Odds & Ends

I’ve been pretty slack on the blog front of late, partly because I have not made many substantial investments that have warranted a full write-up, partly because it is summer and I have been on holidays and finally because a decent chunk of my time has been consumed reviewing (and bidding) on some private deals.

However, I have kept myself busy with a few interesting trades and special situations that I thought may be of interest to those of you that follow the blog. Some have already played out while others are still at prices I believe to be attractive.

Going forward, I may start to write more frequent, but less detailed notes on ideas I’m looking at or purchasing.

 

Ideas that have already played out

  • Realm Therapeutics
    • As anyone who has followed my blog would know, I was engaged in a fairly large battle with the Board of Directors at Realm
    • We ended up taking the company to Court in an attempt to block the Scheme under grounds of “unreasonableness”
    • The Judge deliberated on our case for over 2 weeks (highly unusual) but alas, decided in favour of the transaction (as we expected he would)
    • What ended up being a terrible transaction for shareholders (selling a dollar for less than eighty cents) turned out ok for us, as we are currently sitting on a >50% return, and managed to get the company to repay our legal costs

 

  • The Local Shopping REIT
    • Another idea I have written about extensively on the blog
    • After Thalassa’s failed attempt to acquire the remaining shares (via another transaction that put managements interests ahead of shareholders) the Board and THAL agreed on a tender offer at NAV
    • Based on the price it traded around the day I first wrote about it (27p), one could have achieved a roughly 15% return in less than 12 months by tendering at the offer price (31p)
    • Not a bad result for what was my largest personal holding

 

  • Countplus
    • Announced a transaction to acquire their former parent for the bargain price of negative $9.5m
    • This looks like a great deal and I encourage anyone interested in the company to read through the substantial documents that have been released relating to the transaction
    • The only concern I had/have was regarding the liability once the Indemnity Reserve from CBA rolls off. My guess/hope is that the company was acquired via a NewCo so any contingent liabilities are ring-fenced, and the parent company’s exposure is limited to the $2.5m investment. Given the management team are accountants (and have substantial personal investments in the company) this is what I would suspect

 

  •  Friends Bank
    • Despite being off on my initial share count (due to the company being “dark”) I managed to be correct on my initial bet that “the market is probably not pricing this efficiently”
    • I managed to build a small position around $7.60 and the takeover price was finally disclosed to me (as a shareholder…) at $9.00
    • Resulted in a ~18% return in a few months

 

  • OneMarket (ASX:OMN)
    • I was originally interested in OneMarket because it was spun off from a much larger parent (1 for 20), to an investor base that was completely different (parent was stable dividend paying company, OMN is a money losing startup), it has a complex HoldCo structure with unique diluting shares and it was trading at $0.66 despite having an estimated $1.20 in net cash per share
    • I was also attracted due to two of my favourite Aussie value investors holding >20% of the shares
    • However, as I dug into it and discovered how the dilution from the RSU’s issued to management worked, it looked like the ice cube was melting much faster than I originally thought
    • My analysis showed that if the trade took 12 months to play out, through a combination of monthly cash burn and vesting of the RSU’s, the net cash per share would decline to the current price
    • However, because I respected the shareholders involved and knew they would be taking an active route, I decided to hold on until the company had it’s first AGM (in August) to see if anything came out of it
    • Luckily, the company announced a strategic review, sending the stock up over $0.80 and allowing me to cash out for a 20%+ return
    • For anyone currently looking at this idea (because it does still trade at a discount to net cash), I encourage you to look at the corporate structure outlined in the prospectus – OneMarket Limited (PublicCo) owns shares in OM Delaware (private co) which is where the assets are held. The management teams RSU’s relate to shares in OM Delaware – making the dilutive affect substantially higher than it looks

 

  • Gannett Co (NYSE:GCI)
    • I got into this trade after reading Clark Street Value‘s post
    • Worked out extremely well with a holding period of a week or so
    • The basic idea was that New Media Investment Corp was rumoured to be looking at Gannett as a takeover target and due to NEWM’s weird structure (Fortress get a management fee on the size of the asset base) they were highly incentivised to do a deal at practically any price
    • I structured the bet through buying January 2020 $10 strike call options, costing $0.62 at the time because after doing “the math” it looked like the market implied expectation of a takeover at $12+ per share was less than 35% (and to me, it seemed very likely (>50%) that one would occur)
    • Low and behold, NEWM came out with a ~$12 offer and I was able to flick the options out at $2.32 and make a quick ~250% after comm

 

  • AEW UK Long Lease REIT plc (LSE:AEWL)
    • Finally one that didn’t quite work out as planned
    • This is a fairly low quality REIT that was trading at ~80% of NAV and announced a strategic review
    • Given it is sub-scale and had recently acquired its assets, I thought there was a reasonable chance of a favourable outcome
    • As the stock didn’t react to the news, I thought downside was limited so it fit nicely into my “unfair coin flip” investment style
    • Unfortunately, nothing came from the review and the REIT will just remain as is. The stock fell a few p on the news and I closed out for a roughly 5% loss

 

