COMMENTS ON CLT, APW, AIK, GDXJ:US, RMS

CELLNET (CLT)

I first made comment about CLT for the share idea website back in March this year.

https://shareidea.com.au/idea/20160311/clt-cellnet-group-ltd

The stock was trading at 18 cents at the time and has since paid a 1.25 cent divided. Last week it received a proportional (83%) takeover offer at 28 cents.

I initially came across this seeing Mercantile on the register. Only recently I posted about regretting not buying more RIS, an illiquid security that Mercantile had and was taken over at 35 cents, which I missed out buying as low as about 15 cents. I think that prompted me to look even more closer at CLT the last few months. I liked their recent results and chipped away a second time buying some small amounts on offer in the mid 20 cents. It is such a small, tightly held an illiquid company that even a mug like me can become a top 20 shareholder easily enough.

Given that the takeover offer is only 8% above the price before the trading halt occurred, I was a bit disappointed with the news. Being a small company I haven’t read any views about the offer, so I guess I must come up with my own! So why the proportional bid and why the small takeover premium?

The major shareholder (58%) CVC Limited have indicated they plan to accept this offer. CVC often takes large positions in companies and usually has an exit plan a few years down the track. Perhaps 28 cents is on the low side but it enables an exit, yet still remain with some upside for them. The bidder is an unlisted German company (Wentronic) with 200 employees and international reach through also HK, China, UK & Italy. They can give Cellnet needed distribution capacity for their products including the recently developed own brand in 3SIXT. I don’t know too much about the bidder but they have turnover exceeding about $55 mill AUD, and the Cellnet market cap is about $16 million. Possibly funding may be an issue to make a full bid at a higher price now, so this could be a first step to a full bid in a year or years down the track. Cellnet should continue to generate good cash flows for the new group so this may assist in that regard. Whilst 28 cents may seem low, CVC may think this partnership offers a big chance to generate the level of growth for the company that would be very difficult staying on its own. If that can be achieved, then the remainder of their stake may generate a far greater return than that of which they are accepting this offer of 28 cents. I can kind of see how CVC may be willing to accept a low price for the bulk of their holding to generate the catalyst for some growth, see an exit plan and a positive return on their investment, and maybe some upside for their remaining stake.

Other shareholders are in a different boat though. With CVC potentially making a bit of a sacrifice on most of their holding to get an exit and a catalyst for growth, there is not necessarily the need for smaller shareholders to accept the 28 cents to generate that catalyst. Another reason for the proportional bid may be that they see other major shareholders such as Mercantile (7%) being too difficult to win over around this 28 cents level. Therefore, for now their focus is on winning some control from CVC, who have a larger stake to exit.

My inclination is unless you are CVC, it is probably worth holding onto your stock with the potential of a full bid down the track, or just ride on some improved operational performance. At this stage my shares wouldn’t even satisfy the CGT discount for less than a year hold. If I keep holding I would still expect the healthy dividends to continue. At 28 cents, they are on a P/E of 8.5, dividend yield of 4.5%. The book value is 26 cents with extra value of unutilized tax losses you could perhaps make a case more like closer to 35. Even before the potential synergies of this deal there seemed to be strong hints of further cost savings to filter through from concentrating their focus on fewer higher margin brands compared to years ago. The comments on the revenue side appeared promising with their own new brand, and overall their product lists looked like a decent mix to me in areas that should be seeing higher demand.

I must confess when they went in trading halt I hoped for the instant sugar hit of an immediate 35 cent plus bid. Therefore, this announcement was kind of a disappointment. Perhaps though it is a blessing in disguise. If the group can be run more efficiently in the control of the bidder we may see a higher bid than I just mentioned, a year or two down the track anyway.

If anyone thinks my initial thoughts of holding onto this illiquid stock in the hands of a new majority shareholder seems a little crazy feel free to add your views. It doesn’t have a very high profile this company so I doubt I will come across many opinions about this situation anywhere! What this bid may do is clean out any holders that were the slightest bit uncertain about the future potential of Cellnet, leaving what little stock is out there in strong hands.

