FACE VALUE

Back­ing value and op­er­a­tional ex­per­tise not al­ways recog­nised by the main­stream mar­ket can be lu­cra­tive

Financial Mail - Investors Monthly - - Contents - MARC HASEN­FUSS

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.

Pic­ture: THINKSTOCK

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