ED­I­TOR’S NOTE

Financial Mail - Investors Monthly - - Contents - MARC HASENFUSS email Marc on hasen­fussm@times­me­dia.co.za

Is it worth stick­ing around af­ter a delist­ing?

WHAT TRAN­SPIRES AT pub­lic com­pa­nies af­ter they delist from the JSE is some­thing that can mor­bidly oc­cupy the minds of in­vestors for many a year.

Delist­ings — cou­pled to a take-out of­fer pitched to mi­nor­ity share­hold­ers — of­ten en­tail large share­hold­ers with in­ti­mate knowl­edge of a busi­ness buy­ing shares from mi­nor­ity share­hold­ers who are frus­trated or let down by the per­for­mance of the com­pany or its shares.

There is of­ten a sense that the in­sid­ers — who in­evitably had sold shares in the busi­ness at a premium at list­ing — are now buy­ing scrip back on the cheap with a rea­son­able de­gree of cer­tainty that per­for­mance will im­prove and value will ap­pre­ci­ate in the medium to long term.

Of course, th­ese days most of­fers to mi­nori­ties do in­clude an op­tion to stay aboard the un­listed ve­hi­cle. But this does pre­clude in­sti­tu­tional as­set man­agers, and prob­a­bly a ma­jor­ity of or­di­nary share­hold­ers that don’t want to be locked (trapped?) into an illiq­uid un­listed struc­ture where the lack of pub­lic scrutiny might lead to lapses in cor­po­rate gov­er­nance.

I am air­ing the ques­tion around delisted com­pa­nies be­cause the dour sen­ti­ment and dis­mis­sive rat­ings placed on the JSE’s small cap sec­tor are bound to tempt con­trol­ling or in­flu­en­tial share­hold­ers to take ad­van­tage of the gen­eral mar­ket wari­ness by pitch­ing buy­out of­fers to weary mi­nor­ity share­hold­ers.

There are some small cap com­pa­nies — with un­bro­ken profit records of more than five years — that are trad­ing on low sin­gledigit earn­ings mul­ti­ples. Bal­ance sheets would hardly be strained to buy out mi­nori­ties at a de­cent premium to the share price, and ex­ist­ing cash flows would cover the cost of the ex­er­cise.

In­vestors who can af­ford to hang onto qual­ity com­pa­nies in an un­listed en­vi­ron­ment might do well over the long term.

I picked up one re­cent ex­am­ple “pa­tience re­warded” in the re­cently re­leased fi­nan­cial re­sults of “deep value” in­vest­ment com­pany RECM & Cal­i­bre (RAC). The com­pany re­cently con­firmed it had sold its hold­ing in ser­vices com­pany Ex­celler­ate — which was qui­etly delisted from the JSE way back in 2012.

RAC dis­closed it had sold its en­tire hold­ing in Ex­celler­ate to a pri­vate buyer — turn­ing an en­try price of 123c into an exit price of 540c (which was also markedly more than RAC’s car­ry­ing value of 280c/share). While few in­vestors would have paid much mind to the hold­ing in un­listed Ex­celler­ate, the even­tual exit price rep­re­sented growth of 24% a year for the du­ra­tion of the in­vest­ment.

Bear this in mind the next time you need to de­cide whether it’s worth pursuing a qual­ity small cap when it de­cides to shuf­fle off the JSE.

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