RHG Ltd (RHG) - almost there

Most recent post here.

CDM/Pepper have withdrawn from the race for RHG. This leaves the Resimac offer of 50.1c cash standing. This is a good outcome for RHG shareholders. They are getting straight cash for their investment, and on my numbers we are getting a very fair price. The RHG Board is recommending shareholders vote for the Resimac offer, which will be conducted through a scheme of arrangement requiring 75% of shareholders to agree. Unless CDM decides to vote against the offer, there should be no problem getting the deal over the line now. 

Anything could happen, however the chances of finishing this trade quickly with a straightforward and handsome profit have have improved remarkably.  

CDM/Karl Seigling has copped a bit of flak over this deal. I think this is unwarranted. Although it is convoluted (it took me quite a bit of time to get my head around it), the net result is that CDM has helped drive the offer higher. As a RHG shareholder I am thankful. 

Kristian   

Disclosure: own RHG

RHG Ltd (RHG)

Please click here for the last post on RHG.

• Higher Bid from Resimac
• NTA of CDM has increased
• Wilson Asset Management has become substantial shareholder in RHG

In 2004 I fulfilled a lifelong ambition: to run the New York Marathon. It was an incredible experience, however I 'hit the wall' in the last 10km and slipped from an estimated completion time of 3hrs 10m to 3hrs 39m. It was agony. It was literally a matter of one step at a time. But I got there and it was well worth it. 

RHG is starting to feel like the last 10km of a marathon. Resimac has put a fresh step forward by upping it's firm cash offer from 49.5c to 50.1c. This bid has been endorsed by the RHG Board, which clearly likes the all-cash offer.

CDM has announced an estimated interim NTA of $1.42 pre-tax / $1.40 post-tax. This is up from $1.60 pre and post at the end of September. This has helped kick along the CDM price to the current price of $1.40. I have updated the previous table below for the higher CDM price:

Including franking credits the offer is worth 51.6c. Excluding franking credits it is worth 50.5c. This obviously depends on the CDM share price staying where it is.

So we are kind-of back to square one: albeit at a slightly higher level. CDM won't support the Resimac bid unless it is higher than it's own. To win, Resimac will need to increase the bid further, or it may get lucky if the CDM share price falls over and becomes inferior by default.

On top of all this the chaps at Wilson Asset Management have been buying RHG. I'm actually not sure how this impacts the position and what their plans may be. They may very well be having a sniff at potential future franking credits RHG yield and perhaps are simply following the idea of this being a fairly low risk trade. Regardless, as ordinary shareholders it is always nice to see Wilson on the register.

The annoying thing is RHG is hardly moving! It is 48.5c as I write. Obviously a lot of people just can't bothered with trade anymore.

But the marathon hasn't finished yet. I continue to hold.

Kristian

Disclosure: own RHG

MacarthurCook Property Securities Fund (MPS) - open email to MacarthurCook

Last week (17 October) I wrote an email to Michael Goldman from MacarthurCook asking for an update on the buy-back and clarification of earnings estimate provided in a recent media interview. I have not had a reply. Since winning the unit holder vote, MacarthurCook have gone very quiet on their proposed turnaround strategy. Prior to the meeting, they were quite vocal about the actions they intended to take. It's time to start delivering.  

A copy of the email is below. I will update you when/if I hear any further news. 

(click on the image to enlarge) 

Kristian 

Disclosure: own MPS

Royal Mail (LSE: RMG)

Nigel Littlewood and I spent quite a bit of time reading the prospectus ahead of the Royal Mail float. One only conclusion was possible: at the float price of 330p it was absurdly cheap. Even without fully understanding the potential for strikes, transformation costs, future CAPEX requirements and many other issues, it was clear the stock was a dead give-away. A yield of 6% (massive for a UK stock). A normalised PE (by our estimations) of 6-7. Good Balance Sheet. Great brand name. A growing business.

Royal Mail is now 523p.

Would love to have been a shareholder at the float.

Would love to have been one of the underwriters.

Would hate to be the guy who has to explain this to HMG.

