Value stock offers good opportunity
Verimark Holdings Limited is a seller and distributor of direct response TV products. It has been around for 41 years and has been doing the same basic thing for that entire period.
The model is simple: find and import quality products, then create infomercials and advertise on TV. Customers call in and make purchases, or buy on its website. But wait, there’s more. It has about 88 Verimark Direct stores and 1,120 storewithin-a-store outlets throughout Southern and East Africa.
It sources high-quality products that it can market to a wide demographic, with an exclusive import and distribution agreement with the manufacturer.
Infomercial-style advertising allows it to create strong brand recognition for the products. It’s a system that has worked for a long time.
Technically it is a small-cap stock, trading at about R1.10 a share. So, there is a higher level of risk than you would find in a blue-chip stock. But that extra risk is rewarded with a solid set of fundamentals.
With just over R500m turnover, Verimark boasts a very low p:e ratio of 3.86, compared to an industry average of 14.27. The company’s total
debt-to-equity ratio is 19.81%, which classes it as relatively safe. Current dividend yield is 12.83% and the dividend growth rate is 42.22% (and an impressive 12.02% average dividend growth rate over five years). By those metrics, this is a little value stock.
In fact, the company’s biggest shareholder, the Van Straaten Family Trust, which no doubt is controlled by CEO Michael Van Straaten, has expressed an interest in delisting the company. The trust owns 64% of the company. To delist the company, the trust would likely have to make an offer to buy out the minority shareholders, which could see the share price react positively, or even a bid price significantly above where the share is trading now.
Given the value in the stock, shareholders would likely not accept anything but a healthy premium for their holdings. Also, it is worth noting that when founders and CEOs want to delist companies and buy out all the other shareholders, it is usually because they see value that they believe is not being reflected by the market price of their shares. This is evidenced by the equity on the balance sheet reflecting an enterprise value of R150m, while the market capitalisation is only R131m.
Verimark is not immune to the trials and tribulations of the broader economy. As a retailer, it is dependent on imports and sensitive to exchange rate fluctuations. In August Verimark reported a 1% decline in revenue, citing that it has felt the pinch of the recession. Given the solid fundamentals, it should be a bit more resilient in the face of a drawn-out downturn in the economy and should relatively outperform traditional retailers.
The proposed delisting has been made public and the board of directors have appointed an independent board to consider the terms of the proposal.
Minority shareholders will likely be bought out and the company delisted. For individuals, this could be an opportunity to make a good return in a relatively safe and short-term manner.