Stellar’s enduring encore

If Stellar management want to win an Oscar, play to the crowd. Give them what they want

In a volatile market, stocks are often ignored or become paralysed due to circumstances beyond their control. These out of favour stocks then usually trade at minuscule earnings multiples or become value traps. Stellar Capital is one such value stock.

In 2014 and 2015 when small caps were in vogue, it was seen as a bright young starlet, brash and vivacious, run by gung-ho corporate financiers who used highly valued paper to acquire a disparate range of assets.

Stellar Capital began as an information technology business called ConvergeNet. It was acquired by a corporate crowd with the added allure of Christo Wiese behind the scenes. Many thought his touch would propel the company into a new orbit.

Wiese took a 20% stake and injected into the renamed Stellar Capital a ragbag of his smaller mining and industrial assets — some mediocre. Many were repurposed and sold off, generating some cash. With the Wiese allure and frenetic deal making and scrip issues, Stellar rose from 80c to 330c within 18 months.

Stakes in industrial assets such as Torre Industries and Control Instruments and financial assets such as Prescient were acquired. Nobody seemed to care there was no cohesion. The share price was high, paper was easy to place, deal making abounded.

That all collapsed towards the end of 2015 as the market — battered by economic weakness in SA — ran scared … Small caps’ ratings and valuations crumbled with deep discounts to net asset values (NAV) becoming the norm. Sentiment for Stellar Capital nearly died. The starlet faded and was cast out as yesterday’s attraction. However, could she be about to get a facelift and be ready for a close-up?

From a recent low of 42c, Stellar is now 68c and trades at a 43% discount to its own stated NAV 120c a share.

Management has cleaned it up and sold off many assets, such as Torre Industries and Amecor. The company plans to redeem all its debt and build a cash war chest. Once the deals are settled, by the next June results, Stellar should sit on near 60c a share in cash out of the 120c a share NAV.

Stellar will be left with a remnant of industrial assets, but will primarily be a financial services type business. Where will it go next? Back to the investor big screen under a new, accepted strategy … or straight to the DVD rental bin and forgotten.

Financial services conglomerates are out of favour. Most trade at discounts — even giant blue chips such as Rembrandt and PSG. Why would the market re-rate a smaller version with “so-so” assets? Perhaps some hope for the cash to be paid out to shareholders or a new, bold vision for the starlet to regain her lustre and rating.

Value funds have acquired stakes in Stellar to try to press for value unlock. But Stellar is controlled by a management company and 50% of the stock is owned or aligned to current management.

Nothing is certain. The script has yet to be written. Shareholders may or may not like the screenplay. If it’s more of the “same old, same old”, Stellar Capital will languish. Fresh lipstick on a donkey is just lipstick … it’s still an old nag.

If Stellar management want to win an Oscar, play to the crowd. Give them what they want. Pay back some of the cash as a special dividend and have a clear strategy. A pure financial services play with minority stakes in various businesses won’t sway the audience.

However, with a limited budget and an inability to place paper, Stellar may not be able to make the movie it wants.

Another option is full-scale wind-up, which would mean selling the remaining assets and paying out the proceeds.

For now, at 68c I highlight what could be an interesting play that is due to unfold in the coming quarter. Many will say they’ve seen this movie, and will not be persuaded to re-invest. However, “angels” often look for sleeper stories … and Stellar Capital may just be that sleeper.

“Stellar will be left with a remnant of industrial assets, but will primarily be a financial services type business