about some suspicious pre-deal share moves that might prompt cries of “insider trading”, Iliad’s shares jumped close to 10% following the cautionary. This again underlines the premise that backing value and operational expertise not always recognised by the mainstream market can be awfully lucrative.