No ur­gency to buy de­spite the value trap

Financial Mail - Investors Monthly - - Analysis - An­thony Clark

Small-cap in­vest­ment busi­ness Stel­lar Cap­i­tal Part­ners has raised some in­vestors’ eye­brows, and some ac­tivist share­hold­ers are now hop­ing for a pay day that has been very long com­ing.

Trad­ing at 70c at the time of writ­ing, Stel­lar has a mar­ket cap­i­tal­i­sa­tion of R752m, with a wide trad­ing range for the past 52 weeks of 41c-82c. As of the most re­cent re­sults to June 2019, NAV was 121c a share — which places Stel­lar on a deep 42% dis­count to NAV.

Within that NAV, fol­low­ing in­dus­trial as­set sales in the past months and cash en­ter­ing the bal­ance sheet after the year end, roughly 49c a share of the re­ported 121c a share is cold, hard cash. Put an­other way, Stel­lar’s R518m cash hold­ing equates to al­most 70% of the group’s mar­ket cap­i­tal­i­sa­tion.

So it’s easy to un­der­stand why some value share­hold­ers are ag­i­tat­ing for a value un­lock.

Stel­lar is far re­moved now from its “go-go” days as a wheeler-dealer in­vest­ment ve­hi­cle that em­anated from a re­con­fig­u­ra­tion of listed in­for­ma­tion tech­nol­ogy firm Con­ver­geNet Hold­ings.

For the past two years Stel­lar has been lack­lus­tre in spite of the prospect of riches from as­set sales and re­struc­tur­ing.

It’s dif­fi­cult to feel in­spired by Stel­lar’s hopes of build­ing a new fi­nan­cial and wealth man­age­ment em­pire with lim­ited re­sources. It’s hard to see Stel­lar gain­ing trac­tion in this en­deav­our or the mar­ket giv­ing the share the re-rat­ing man­age­ment feels it de­serves.

Within the slimmed-down Stel­lar is a rag-bag of as­sets that are all fairly small. The most im­por­tant in­vest­ment is a sig­nif­i­cant mi­nor­ity stake in as­set manger Pre­scient, which holds a value of about R318m.

Pre­scient has a good foot­print and a solid rep­u­ta­tion, but is it enough to hang a new strat­egy on? At the most re­cent Stel­lar AGM, man­age­ment stated that when the June 2019 re­sults were re­leased they would de­tail the grand master plan strat­egy. Re­sults were pub­lished, but the strat­egy was still not clearly ar­tic­u­lated.

What many mi­nor­ity share­hold­ers want is an un­lock of trapped value and per­haps a wind­ing up of the com­pany.

Back in the day, the story that sold the Con­ver­geNet re­vamp­ing to the mar­ket was the (then) vaunted and im­pec­ca­ble in­vest­ment skills of leg­endary in­vestor Christo Wiese. How time and his­tory changes that nar­ra­tive.

Wiese in­jected a mixed bag of as­sets into Con­ver­geNet which then be­came Stel­lar. Over the years th­ese were sold off leav­ing what we see to­day. Wiese him­self is out of Stel­lar hav­ing got­ten in (with pa­per) at 200c a share, and sub­se­quently ex­it­ing his last stake re­cently in the mid-80c range.

IM be­lieves Stel­lar is at an im­passe. We can­not see the counter re-rat­ing or the dis­count nar­row­ing, as the mar­ket is sim­ply not that in­ter­ested in small in­vest­ment hold­ing com­pa­nies. Stel­lar’s abil­ity to grow via pa­per is thus stymied by in­vestor lethargy and its own track record.

At a share price of 70c, IM sees no ur­gency to snap up the stock de­spite the value trap.

In the mean­time, man­age­ment needs to ar­tic­u­late what they in­tend to do. Only at that point could Stel­lar start to at­tract in­ter­est. The ball is in Stel­lar’s court. Un­til then the stock will flat­line. ●

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