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wexboy.wordpress.com A blog about value investing, mostly in UK, Irish and US listed stocks. Interested in individual company stocks, investment funds, risk arbitrage, event driven/special situations, fixed income and even some natural resource stocks.
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  • Seduction…and Neglect?! How About A Catalyst? (Part III) 0 comments
    Jan 24, 2012 12:20 AM | about stocks: GPGPF, GHMHF, TRDGF, TKNTF, LMSZF, SPKVF

    Continued from here:

    i) Liquidations are top of the heap for catalysts! They're usually only announced after a company has sold all/the majority of its assets (or occasionally its business(es)). They offer the best prospect of a highly certain final asset value, to be realized within a reasonably short/well-defined timeline. They're usually concluded within 6 months to 2 years, and any decent BoD/management will provide an estimated total distribution amount (net of all expected liquidation expenses) and schedule.

    Of course, if they've an ounce of sense, they'll be as conservative/pessimistic as possible with their forecasts, so any surprises should hopefully be positive… (In fact, they should recast the B/S with all future expected liquidation expenses included as a provision - i.e. accounting on a liquidation basis, not a going concern basis). In aggregate, these features mean that liquidations have v attractive IRRs and Expected Value Returns!

    There are only two real negatives: First, these can be very difficult to pick up! A wide spread/high offer price will slice away/eliminate your potential return. Also, market-makers/hedge funds like these, and will bid them up to levels that won't make sense for you. Yes, their end result is exactly the same as yours, but their lower dealing costs and ability to actively trade, bid for, and leverage their purchases mean their average entry prices and IRRs will be dramatically better. Second, liquidation stocks will often delist - which creates a bit of a dilemma for many investors. However, considering the facts and presuming you've done your analysis, you should have no anxieties about this.

    Also, usually, the level of disclosure from the company and/or liquidator will continue to be reasonable after a delisting. (Although I'm still having problems with Veris plc (VERI:ID) - this was a very successful liquidation for me to date, but there's still some money left on the table and Mazars, the liquidator, have been atrocious in their poor execution, disclosure and general response to shareholders (their employers!). Who do they bloody think they are? Management of an AIM company?! ) Some recent or current liquidation examples are:

    Nordic Land (NLD:LN)

    Economic Lifestyle Property Inv Co (EPL:LN)

    JSM Indochina (JSM:LN)

    FRM Credit Alpha (FCAP:LN)

    FRM Diversified Alpha (DIVA:LN)

    Siteserv (SSV:ID), on the other hand, is a recent example of a different type of liquidation! Avoid these situations! Company management finally responded to the newspaper reports by stating, rather hilariously, that "At this stage it is not possible to predict the outcome of this exercise nor quantify the financial impact for shareholders. However the exercise is not expected to have any negative impact for staff, customers, key business relationships or suppliers." So, glad to see they have the key stakeholders covered… That figures: The value of directors' shareholdings last week - EUR 260 K. The value of their annual remuneration? EUR 1.221 million! But they can't manage to assess the impact for other shareholders? What do they need, a guide dog and a f**king abacus?! Huh, there's not a hope in hell shareholders will get a penny back from this debacle.

    I usually find news of liquidations as I go along, or they're companies I'm already tracking. If you plug in 'liquidate', 'liquidation' and other related phrases as a keyword or free text search on Investegate or the RNS section of the LSE website you'll come up with a list of announcements that should reveal an occasional gem.

    ii) Wind-downs are an extended form of liquidation, usually where the company still has all/the majority of its assets (or business(es) to sell. In fact, wind-downs will occasionally precede a liquidation. They're usually concluded within 1 to 3 years, there's usually no clear distribution timeline provided (as it will depend on divestitures), and expect that asset values can change radically over time. You need to be a lot more careful with these as (oddly enough) during a wind-down, asset values never seem to rise..!?! If there's Debt involved, be v aware of how quickly a small decline in Assets can translate into a larger decline in Net Assets.

    Of course, another reason for 'asset volatility' is that management's often still stuck in the wishful thinking stage when a wind-down strategy's announced (sometimes reluctantly), and/or they're a little embarrassed to mark down a balance sheet so quickly when they said it was fairly/under-valued just a few months earlier!