Kristian

Disclosure: no position in Royal Mail

Healthscope Notes (HLNG, HLNGA)

The most widely read articles on this blog are the Healthscope Notes: HLNG and HLNGA. I think the reason for this is straightforward. There has been a very big appetite for income and therefore stocks paying large yields have been Googled. 

First post on HLNG.

Follow post on HLNGA.

Based on the current prices, here are the running yields and yields to maturity for both securities: 

Here is a snapshot of the financial results: 

Other expenses include $120 in write-downs against the pathology business. So, the performance of the company has certainly improved however the sheer amount of leverage is still eye-popping: add back the $120m in write-downs to adjusted EBIT gives $236.1m - $165.6m + $120m = $190.5m. The interest bill is $185.2m. 

I disclosed I was selling out of HLNG and not participating in the new HLNGA (which were being issued at the time of writing) and made this statement in response to one of the comments: I am probably being too conservative in my view of the debt levels of Healthscope given the quality of the underlying business. 

I am probably being too conservative. However my logic is the leverage involved in order to get a maximum yield to maturity (on current prices) of 8.1% to 8.9% p.a. is too much for me, or at least to get too excited about digging more. But that's me and what I am comfortable investing and spending time understanding. You may disagree, and could well be right. 

Kristian

Disclosure: no position in any of the above names

Australasian Wealth Investments Ltd (AWK)

Last year my family and I went on a safari in Kenya visiting the parks at Masai Mara (to see the Wildebeest and Zebra migration), Lake Nakuru, Amboseli and Tsavo West. While bouncing around in a Land Cruiser in the Masai Mara one morning, we came upon some lions feeding on a recently killed Wildebeest and vultures were milling around in the background waiting their turn to pick at the carcass. Blood and guts were everywhere! I had the most amazing sense of being in the middle of the 'circle of life'. If you have been there you know what I mean. If you haven't been there I strongly recommend going. It's a bucket list must. 

And so as the economy and share market gain more confidence, we are seeing a similar evolution. Old carcasses are being picked over and in some cases are being (or will be) brought back to life and being used or will be used as a corporate shell for other purposes. There is a lot of this happening at the moment. A few off the top of my head: GMI, ABQ, AIX, WWM, MMX, AWN and AWK. The beauty of trawling through cigar-butt type stocks is that it occasionally throws up a fresh - and potentially exciting - story like AWK. 

AWK is the reincarnated version of MEF: see here for the most recent post. 

That post was written in May and a lot has happened since then. I have been meaning to write this post for some time now and in the meantime the price has been volatile - but has recently moved up rapidly. What the share price will do in the short term is anyones guess and I think it's fair to say that AWK has been a traders plaything as the story gets out along with the general enthusiasm displayed toward tech/online stocks. (MBE is another great example). So please very careful with your own analysis on these types of situations. 

I have now twice met the person spearheading the company, Andrew Barnes, and have been very impressed. Mr Barnes owns a substantial portion of AWK stock. 

Simply, AWK is being modelled on the UK mega success stories Best Invest and Hargreaves Lownsdown PLC. Hargreaves is listed and has a market capitalisation of £5.2bn. These businesses are quite simple: they provide an online platform in which to research, choose and invest in a very broad range of managed funds. To kick start the strategy here in Australia, AWK has bought InvestSmart which is an existing platform for investors to invest in managed funds online. With the relentless move towards SMSFs and tighter regulation in financial services through FOFA, the view taken by AWK (which I completely agree with) is investors will opt increasingly for direct solutions over financial planners. At least, there is plenty of room for both models. InvestSmart was bought for a song from Fairfax. Revenues have been in decline at InvestSmart however this appears to be due to an underinvestment in the website and marketing. 

To augment InvestSmart, a stake in research house van Eyk has also been purchased, also for a song. The idea here is to make the research available on InvestSmart so investors can ultimately choose between say different risk profiles, asset sectors, and drill down to ratings on each managed fund. Once selected, the fund can be purchased directly through the website. 