 

Aims Property Securities Fund (APW)

This has been interesting to watch since August. I had a few frustrations with this holding around then.

https://stevegreeny.com/2016/08/03/frustrated-holder-of-apw-aims-property-securities-fund/

Those who are new to this and don’t want to read the long whinge above in the link, I will try and quickly highlight a few frustrations. They were not buying back their shares despite of a huge discount to NTA, instead were making acquisitions, and arguably not paying out as much as they could in distributions.

Since then they have announced a share buyback, a big increase in distribution, and then last week a change in investment policy indicating a bias to raise cash through property sales rather than spend it on acquisitions. Also in this short space of time the head of property funds departed the group. In this time, we have seen the shares trade 15% higher (inc dividend) amidst a very weak period for other REITS and yield sensitive stocks.

Recently I am pleased to see Samuel Terry Asset Management become a substantial shareholder, now owning 7.7% of the company. Most of this stake was bought in this same recent time period, yet they have had a core holding and I believe supported the wind-up plan a few years back that didn’t get up. Their website states “We are willing to be activist investors”. Fred Woollard is the founder & MD and some googling suggests that line about being willing to be an activist is not just talk.

More importantly though their fund has an excellent performance record. Above $1.40 it has probably crept up to that point to be more of a hold than a buy, given the rising yield environment and the fact it has outperformed in the sector of late. I will monitor the Samuel Terry Asset Management page to see if there are hints they want to take more of a hands-on approach with this investment, or are just happy to sit silent given recent events. I suspect and prefer that the former will be the case, but time will tell.

 

Armidale Investment Corporation (AIK)

This stock I have mentioned numerous times since early in the year that I am positive on. Giving me some comfort has been that NAOS Asset management and Sandon Capital are also positive on it and have large stakes.

On Friday, it only just came to my attention that Geoff Wilson likes the stock also. Here is the article. There are some other stock tips from different managers in this article also in case that interests you, although AIK is the only one I currently own out of that lot.

http://wilsonassetmanagement.com.au/2016/11/11/best-stock-ideas-sohn-hearts-minds-2016-australian-conference/

 

VanEck Vectors Junior Gold Miners ETF (GDXJ:US) & Ramelius Resources (RMS)

I have sold GDXJ:US at $37 as I recently have been offloading some gold stocks as they start to trend below the 200-day moving average. They were purchased at $20 this year so I am not going to cry about the fact I am selling far below the high of nearly $52 a few months ago. When my exposure to the sector increased as they gained the plan was always to exit via stops which were likely to get hit well below recent peaks. I currently will stick to owning CEF:US and GOLD.AX still. RMS is my only individual stock exposure now in the sector, but I strongly suspect I will stop out of this on Monday. My main premise earlier in the year was with bond yields globally offering almost no yield, the old argument against gold of not offering income was looking a bit weaker. With the US 10-year yield having backed up around 70bps from lows earlier in the year things have changed a little. In this environment where many gold equities are still showing very good gains year to date, they are looking a little vulnerable still.

 

Asset Allocation

With some recent selling my cash equivalents are approximately 29%. It was an interesting week and I can’t accuse the markets of being boring like I did not all that long ago. My exposure to the commodities sector is slightly overweight but now more balanced, rather than the strong focus on gold. That exposure has suffered since the middle of the year, but certainly still provided me great returns when looking at this calendar year. If markets continue to march higher from here I suspect I will find it difficult to match the performance, which will not be a disaster since the returns leading up to this point have been quite good. I am a little reluctant use the recent cash raised on new investments right now, because the strength in the US equities market despite sharp rises in bond yields concerns me. Most are seeing the new president as a loose cannon with the potential to increase spending and spark some inflation. That to me doesn’t signal the sort of efficient pro-spending government that equities markets should be excited about. If bond yields were to rise another 50bps from here, then equities markets may not be so enthusiastic. Any dips we get from here I might be inclined to invest the cash in some emerging markets where valuations look cheaper. If you subscribe to the theory the globe may shift more toward fiscal spending again instead of the blunt unconventional monetary policy tools of late, then some of those emerging economies that are assisted by rising commodity prices may be worth examining more closely.