    If you have enough information to hand, you may be able to calculate an appropriate 'haircut' or asset value, allowing you to determine if your price target (and timeline) offer a sufficient upside on an IRR basis. This worked really well for me recently with Dhir India (DHIR:LN) - a wind-down strategy had not been definitively announced, but it was obvious this would be the end-game. Despite an NAV of GBP 134p, I calculated a much lower adjusted NAV of GBP 69.6p as a Fair Value Target, which still offered a gross Upside Potential of 335%. In the event, the Investment Manager actually launched a GBP 42p Cash Offer shortly thereafter - which I accepted. This might seem a poorer (relative) price, but in terms of certainty and a much shorter time line, this offered a hugely better IRR in the end. Otherwise, much of the time (I must confess!), I simply use the latest NAV/Book Value as a price target - if/when the share price begins to close in on the NAV, I become conscious of the increased risk and may sell/switch to a more attractive situation, so there's a natural 'haircutting' process involved anyway.

    Here's a selection of stocks currently in wind-down mode:

    Investment Companies:

    Guinness Peat Group (GPG:LN): Price - GBP 28.5p, Latest NAV - GBP 52.8p, Discount to NAV - 46%

    Gresham House (GHE:LN): Price - GBP 285p, Latest NAV - GBP 493p, Discount to NAV - 42%

    Trading Emissions (TRE:LN): Price - GBP 24p, Latest NAV - GBP 76.7p, Discount to NAV - 69%

    Property Companies:

    Trinity Capital (TRC:LN): Price - GBP 15.25p, Latest NAV - GBP 30.7p, Discount to NAV - 50%

    Ottoman Fund (OTM:LN): Price - GBP 43.5p, Latest NAV - GBP 74.7p, Discount to NAV - 42%

    South African Property Opps (SAPO:LN): Price - GBP 53p, Latest NAV - GBP 109.7p, Discount to NAV - 52%

    Private Equity/Venture Capital Companies:

    LMS Capital (LMS:LN): Price - GBP 56.5p, Latest NAV - GBP 89p, Discount to NAV - 37%

    Eurovestech (EVT:LN): Price - GBP 9.125p, Latest NAV - GBP 16.9p, Discount to NAV - 46%**

    Spark Ventures (SPK:LN): Price - GBP 7.125p, Latest NAV - GBP 13.5p, Discount to NAV - 47%

    Private Equity Investor (PEQ:LN): Price - GBP 151.5p, Latest NAV - GBP 241.7p, Discount to NAV - 37%

    Avanti Capital (AVA:LN): Price - GBP 83.5p, Latest NAV - GBP 150p, Discount to NAV - 44%

    ** Wind-down strategy not formally confirmed, but company is in distribution mode.

    You'll note I've grouped all of the above by company type, for your guide - while every company is unique, it wouldn't be the best idea to load up on 5 different private equity companies, all in wind-down mode..! I tend to suffer as a result of this proviso - I feel like I have to find and track every last wind-down out there, but then I have to discard most of them in the interests of diversification!

    One last warning: Be v careful how distributions are characterized in a wind-down. Don't be fooled by the words dividend, distribution, or even special dividend - what you need to see is 'capital return' or 'return of capital'. Why? Well, the former are subject to Income Tax, while the latter are subject to CGT. There's nothing worse than investing in a wind-down situation (this is not an issue with liquidations) and discovering that your invested Capital will be returned to you as Taxable Income!?! And obviously it can really screw up your expected returns! Don't hesitate to check in with a company for clarification, though God knows whether you'll get a decent response…

    Heaven knows why companies do this? If I'm charitable, I guess they've got large/tax-free pension funds/offshore hedge funds snapping at their heels for the quickest/cheapest distribution process possible. But in many cases, I'm sure it just boils down to executive laziness and/or simple shareholder neglect. JSM Indochina (JSM:LN) was an example of this for me - during its wind-down (it's now switching to a liquidation), I was aghast to discover that distributions were, in fact, dividends and I was only saved by the NAV discount I'd captured in the first place. I collected a couple of distributions but ultimately disposed of this investment as I feared I'd suffer Income Tax the whole way down on the NAV (which would have turned out to be the case).

    OK, I'll return shortly with more catalysts.

    Disclosure: I am long OTC:TRDGF.

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