No urgency to buy despite the value trap
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. ●