AWK will make most of its money through taking a small clip on annual FUM of around 0.3-0.45%. So this is a FUM story and the name of the game is to build scale as quickly as possible. One very important point to note is that AWK is not in the business of building its own investment platform (such as the Macquarie Wrap). Investors will most likely invest in a managed fund via one of the wraps on the InvestSmart website. The reason for this being important to note is that AWK will not incur the substantial CAPEX requirements that goes into the investment platforms, but is merely a selling agent of existing platforms. By investing via a wrap, it is easier to switch between managed funds and other investments such as shares. In time, the InvestSmart website may provide a consolidation platform for investors investing in more than one wrap. 

A lot could go wrong. There is already some competition in the space - I understand CommSec offer a similar service. So too does 2020 DirectInvest. There is always legislation risk in financial services. As with other online sectors, gaining the critical mass of eyeballs is essential in order to develop the 'virtuous circle' effect and develop enough scale. And from my recent meetings with CEO's it is apparent there has been a dearth of investment in online in certain sectors (finance and travel especially) in Australia in recent years: this is creating massive opportunity for disruptive players however the future landscape is uncertain. To take this further, yesterday I was given a tour of Fishburners; a Sydney based collective for entrepreneurs. It's extraordinary. 

This is a very basic overview of the business. For this post I have avoided getting into the numbers too much. AWK has recently undertaken a rights issue, is cashed-up, and is in all likelihood on the prowl for further acquisitions, so the existing numbers could easily become redundant. I will endeavour to provide some more numbers in coming posts. 

Kristian

Disclosure: own AWK

Livewire launch and three stock ideas

I was fortunate to be invited to the launch of Livewire, a new Australian social media platform for investors. To help Tom McKay (MD) launch the event, a panel of stock pickers discussed some macro themes and each provided a stock idea. The discussion was very entertaining and informative - well done Tom and the panellists. 

The panel was moderated by Matthew Kidman who wrote Bulls, Bears and a Croupier, which coincidentally I am currently reading and is a great read. 

In brief, here are the stock ideas: 

Steve Johnson: RNY Property Trust (RNY). US property trust, discount to NTA play - trading at ~60% of NTA. Good management. 

Peter Morgan: Chalmers Ltd (CHR). Transport company, trading at substantial discount to $4.20 NAV. Share price $2.85.

Geoff Wilson: Graincorp Ltd (GNC). Agriculture, Believes FIRB will approve takeover.  

I hope this provides you with some good stock ideas.  

I have been invited to contribute to Livewire, which I am very much looking forward to in the future. 

Kristian 

Disclosure: no position in any of the above names. 

RHG Ltd (RHG)

This is a follow up to previous posts. Most recent post here.

Please note I wrote this post on and off over the course of the week or so. The stock prices were correct at time of writing.

With the exception of bids for resource stocks, it is very rare to see a share price trading below a firm cash takeover price. But that is exactly what has been happening at RHG. There are two competing bidders: Resimac and the combined Pepper/Cadence (CDM). Resimac has offered 49.5c cash. Pepper/CDM have offered a part cash, part scrip deal (I will go into that shortly). RHG is currently 48c and has recently been as low as 42.5c (I missed that... talk about easy money). 

Pepper/CDM Offer

There are several components to the offer. In the table below I have tried to simplify this as best I can. For the time being I am assuming the CDM share price remains constant, even after a 5c dividend is paid on new CDM shares post the deal completing. I will re-visit this assumption shortly. This is all pre-tax analysis. The results will vary depending on your personal situation.

Let me put this in a different context. Ignoring franking credits, Pepper/CDM will pay us 36c cash. So that means buying RHG at 48c leaves an entry price of 12c. That means you are paying a $1.20 entry price for CDM shares. CDM would need to trade less than $1.20 to lose money on the deal, assuming it actually goes through. And this ignores the dividend on new CDM shares.

Right, CDM will look quite a bit different post a successful takeover.

The table below shows what CDM looks post the takeover in simple terms. I have assumed NTA remains constant at $1.36. This could be wrong!