Current investments / potentially actionable

  • Chant West Holdings (ASX:CWL)
    • This may be worthy of a full write-up so I will keep this brief
    • Busted IPO, historically loss making and original business from IPO fairly “crappy”
      • Result = $7.8m market cap, $3.7m in net cash and potentially $1m in free cash flow (25% free cash flow yield)
    • Reported profits this year still showed losses, however, focussing on the cash flow (ex R&D grants) the company has moved past break-even and is now making some money
    • The Chant West side of the business is decent quality – niche data provider to the superannuation industry – recurring revenues, difficult to replicate database etc.
    • The Enzumo side of the business is pretty average, IT integration sort of stuff. However, it’s now back breaking even, so not too bad
    • There’s been a lot of management transitioning which now looks to have ceased and the new CEO, Brendan Burwood, sounds sharp and rational from the discussions we’ve had. The only downside is he doesn’t have much skin in the game (due to the tiny free-float and illiquidity)
    • My thinking with this one is, there’s not much downside (cash flow positive, net cash 50% market cap) and there could be substantial upside once they start to “report profits.” Brendan also has some more levers to pull now that the managerial issues seem to have concluded

 

  • Universal Biosensors (ASX:UBI)
    • Another simple, net-net idea
    • Company is controlled by two good Aussie investors, and looks to be in stealth liquidation – with its main business unit being sold off recently (was basically a patent where the payer a call option)
    • I bought at $0.19 and the company had $0.29 in net cash per share
    • Based on the worst case burn rate I could come up with, they would still end the calendar year with $0.26 in net cash per share
    • They’re currently restricted from distributing anything or making any other major capital allocation decisions due to an ongoing negotiation with Siemens (which I’m assuming is regarding the future of their current business relationship in which UBI is losing money)
    • Given the people involved are incentivised value investors, I think that once this issue is resolved, the cash will either be returned or deployed in some other shareholder friendly manner

 

  • The Property Franchise Group (AIM:TPFG)
    • I originally intended to write this one up in depth, given I put a lot of work into the idea. However, after my firm acquired ~10% of the company at 117p, clearing the substantial overhang that had been present for a long time, the stock price increased substantially to >160p
    • The stock is still attractively priced, ~10% free cash flow yield for a capital light master franchisor with the bulk of revenues derived from “annuity like” property management fees (% of rents collected)
    • I may write this one up further in the future

 

  • Millennium Investment & Acquisition Company Inc. (OTCPK:MILC)
    • Another simple discount to NAV story
    • Sat on the bid at $0.41 for a while and eventually managed to pick up a small stake
    • At that price, it was trading at <20% of tangible book value – which is comprised of cash and two investments
    • The largest investment is Millennium HI Carbon, which “owns an activated carbon plant located in Kawaihae, Hawaii. The plant converts macadamia nut shells into activated carbon which has a diverse range of industrial and consumer applications”
      • It’s held on the books at $17m and I have no idea what it’s worth
    • The other investment is a 10.5% stake in SMC Global – which is an Indian Financial Services company (mostly stockbroking)
      • Speaking with my Indian counterpart, it’s not likely a fraud, is making money and is pursuing an IPO (although, has been doing so for many years and the current equity environment in India is not conducive to new offerings)
      • It’s held on the books at $9m and has an interesting “put option” that allows them to sell back a certain percentage of their holding to the controlling shareholders (which they are taking advantage of)
      • The implied valuation looks reasonable too ($9m / 10.5% implies $86m valuation, vs. profits of $9m last year – <10x PE)
    • At my purchase price I bought the Indian company at 50c on the dollar, so any upside from the activated carbon plant is gravy
    • The current burn rate isn’t too bad and insiders own a substantial amount of the company
    • It’s only a small position for me, but the combination of an extremely cheap price and insider owners often results in good things happening.

 

As always, do not rely on my opinions or any numbers I present. Do your own DD.

 

 

 

3 thoughts on “Odds & Ends

  1. Good stuff. I also have a position in LSR, more or less thanks to your blog. Still a smallish risk that they won’t get the required acceptance rate. They need ~66% of minority holders to tender and, as with RLM, there are probably a lot of donkeys in this name.

    re FRIE: will the consideration be in stock or cash? One of the tail risks seemed to me that you’d end up with unlisted shares of the credit union.

    Other ideas are interesting, thanks for sharing. Have you ever looked at BFFI? Another illiquid bank deal. Seems attractive to me, I hold a position.

    Like

    1. You’re right that LSR isn’t a done deal yet – although the market is pricing it that way and if it fails due to turn out, I’d imagine value would be realised some other way.

      On FRIE I exited most via the market (only had a tiny position and now it’s just a few hundred bucks) and I can’t find the letter anywhere stating what the terms were…

      BFFI looks interesting, I think one would have done well riding on Stilwell’s coattails over the years!

      Like

    2. FRIE: not 100% sure myself, but I think the consideration would almost have to be cash. As far as I understand, credit unions have members and no shareholders. So I don’t think they even have stock. Besides, if FRIE shareholders were to receive some sort of an interest in an unlisted credit union, I think the spread would be a lot higher than it currently is.

      Like

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