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4 thoughts on “COMMENTS ON CLT, APW, AIK, GDXJ:US, RMS”

  1. I think 28c is a pretty low bid. A few years back Dicker Data was interested in CLT, there would surely have to be more synergies there than for an overseas company. I will be waiting to see the ‘independents’ report although fully expect there will be a valuation prepared that will have industry comparisons which will then be discounted for company size, further discounted due to liquidity, another discount for control already existing, and will arrive at a range close to 28c. MVT and CVC should be well known to each other from common holdings and investments, will be interesting to see if MVT acts as CVC says they will. Hopefully MVT, not having any CLT board representation, might be able to look around and find another bidder.

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    1. Appreciate your views Ed as I didn’t anticipate I’d receive much feedback on CLT. I think you are spot on about the usual games with “independent” reports. Interesting point about Dicker Data also which I failed to bring up. I see there is a history of some rumours on that front going back a long way. Looks like CLT could be a good size and fit to possibly slot into Dicker Data. CVC accepting this 28 cents level may have also been in hope that it signals to the market they are quite a willing seller. Their hope may be another potential bidder looks at 28 cents and thinks we can make this work at a higher level.

      Has CVC implied MVT will accept the bid? I was thinking MVT would try and hold on to all their shares, and as you say may even do some work behind the scenes to flush out a higher bidder. Assuming this should be perfectly acceptable for them to do if they are not formally part of the Cellnet team.

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  2. I could be completely wrong but reading the announcement once CVC and the board agree to accept the offer it’s pretty much a done deal.

    “The aggregate of the relevant interest held by CVC and the Cellnet directors is approximately 62.69% of Cellnet’s issued shares. ”

    “If Wentronic is entitled to be registered as the holder of not less than 50.1% of the Target Shares, the Offer has become unconditional and Wentronic has paid the consideration to all Shareholders who have accepted the Offer, the current Cellnet directors will resign and Wentronic will be entitled to nominate up to five directors to the Cellnet board.”

    83% of 62% is 51% – once the board and CVC agree to accept it’s irrelevant how anybody else votes – or have I missed something?

    So the question then becomes why would CVC accept for only a 7% premium?

    “CVC continued to hold significant investments in Cellnet Group Limited, Lantern Hotel Group, Mitchell Services Limited, 360 Total Return Fund, Bionomics Limited, Prime Media Group Limited, Vita Life Sciences Limited, and Cyclopharm Limited. CVC derives income from these strategic listed investments, including dividend income, but has acquired the holdings with the view to meaningful long-term capital returns from a re-rating or improved performance.”

    Given that the SP of CLT has been relatively flat for the last 7 years having rarely been above 25c since 2012 and since 2009 it looks like its been below 45c it looks like CVC have given up on waiting for the market to rerate CLT. Offloading 83% of their shares will leave CVC with just over 5 million leaving them 2nd largest holder.

    If my maths are right and this deal is merely a formality with CVC and board support, then what does it say about Wentronics intentions to minority shareholders – either they are letting them share in the future good prospects of CLT by not proposing a full takeover, or they are out to screw minorities by getting the deal through (wrest control) at minimal cost. If it’s the latter then grab the 7% with both hands and run as fast as you can.

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    1. Hi Trev,

      Yes I am with you in terms of the numbers there, it is a done deal from that point of view and not accepting this offer will make you a minority holder with a risk Wentronics doesn’t look after you. (unless of course another bidder emerges quickly, CVC still would have the right to accept but not solicit another bid).

      Also agree that CVC might have lost a little patience and keen to bank something on this investment. Whilst CVC might like the idea of realising this investment and moving onto something else, I don’t know if they would agree to this deal having to still keep some of their shares if they felt the bidder would act unfairly towards the minority holders down the track. Though I couldn’t rule that theory out I must admit. So I appreciate your views where you seem to perhaps give more weight to this theory. CVC maybe just happy to exit 83% of their holding even if they see a risk as being the second largest holder down the track. However I personally thought that Cellnet operationally was ticking along well without them having to be too keen on exiting in a hurry.

      It is a tricky one and perhaps I didn’t highlight the risks of not accepting this bid enough. I may be looking at things too optimistically because when it went in trading halt with pending takeover news I started to mentally bank some higher profits! I haven’t completely ruled out accepting the takeover offer as it is still a nice return with most of my purchases nearer 20 cents, and I suppose 17% of my holding would still continue to exist under this deal.

      Steve.

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