Note Pepper will buy CDM's existing RHG shares for 50c cash. This is really important to note for two reasons: a) by doing the flip, CDM is profiting by getting the upcoming 2c fully franked RHG dividend and b) CDM will have a huge pile of cash on its balance sheet and no RHG shares.

What all this tells me is the NTA might dip very slightly post the takeover, even after the 5c dividend to be paid to new CDM shares. Hence why I assumed previously the share price may not move much, or at all. Underpinning this is the CDM dividend: last 12 months it was 11c fully franked or 15.7c including franking. Note the deal is franking credits accretive to CDM.

Yes, the share price could certainly drop with a bunch of new shareholders on the books and yes the NTA could of course drop. Most other LIC's are trading at premiums or close to. If CDM drops materially below NTA, then personally I will be buying with my ears-pinned-back.

On another note, the Takeovers Panel has rejected Resimac's complaint. I'm not surprised at all. Resimac will need to stump up a higher cash bid than Pepper/CDM's (i.e. over 50c) to have any hope. But that would be the icing on the cake.

Kristian 

Disclosure: own RHG

Paperlinx Ltd (PXP) and Paperlinx Hybrids (PXUPA)

This article should be read in-conjunction with the previous post Elders Ltd (ELD) v Elders Hybrids (ELDPA): Reservoir Dogs edition. 

PPX has announced a fairly vague update regarding a potential acquisition of PXUPA hybrids in November. No details have been provided as to pricing, terms and whether the offer might be cash or scrip. Apparently the discussions have had strong support from PXUPA holders. 

Some people in the market think a transaction will happen with a figure of $20 per PXUPA has been touted. Result: the PXUPA price has kicked up to $12. 

This all continues to look like a minefield. It's not the first time a deal has tried to be done. The capital structure puts PPX and PXUPA holders on a collision course with each other. However for the major contrarians out there: the underlying business is worth some more analysis. The upside on PPX could be substantial if the company is ever turned around and PPX shareholders aren't massively diluted in the meantime. 

Kristian 

Disclosure: no position in any of the above. 

MacarthurCook Property Securities Fund (MPS)

Just a few points to update on this position in no particular order: 

1. Litigation

MPS has applied to head back to court after the recent ruling against it in favour of P-REIT. If leave is granted, the appeal is not expected to be heard until late 2014. If MPS is successful, the upside to shareholders is huge. I'm just treating it as a lottery ticket: not much downside, lots of upside. 

2. P-REIT (PXT)

PXT (another A-REIT) is very illiquid. The share price shot up from 13c to 20c following the legal case against it (see above) getting thrown out. PXT itself trades at quite a discount to NTA: including the potential liability for the legal claim NTA is 24c. NTA excluding the legal costs is 34c. So when the stock was at 13c, it was trading at 54% of NTA fully assuming it would lose the case and 38% of NTA ex legal costs. Talk about glass being half-full! . 

All is not lost. MPS holds a 10.9% stake in PXT valued at $3.6m as at 30 June. So with the PXT share price having increased by 25% since then, the value has increased to $4.5m albeit on very light volume.  

3. Arena REIT

Another MPS's larger holdings is the Arena REIT. The recent share price performance has been strong: it has increased from $1.02 30 June to $1.20. This has increased the value of the investment from $6.9m to $8.1m.  

3. Buy-Back

Still waiting for this to start... 

There continue to be plenty of catalysts in place to see the stock re-rated: distributions, buy-back, and maybe even an increase in NTA(?). 

Kristian 

Disclosure: own MPS

ASX Listed Stocks Yielding Over 10% p.a.

Listed below is a simple screen for ASX listed stocks with a historic dividend yield of 10% or more: 

Slim pickings. 

This screen is limited as it does not include 'grossing-up' for franking credits. 

Note: a number of these stocks have artificially high dividend yields as they are paying lumpy dividends and/or are in wind-up mode. To my knowledge, these include AIX, HHY, IPE and RHG. I don't know about the others. Regular readers of this blog will recognise some of the names in this list, notably AIX, HHY and RHG. 

I hope you find some good ideas from this list. 

Kristian 

Disclosure: own RHG